Albert Edwards Does Not Capitulate, Sees EM Bubble Pop As Triggering A 60% Decline In Equity Prices

Tyler Durden's picture

Contrary to conventional wisdom the SocGen duo of Edwards and Grice has not turned bullish (despite Dylan's "call" for a 63 million Nikkei). In the following note, Edwards debunks this recent fallacy. More importantly, Albert provides a geographic locus of where the next bubble pop will come from, which is no surprise as it is the focus of all capital flows - Emerging Markets. As he says: "The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008." Sorry Albert, with every central bank now all in, and ammo for additional operations now gone, the next blow up with make the H2 2008 implosion seem like a walk in the park. This will be infinitely worse than Japan. Which is why the last ditch to preserve the Ponzi will be unlike what anyone has ever seen before.

From Albert Edwards:

A  very  good  client  complained  that we were  doing  a U-turn, ditching  our previous  Ice Age bearish stance on equities and becoming vastly more bullish – using QE as the excuse. And to be  fair, Dylan’s  last  two notes, suggesting  that  the Nikkei could go  to 63 million  in 15 years and  that emerging markets could double, might be construed as being a  tad bullish.  In  this note I will make MY view crystal clear and tie it into Dylan’s recent work.

Our Ice Age views have driven our asset allocation for over a decade. We still believe we are locked in a secular valuation bear market for equities that will take many cycles to play out. We believe that we are now one recession from outright deflation in the west and that cyclical failure will take us to new lows on both equity prices and bond yields.

It remains my view that recession looms and will trigger yet another 60% decline in equity prices - the third in just a decade. But to be sure, the latest US ISM was better than widely expected, and the ECRI$s weekly leading indicator has just begun to turn upwards after reaching very weak levels recently that are normally consistent with recession (see left-hand chart below). The excellent folks at the ECRI recently declared "definitively" the risk of a double dip has now passed. But while I commend their lack of prevarication, I think this is a premature call given the degree of fiscal tightening coming down the tracks. In addition, the Conference Board leading indicator has also now moved into recession territory when the now defunct yield curve sub-component is excluded (because at zero Fed Funds the shape of the yield curve will now always add positively to the lead indicator, see right-hand chart below).

Meanwhile, bull-bear indicators suggest that the equity rally is now exhausted and crying out for a major correction (see left-hand chart below) at a time when the Conference Board measure of the jobs market suggests that the unemployment rate may be close to heading back up again, stoking further trade tensions with China (see right-hand chart below).

Dylan Grice and my erstwhile colleague James Montier have one key point in common when it comes to their investment approach - namely they both recognise the futility of economic forecasting. Dylan's mantra (apart from "make the tea Albert") is !there is no such thing as toxic assets, only toxic prices". Hence, like James, he is happy to invest if the asset is cheap enough. This approach also applies to insurance. Where there is a credible risk and insurance IS CHEAP, then one should buy that insurance. Hence his recent note on the high  risk of runaway inflation in Japan sending the Nikkei to 63,000,000 in 15 years came to the conclusion that insurance is cheap and it is available.

However, as we first said about a year ago, the only statements that matter are the H.4.1 and the H.3. Everything else is now ignored. Which is why the hedge fund community will soon lose a bulk of their analyst pool: their services are now redundant (unless they are good at ferreting out insider information of course). They will be replaced by former Fed workers who can at least pretend to think like the bearded madman.

In the same context, his note last week showed that to the extent that EM had become the liquidity and momentum trade de rigueur, valuation was not a binding constraint and prices could rise significantly if we were to reach the same excesses seen in 2008 (see charts below). Even a wizened bear such as myself would buy out of the money calls if they were cheap enough as a hedge against my central case being wrong or, indeed, too early.

But for me, despite all this liquidity pouring into EM equities, they are just another high beta trade, outperforming on the way up and underperforming on the way down (see charts below). Show me a period when developed markets are down 20% and EM equities rise by 20% and I might be more of a believer. The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008.

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MountainMan's picture

Silver short squeeze underway.

fiftybagger's picture



The risk of large potential losses through short selling inspired financier Daniel Drew to warn:

"He who sells what isn't his'n, Must buy it back or go to pris'n"

calltoaccount's picture

"He who sells what isn't his'n, Must buy it back or go to pris'n"


Except that's before the SEC decided enforcing the securities laws for the prompt settlement of transactions was contra to Agency policy and a distinct impediment to advancement in the Agency or thereafter, working directly for the house.

