A legendary Wall Street strategist lays out the stock market's 'nightmare scenario'The legendary strategist Albert Edwards thinks investors are ignoring many latent risks in the stock market.
His "nightmare scenario" combines
accelerating wage inflation with a hawkish adjustment to Federal Reserve rate-hike expectations.
He's identified the worst-case scenario for what could cause a massive stock blowout, and it ultimately involves the Federal Reserve raising rates too slowly. But that won't just happen for no reason — Edwards thinks there needs to be a surprising economic jolt.
That's right: In an ironic twist, the economy could recover too quickly for the stock market to handle. And shockingly strong wage inflation could be the root cause of the catastrophe.
"High wage inflation data in the months ahead could cause a rapid reappraisal of the pace of Fed rate hikes. At these high equity valuations, that could really scare investors."
Another element of the US macroeconomic picture that could be affected by expectations of quicker Fed tightening is the dollar. Bucking forecasts and staying surprisingly weak for much of 2017,
the greenback could be due for a bullish reversal in the event of hawkish expectations. The US dollar index has fallen by more than 7% year-to-date.
That would be bad news for the torrid earnings growth being enjoyed by US companies, since the large multinational corporations with heavy weighting in stock indexes have had exports boosted by a weak currency.
Edwards also draws a comparison between modern-day investment methods — volatility targeting, risk parity, and trend-following quant funds — and the 1987-era hedging technique called "portfolio insurance," which is frequently associated with the market crash.
Source: Business Insider
https://finance.yahoo.com/news/legendar ... 00017.html
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