bear skeptic Albert Edwards is best known for one thing: predicting that the financial world will end in a deflationary singularity, one which will send yields in the US deep in the negative, and which he first dubbed two decades ago as the “Ice Age.” He is also known for casually and periodically forecasting – as he did a few weeks ago in an interview with Barrons – that the S&P will suffer a historic crash, one which will send it back under the March 2009 low of 666.
In this context, a couple of recent events caught Edwards’ attention.
First, speaking of the above mentioned Barron’s interview, Edwards was taken aback by one commentator who took the SocGen strategist to task for his relentless bearishness. Indirectly responding to the reader, in his latest letter to clients Edwards writes that “its good to have a little humility in this business because its so darn humiliating when forecasts are proved wrong. And the bolder the forecast, the more humiliating it is!” He continues:
That is one reason why most commentators on the sell-side never stray too far from consensus. When I was an avid consumer of sell-side research some 30 years ago, there was one thing about the macro sell-side that I truly marvelled at namely the analysts ability to totally reverse a view and pretend that had been their view all along! In the days before the internet and email, I had to rifle through our storage cupboards to find the evidence of what were often 180 degree handbrake turns. In the internet age, there is no hiding any more.
One of the most leveling experiences at the end of an article or interview about my thoughts is to scroll down and read some of the readers comments. In my case, they often marvel that I am still in any sort of employment at all! Some are witty and make me smile - like the one below in response to a recent interview I did with Barrons.
Edwards refers to the comment titled “Prescient as a Broken Clock?” authored by one Gordon Gould from Boulder, Colorado who writes:
“Barron’s notes that Société Générale’s Albert Edwards is a permabear (“S&P 500 Could Still Test 2009 Lows,” Interview, April 7). However, your readers would surely like to know how some of his previous calls have turned out. A quick Google search revealed that nearly five years ago, Edwards called for the Standard & Poor’s 500 index to hit 450 and gold to exceed $10,000. While even a broken clock is correct twice a day, perhaps in Edwards’ case, we’re talking about a broken calendar on Saturn, which takes about 29 years to orbit the sun.”
Albert summarizes his response to this comment eloquently, using just one word: “ouch.” Hit to his pride aside, Albert asks rhetorically “Where did it all go so wrong?” and explains that in the Barrons interview, “I explain why in my Ice Age thesis I still expect US equity prices to fall to new lows in the next recession.” To be sure, this is familiar to ZH readers, as we highlight every incremental piece from Edwards, because no matter if one agrees or disagrees, he always provides the factual backing to justify his outlook, gloomy as it may be.
He explains as much:
I always expected the equity markets day of reckoning to come in a recession with equity valuations falling to lower lows than in the two previous cyclical bear market bottoms in 2001 and 2009. If I am right, the next recession will see a lower level than the forward PE of 10.5x in March 2009. A forward PE of 7x and a 30% decline in forward earnings would take the market to new lows as part of a long-term secular valuation bear market (which began in 2001). Then the stratospheric rise in the market over the past few years will be seen as just a temporary aberration fuelled by QE.
The moment of truth for my strategic Ice Age view will come when we know how far the equity bear market will fall in the next recession, or conversely whether the bond bull market will continue with 10y US yields, for example, falling into negative territory.
And yet, here we are a decade into central planning, and global stocks are just shy of all time highs. How come?
If I were to identify the major error that led me to be too bearish on equities, it would not be the inflationary impact of QE on asset prices. What I got wrong is that after the end of the Great Moderation, which saw an extended period of economic expansion from Dec 2001 to Dec 2007 as well as low financial volatility, triggering rampant credit growth I expected economic volatility to return to normal. The lesson from Japan I told clients was that once their Great Moderation died in 1990, the economic cycle returned to normal amplitude as private credit growth could no longer be induced to keep it going. Thus I expected that after the 2008 economic debacle the US economic cycle would return to normality and for recessions to become much more frequent events as they were in Japan after 1990. And as in Japan, I expected each rapidly arriving recession would take equity valuations down to new lower lows. After 2008, I expected the US economic recovery to quickly fall back into recession and the cyclical bull run in equities to be surprisingly short-lived. How wrong I was!