SEC non enforcement of requirement for actual delivery of that which is sold, enabled by the DTCC's insidious counterfeiting operation, permitted bankster-hedgefund-wheeler dealers to scam billions from investors directly into pockets.   It is that unchallenged success (until they started doing it to each other)-- and getting away with systemic fraud at such a basic level that emboldened these bastards to think they were invulnerable-- and having the Fed continue to blow them only reinforces their psychopathy.  

MeTarzanUjane's picture

I'd like some silver news today. Looks interesting.

lsbumblebee's picture

Nah. Nadler probably heard a knock at the door and is hiding under his desk.

Cognitive Dissonance's picture

Now that's funny shit. I have the image in my brain as I type.

Whoops, he just peeed his pants. :>)

johngaltfla's picture

That's almost as funny as a comment I read elsewhere saying that for every 1% increase in silver prices there is a correlating 7% increase in his skid marks.

Saxxon's picture

+1.  I read Nadler for a sedative, when I feel I'm getting too giddy.

centerline's picture

servers must be getting hit hard to today.  Took me a couple of hits to get through.

Hansel's picture

Kitco has been having problems for a couple months now that I have noticed.  The new audience to gold is maxing out their tubes.

Bill Lumbergh's picture

No, but Nadler had just confirmed for us that GLD is a safe investment per Lara:

“Conspiracy theorists claim that the major gold ETFs don’t regularly conduct audits, so investors can’t necessarily trust that the gold the funds claim to hold actually exists.  This is 100% false.  Factually incorrect.  Wrong-o.  ALL of the major gold bullion ETFs available to US investors conduct independent audits, including GLD.

One audit is a full bar count, while the other is a random sampling.  In some ways, ETF gold is actually more trustworthy than the stuff you’d find at coin shops or dealers, because banks offer a paper trail tracking the entire life cycle of each gold bar, from casting to custody.  Outside of a bank, it’s harder to dig up the same certified paper trail."

Looks like we have been "wrong-o" the entire time...thanks Nadler for clearing up this issue.

Ragnarok's picture

WB7, To Boldy Go Where No CB Has Gone Before!

pseanthebull's picture

Hey Tyler

Is there anyway you can post the PDF of AE and DG's reports from Socgen?

Or are there compliance issues?



Cognitive Dissonance's picture

This will be infinitely worse than Japan. Which is why the last ditch to preserve the Ponzi will be unlike what anyone has ever seen before.

The herding into the risk trade has accelerated. This is an "all in" FED bet with an unlimited supply of chips. I'm simply amazed how many people wish to believe the lunacy that it's all right to pig pile into EVERYTHING because they'll be able to see the top before everyone else.

As someone who worked in an insane asylum for a summer as an orderly, there is no describing how quickly a wave of hysteria sweeps through 50 lunatics gathered in one room. Breathtaking in speed and magnitude, what really surprised me when I witnessed it twice in three months was the effect it had on me, the supposedly sane one in the room.

We are witnessing the same thing in the world and the markets today. This could last another day or another month. But when the change happens, and it always happens, it will be swift and merciless and no one will see it coming. No one. You'll know it's coming at some point because it's obvious, but you won't actually see it until you're engulfed and gasping for air.

Divided States of America's picture

Armageddon will play out faster than you think. Its not going to take 10 years, it will take probably 2-3 years. Look at all the bubbles over the last 15 years, tech, housing, credit. Each expedited the occurence of the next one before blow-up and more awful fed policies. Thanks to Benny boy, the mother of all blow-ups have been fast forwarded a few years.

AR's picture

CD  /  This is going to end extremely badly. We discuss weekly our amazement at the newbie-type money managers who have scant regard for history, or, for how easy it is to lose one's hard earned money. Market psychology is reckless in our opinion. As posted earlier, 10 years ago, even a hint of government intentionally inflating or propping up prices would cause the S&P's to open locked limit down 50 handles. Today, it is all greeted with cheers. Just stunning. Manage your risk well, as there will be plenty of time to sell markets when they turn down. Crack cocaine mixed with heroin, is not good, no matter how one packages and sells it.  You be well...

unum mountaineer's picture

Crack cocaine mixed with heroin, is not good, no matter how one packages and sells it.

new names,

same games,

sloppiness rules the day


SteveNYC's picture

Right you are. We are less conscious as a race than at any point in our history, therefore far more subject to the panics and behaviours of the herd.

Be conscious, moment to moment, maintain awareness......


Cognitive Dissonance's picture

I like to say "Be Mindful", but any phrase works as long as you're moving towards it.

trav7777's picture

some of us saw it coming in 2007.

The risk-on trade is what the Fed wants.  They control the pricing of the SP500.

