Clearly that shake-off in the tech-heavy stocks is causing a ripple effect across the globe. Is it a knee-jerk reaction, will it settle in, and is it just another day in a very intact bull market?
ED Yardeni: It does seem like just another day. It is very reminiscent of what happened not very long ago. In early August, we had the carry trade unwind as you mentioned and now I call this a sort of the semiconductor unwind. On Tuesday, somebody must have leaked the information that the Department of Justice was going to investigate Nvidia for monopolistic behaviour, and, at the end of the day, after the market closed, the Department of Justice announced exactly that, they were going to investigate Nvidia. So, a lot of that selloff on Tuesday was related to that very issue and it had a negative impact on other semiconductors. Again, you were correct in assessing that if people are selling Nvidia by selling an ETF, then obviously some of the related stocks are going down.
Markets are down because there is fear of a slowdown. But bond yields and commodity prices are telling a completely different story. What is the right way of looking at this market that could benefit if rates come down or a market which in a sense is getting ready to embrace the slowdown?
ED Yardeni: We have to look at it globally. and the global economy is weak. It is weak to a large extent because China is in a property depression and overall they are in a recession. Their economic indicators remain very weak and they are exporting deflation to the rest of the world and are also not consuming as much oil. So, oil prices are coming down. But this all benefits everybody else who consumes oil, everybody else who benefits from lower prices.
If we are talking about the United States, I disagree with a widely held view that the economy is slowing. I think it is just normalising. It is coming back to the pre-pandemic normal. And in that scenario, I do not see the unemployment rate going up a lot. I see the labour market continuing to hang in there pretty well. Friday’s employment number is going to be on the surprisingly strong side because July’s number was impacted by the weather. All together, it is not a bad scenario.Given that of late the markets have been fairly sensitive to the kind of potential growth scares that we have seen over the past few weeks, is that going to put increased importance on the jobless data that we are expecting and other important data points later this week?
ED Yardeni: Every employment number we have had this year has been described as the most important employment number we have ever had. One can say the same thing about the number that is about to come out. If it is remarkably weak, which I do not expect, then everybody will be talking about a 50 bps cut instead of a 25 bps cut by the Fed. But that raises the potential for another carry trade unwind.
So, I think the Fed is going to do a 25 basis points cut at their September meeting coming up shortly, and the growth scare, at least in the United States, is going to become less of a factor. Increasingly, the elections on November 5th will be the key issue that the market will be struggling with. I see that the US stock market, the S&P 500, continuing to be choppy and moving sideways with a lot of volatility below its July 16th low.
Once we get past the November 5th election, we can talk about the results. The market will be happiest if it is gridlock. I do not think it will be very happy if it is a sweep where either the Democrats or the Republicans get all both the Congress and the White House.
A Morgan Stanley India report is saying that when China was going through a huge economic bull run, the economy in a sense chugged along for at least 15 years. They are making a case that what happened to Japan in the 80s, to America in the 90s, and China in the first decade of this century, could happen to India, in the next five years. Do you agree with that?
ED Yardeni: I think China is a peculiar case. There are similarities with Japan, especially with the aging demographics. But of course, China exacerbated their demographic profile, their geriatric demographic profile with a one-child policy that has come back to haunt them. And so, China has had a very difficult time stimulating consumers. So again, there are similarities with Japan, but the problems for China are on a much bigger scale. But there are similarities also, obviously, with the real estate bubble that has burst. It suggests to me that it is going to be several years before China comes out of this weak environment. It took Japan quite a while to come out of it and it has done it quite well. I think China will eventually get out of it. India, meanwhile, has a lot going for it. We all know the factors of the relatively young population and their relatively highly educated population. So, I do not think you can make any comparisons between India today or even in 10 or 20 years and what Japan and China were over the past several years.