Indeed, because as Bank of America observed recently, every time the stock market threatened to tumble, central banks would step in: that, if anything, is what Edwards failed to anticipate. The rest is merely noise:
Despite the economy flirting with outright recession on a couple of occasions, this current recovery has endured to the point where we now have enjoyed the second longest economic cycle in US history. We have not returned to normal economic cycles as I had expected. QE has helped this, one of the most feeble economic recoveries in history, to also hobble into the record books for its length!
To be sure, Edwards will eventually get the last laugh as the constant, artificial interventions assure that the (final) crash will be unlike anything ever experienced: “a recession delayed is ultimately a recession deepened as more and more credit excesses have built up, Minsky-like, in the system.”
Then again, will it be worth having a final laugh if the S&P is hovering near zero, the fiat system has been crushed, modern economics discredited, and life as we know it overturned? We’ll cross that bridge when we come to it, for now however, Edwards has to bear the cross of his own forecasting indignities:
… having stepped away from the crazed run-up in equity prices, my reputation for calling the equity market correctly has been severely dented, if it is not actually in tatters. I know that.
Still, it’s not just Edwards. As the strategist notes, increasingly wiser heads than I, who did not leave the equity party early, are suggesting a top might be close. He then goes on to quote Mark Mobious who we first referenced earlier this week:
The renowned investor Mark Mobius is also getting nervous. The Financial Express reports that “After Jim Rogers recently warned of the ‘biggest crash in our lifetimes,’ veteran investor and emerging markets champion Mark Mobius warns of a severe stock market correction. “I can see a 30% drop. The market looks to me to be waiting for a trigger to tumble.” He then goes on in the article to cite some possible triggers.
To be fair, there are plenty of others who have recently and not so recently joined Edwards in the increasingly bearish camp (among them not only billionaire traders but economists and pundits like David Rosenberg and John Authers), although one thing missing so far has been the catalyst that will push the world out of its centrally-planned hypnosis and into outright chaos. Now, Edwards believes that this all important trigger has finally emerged:
Perhaps the greatest near-term threat to the stability of the equity markets is seen as the recent surge in bond yields, which are now testing the critical 3% technical level.
As this is so important, I want to repeat verbatim what our own Stephanie Aymes says on this point. She says, referring to the front page chart, the 10Y UST is marching towards the major support (price) of 3.00%/3.05% consisting of the multi-decade channel, 2013-2014 lows, and the 61.8% retracement of the 2009-2016 uptrend. Moreover, this is also the confirmation level of the multi-year Double Top, which if confirmed, would act as a catapult towards the 2-year channel limit at 3.33%/3.43%, and perhaps even towards 2009-2011 levels of 3.77%/4.00%, also the 50% retracement of the 2007-2016 up-cycle. The Monthly Stochastic indicator continues to withstand a pivotal decadal floor (blue line in chart) which emphasizes the relevance of the 3.00%/3.05% support.
So with everyone chiming in on the significance of the 3% breach in the 10Y, here is Edwards:
“Let me translate: 3% resistance is very strong but if broken, there is big trouble afoot!“
The irony, of course, is that yields blowing out is precisely the opposite of an Ice Age, although to Edwards the implication is simple: once stocks tumble, it will force the Fed to return to active management of markets and risk, and launch the next Fed debt monetization program which will culminate with the end of the current economic paradigm, and Edwards’ long anticipated collapse in risk assets coupled with the long-overdue arrival of the Ice Age.
Or maybe not, as Edwards’ parting words suggest:
I think, like Mark Mobius, that equities are looking for an excuse to sell off and the current rally may abruptly end for any number of reasons. Although I personally do not think it likely that US bonds can break much above 3%, if at all, I discount nothing given the clear end of cycle cyclical pressures that have built up. But if I am wrong on bonds and we have seen the end of the bond bull market, after having been wrong on equities, maybe it is time to think hard on what the Barrons correspondent said and take a sabbatical – maybe on Saturn.
And while we commiserate with Albert’s lament, it could certainly be worse: have you heard of Dennis Gartman?