Like I continue to say, there is NO WAY to balance the math of this system other than printing/QE.  That's IT.

If I read one more freakin person bleating about how "wrong" this is when, once you accept the SYSTEMIC nature of this flaw it all becomes very obvious and logical, I may have to puke.

The Fed is doing the ONLY THING within this system which will work to solve the MONETARY nature of the problem, which is systemic.

The matter of real economics, your jobs, the real cost of energy, is OUTSIDE the control of the Fed.  NOTHING they can do can print oil.  The effects of Peak Oil WILL OCCUR irrespective of whether we are on a GOLD standard.  There is NO FIX for this.

So everyone stop goddamned whining about how the Fed just won't "back off" and let shit fix itself.

jdrose1985's picture


The pricing mechanisms of oil will shut this trade down.

Its unbelievable how much power you goofballs attribute to the Fed.

The laws of nature always win in the end.

Edit; you must have edited your post or I missed the printing oil paragraph (I'm posting from phone) but you are correct.

Unless the Fed can stop this funny money from flowing into real goods the end game is extremely deflationary as the economy collapses beyond salvage as commerce inputs are priced out of existence.

The lunacy has gripped far too many.

Metal Fabrication Business Owner speaking from the real world here.

Orly's picture

Talked to a guy the other day who sells your nuts and bolts in the East.  He says India and VietNam are the shit and China ain't doing so hot.

What say you?

jdrose1985's picture

Chinese materials are suspect in general. Many components which should be 100% carbon steel will tin alloy junk.

Anything with tight tolerances will not say made in China.

plocequ1's picture

Hals response: Decline, Decline.. That command is not in my Memory bank. Decline. Delete command or i will crash.

HelluvaEngineer's picture

My charts show we're 3 pts away from the April pin high, and essentially at the closing high.  If it's gonna happen, it needs to happen now, IMO.  Otherwise this could drag on forever.

Hansel's picture

Albert is announcing QE2 fails before it starts... sounds a little premature.  Further, the people who say QE will fail say asset prices will collapse just after QE is finished, and so they wait on the sidelines in cash, but how long are they going to wait with Ben printing and with life happening in the interim.

I also seriously doubt we will see much fiscal tightening given Ben's willingness to print to fund deficits, and with any fiscal tightening causing GDP to shrink. Gov't is conveying the impression that soft default is preferable to hard default.

Oppressed Monkey

Cognitive Dissonance's picture

Oppressed Monkey

I oppress my monkey on a daily basis. My mother lied when she said I would go blind. :>)

traderjoe's picture

I think it depends upon how you define success. Yes, asset prices are rising. I don't think people who are talking about the failure of QE2 are referring to whether asset prices rise or fall after it ends. 

Have you ever seen Charlie Wilson's war, and the parable of the zen master - "we'll see"?

That's QE2 (and QE) for me. It might work for today, but it sows the seeds for our eventual destruction. Fiscal austerity will have to come at least at the muni level, and maybe at the Federal level too. Savers are seeing less interest. Together gross wages will decline. However, prices of living expenses will rise. Oil's over $85/barrel today. They will never be able to stop QE or ZIRP. Both a traps. Liquidity traps. And there is the creeping realization that maybe the FRN is really just a piece of cotton/paper with some ink on it...

We have begun a cycle into the abyss...

Gust Avrakotos: There's a little boy and on his 14th birthday he gets a horse... and everybody in the village says, "how wonderful. The boy got a horse" And the Zen master says, "we'll see." Two years later, the boy falls off the horse, breaks his leg, and everyone in the village says, "How terrible." And the Zen master says, "We'll see." Then, a war breaks out and all the young men have to go off and fight... except the boy can't cause his legs all messed up. and everybody in the village says, "How wonderful." 
Charlie Wilson: Now the Zen master says, "We'll see." 

Hansel's picture

For me, if we continue to live day after day in the status quo, QE has succeeded.  People on a daily basis bitch and moan about how doom will come eventually and things will be different, but in the meantime life is passing by and the people who succeeded by graft remain fat.

traderjoe's picture

"if we continue to live day after day in the status quo, QE has succeeded."

Respectfully, I couldn't disagree more. The average American, with little to no exposure to the stock market, just got dramatically squeezed today. Gasoline alone is up 1.5% or so today. 44 million people on food stamps. 1 in 7 mortgages delinquent. There's real pain out there. 

Just because my silver is up 5% doesn't mean I think QE has succeeded. Plenty of people were calling a top in housing in 2004/2005. They sounded like Cassandra's for years. 

