- About 63% of US households are planning to take a vacation in the next six months.
- Albert Edwards, the Societe Generale strategist and outspoken market bear, sees the situation as indicative of Americans’ overconfidence in rising wages.
A record number of Americans are taking vacations – and they should enjoy it while it lasts, because the fun will eventually end, says Albert Edwards, the Societe Generale strategist and outspoken market bear.
Edwards sees flagging wage growth as the root of the problem. Wages are not expanding at the pace expected, considering how far the unemployment rate has fallen. This has thrown the so-called Phillips curve – the inverse relationship between inflation and unemployment – out of whack, according to Edwards.
So Edwards sees all the vacation-taking as a sign of overconfidence in wage growth that hasn’t emerged so far.
With this in mind, inflation accelerating sharply as the Federal Reserve raises rates too slowly would create what Edwards sees as a “nightmare scenario” for equities. In a note last month, he went as far as to draw parallels between current market conditions and the 1987 crash.
“I know US consumer confidence has been booming on the back of a surging equity market, but cheap money has also prompted the consumer to book holidays galore,” Edwards said. “When the bubble bursts, households will be mighty pissed that it’’s not just their wealth that evaporates in front of their eyes but their ability to vacation like never before.”
And while Edwards’ bearish rhetoric may be more inflammatory than most, his concerns about inflation have been echoed across Wall Street – including by Daniel Pinto, the head of JPMorgan’s dominant investment bank, in a recent conversation with research analysts from Keefe, Bruyette & Woods.
He told the analysts that inflation exceeding projections by investors and central bankers could disrupt the long bull market we’ve enjoyed and put a halt to the economic cycle, sending shocks through emerging markets as well. Of particular concern to Pinto is the level of complacency he sees.
What do people do when they’re feeling complacent? They take a vacation.
Mark Haefele, the chief investment officer at UBS Wealth Management who oversees policy and strategy for $2 trillion in assets, told Business Insider in September that his firm was also keeping a close eye on inflation. In its mind, the lower that inflation stays, the more hamstrung the Fed will be in its efforts to tighten monetary conditions.
Overall, while it’s unfair to attribute a swelling market bubble to vacationing Americans, Edwards’ warnings about complacency and overconfidence around wages should be heeded – especially if conditions are as tenuous as he suggests.
“The risk is that the market is hugely vulnerable if it hears a distant bark, let alone feels its bite,” he said.