Wall Street Veteran Investor Yadeni: "US Economy and Jobs Are Strong... Low Possibility of Recession"

Ed Yadeni, Creator of the Term 'Bond Vigilantes'
"Similar to 1987... Suffered Recession Then"
"This Crash Due to Yen Carry Trade Unwinding"

Ed Yardeni, a veteran Wall Street investor and head of Yardeni Research, evaluated that the global stock market panic sell-off (overselling) caused by fears of a US-originated recession is similar to the 1987 'Black Monday' crash. He noted that the global economy avoided a recession back then, and currently, the US economy and job market remain strong, making the risk of entering a recession low.

In an interview with Bloomberg on the 5th (local time), Yardeni said, "Looking at the situation so far, it reminds me of 1987," adding, "At that time, we experienced a stock market crash, and basically, everything happened in one day." He was referring to the 'Black Monday' on October 19, 1987, when a massive sell-off after the New York Stock Exchange opened caused the Dow Jones Industrial Average to plunge 22.6% in a single day.

He explained, "The stock market crash in 1987 did not mean that we had entered or were about to enter a recession," emphasizing, "But that never happened."

Despite the July employment report shock that triggered global fears of a recession and panic selling, Yardeni diagnosed that the US economy and employment remain robust. According to the July employment report released by the US Department of Labor on the 2nd, nonfarm payrolls increased by 114,000, and the unemployment rate was 4.3%. The employment increase was significantly below the forecast (176,000), and the unemployment rate rose faster than expected (4.1%), raising concerns about a recession.

Yardeni assessed, "The labor market is still in a relatively good state," and "The US economy is still growing, and the service sector is running well." He further predicted that the current stock sell-off is "more likely to be a technical deviation in the market rather than leading to a recession."

He viewed that a significant portion of the global stock market overselling is related to the unwinding of the 'yen carry trade.' Due to interest rate hikes by the Bank of Japan (BOJ), yen funds invested overseas are returning to Japan, causing global stock markets to decline. He said, "The unwinding of carry trades could become a kind of financial crisis that triggers a recession," but he considered the possibility low. Some in the market also point to AI investment overheating as a cause of the current stock market crash. However, Yardeni forecasted that if panic selling continues, the Federal Reserve (Fed) might lower interest rates by 0.5 percentage points.

He stated, "If the selling pressure on Friday and today continues for several days, central banks will move toward a liquidity supply stance," adding, "This could mean a 50bp (1bp = 0.01 percentage points) rate cut at the September meeting."

Yardeni is a veteran Wall Street investor and economist who first coined the term 'bond vigilantes' to describe investors who sell large amounts of government bonds to raise interest rates when concerns about government fiscal deficits arise.