Like the Chrysler and GM bankruptcies, and how the secured creditors were shafted in contradiction to hundreds of years of precedent, the effects of QE will be subversive and subtle at first. $600 billion is being created at the click of a button - in part admittedly to create inflation. What do large numbers mean anymore? Is the dollar a store of value any more? Was it ever? Why does the Federal Reserve, a private institution, have more power over our economy then any other single institution? Will there ever be an exit from free liquidity? How, when?

One day. one month, one year, cannot be the measure(s) of success for managing the economy. Nor can stock prices be the yardstick of the health of our country. 

Hansel's picture

We don't disagree; I agree with everything you said.  I just think all the problems you listed constitute the status quo, and it hasn't changed.

Robslob's picture

Shit CD that is the stuff dreams are made of!


Right now I am the one gulping for air in short POSitions...lmao...


Must love pain, must love pain....

Cognitive Dissonance's picture

I remind myself on a daily basis that the only reason the so called "lunatics" are locked up is because they hold a minority position. The more socialized and thus acceptable sociopaths are currently supported by the majority.

There is very little difference as far as I can see other than toilet training.

Divided States of America's picture

CD, you make too much sense, its scary. You should try to be elected in your district. We need a voice like yours among a circus of monkeys.

Cognitive Dissonance's picture

Do you really think a group of people want to hear what they don't want to hear?

I didn't think so.

"Daddy, tell me another lie so I can believe it's the truth."

We all say we want to be told the truth right up to the point where it's our own sacred truth that's being debunked by the speaker. Then we're outraged that someone let the dog piss all over the carpet.

Milestones's picture

Toilet training!! +1000  L.M.A.O.   MIlestones

DUNTHAT's picture

Just got off the Treasury site.  In their monthly report, before yesterdays announcement, they were talking QE2 in terms of 1.2 Trillion over 12 months.

Soooo 600B just the first installment???

Keep in mind they have a Four Trillion money supply shortfall (M3) to make up !!

That's why they think they can get away with this without creating runaway inflation.

What_Me_Worry's picture

I capitulated at about 2:20 yesterday.  Sold every put I had.  Thankfully, I had TBT calls to counter.

I just cannot imagine how asset prices are going to go down in the short-term now.  If we take a 60% drop from here, I would have to imagine the whole thing unravels.  It appears QE will be a yearly occurance now.  Might as well start calling them in the year they were announced.  I guess BB wasn't lying when he said he felt comfortable with the Fed balance sheet around $9T.

$900B is a helluva drug.

Mr Lennon Hendrix's picture

BS Bernanke will stop at nothing to not pay the interest on the dollar's debt.  Equities are hyperinflating and will continue to do so until the Fed warrants a slight pullback, only to hyperinflate some more.  Oh, and he must do it before peak oil, because then they really do lose their only revenue stream.  You know, oilgarchs and whatever you would call them...elitest, but I do not like that term.  There is nothing elite about them.

The corporations, these firms, they are about to inherit the economic landscape.  And guess who told you all about it.  Paul Fucking Krugman, that's who.

Rise of the Firms, or maybe I should begin to call it THEY RISE?????????:

gwar5's picture

I figure the crash was already been planned into this whole operation. Nobody told them?  It's like a plague of locusts taking every last bit before they move on.

Hondo's picture

The P/E's don't, in my mind, suggest even more room to the upside.  You would indeed have to be insane to say the ramp from 2006 - 2008 is normal.  Take that out and you're pretty much to the levels from 2002-2006.

No Mas's picture

Now that's funny; like P/Es have anything to do with anything.

In case you missed the memo, there is only one thing that matters in this market and his name is Ben.

lizzy36's picture

I love redux. Seriously.

Doing the same thing over and over, and expecting a different result, may be the definition of insanity, but is sure leads to predictable results.

Anyone who doesn't think the fed is blowing what will ultimately be the last bubble, is to stupid to breathe.

Enjoy the next 12-24 months.

In this case 4 really will be the charm.

Mr Lennon Hendrix's picture

They are getting the results they want.  Inflate the dollar.  Equities rise.  Gold rises.  The game continues as the people of the First World think that it will go on forever and that it will be emerging markets that suffer at the hands of "free" markets.

tempo's picture

Today, US$ down 1.2%, oil prices up 1.8%, cotton up 3.4%, sugar up 3.8%, corn up 1.8%, gold/silver up 3.5%.    How does this price instability (inflation) create domestic jobs?   How can any small business expand in this insanity?  

Mr Lennon Hendrix's picture

Go public and sell, I mean sell your stock.

tip e. canoe's picture

it can't...and that's the point.

MountainMan's picture

Panic setting in for Silver shorts. Please exit to your left.