Albert Edwards: "Equity Investors Are In A Vulcan Death Grip And Are About To Fall Unconscious"

Tyler Durden's picture

Sheer poetic brilliance from the world's greatest realist, Soc Gen's Albert Edwards: "The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data  suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious."

In fact, Albert Edwards and Alan Greenspan should get together in a cage match to the death. It is now well known that the former Fed governor was manipulating the stock market on a day to day basis, as his statement that "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here" makes it all too clear that the Fed does not care about inflation or unemployment but merely Dow 10,000 hat sales, and will do everything in its power, even if that means collaborating with Chicago hedge funds in dark pools, to get stocks to go up. Yet how long until investors finally realize that stocks are not only a lagging indicator but a manic-depressive one at that:

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930's experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.

So yes, the slump is coming and the catalyst will appear loud and clear when the next stage in the analyst downgrade game begins: note - everyone already took down their GDP estimates. Guess what comes next. And yes, those sky high gross profit margins that everyone is touting are a two-edged sword - corporate America has taken advantage of the good side, soon, however, the time to pay will come.

I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can't remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% - the steepest fall since Q3 2006. Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts' optimism confirms we are right on the cusp of falling forward earnings (see chart below).

Edwards get downright hostile when discussing recent economic data out of US. We understand - the ever more acute manipulation of data by the BEA drones is getting infuriating. (bold below is Albert's)

August's rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging  indicators. The leading indicators - new orders, unfilled orders and vendor deliveries - all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent (see left hand chart below).

Lastly, Edwards discusses the feasibility of his S&P 450 target in light of a Fed that is resolute in never ever allowing stocks to fall again.

Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a "portfolio balance channel", but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity. Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes - (see GSW 21 January 2010, Theft! Were the US and UK central banks complicit in robbing the middle classes? - link). The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below).  The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.

And here is the kicker for all those expecting a massive stock surge on the imminet QE2 announcement: 

Many of our clients think QE2 might give a temporary flip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.

Forget our suggestion about the Greenspan-Edwards deathmatch (aside from the obvious outcome) - we cede it to the SocGen dude preemptively:

If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week "let them keep pressing their buttons." Ultimately they cannot fool all of the investors, all of the time.


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firstdivision's picture

The PPT needs to be eliminated.  They create more harm than good, due to the unsustanability they promote.  The markets would have more of an orderly unwind if these markets were not falely propped up.  They have been the main reason for the rise in volatility in these markets. 

Rasna's picture

I agree FD, but that will never happen for political, monetary and fiscal reasons... I saw that something was "wrong" with the market action a year-and-a-half ago with the narrow trading range and the rallies out of the blue... This is a struggle to the death for the Fed and the Wall Street/Washington elites to keep the Ponzie going, and as we've seen, they have infinite resources... This is not to say that they will ultimately succeed, I think that they will be overwhelmed by the oncoming financial tsunami, but they will prolong the inevitable as long as possible, and we shouldn't underestimate their resolve.

Mike Pento said the following:

However, because it failed to spark faster GDP growth, most people now agree that Fed’s traditional ordnance, namely purchases of short-duration Treasuries from primary dealers in order to depress the yield curve, has lost effectiveness. But the Fed is never… ever… ever… out of ammo. In fact, according to Mr. Bernanke himself, the central bank may be about to unleash the heavy artillery.

Go here for the full article if you missed it:

VegasBD's picture

Never underestimate the resolve of the people in power to remain in power. They will keep this going longer than we think they can. Im sure of it. But yes, this will end badly. Eventually.

Vampyroteuthis infernalis's picture

and as we've seen, they have infinite resources...

They have significant resources, not infinite. The scam will eventually end. The question is how long?

Cognitive Dissonance's picture

No, they do have infinite resources. That statement is correct.

What you're saying is that their infinite resources have a finite effect. And I agree. What the Fed and the powers hope is that enough people will say "Don't fight the Fed" long enough that they don't need to run down the effectiveness of their infinite resources.

It's already too late. But many won't come to that conclusion until it's too late for them. 

Kayman's picture

Sorry to dif CD, but the Fed has finite resources.  Money and credit depend on confidence, and everyday confidence is depleted a little more.

The Fed and its puppeteers like the illusion of infinite resources, and the illusion of infinite resources has kept them alive in the past.

Ultimately, they need to fall back on the "full faith and credit" of Uncle Sugar. And the "full faith and credit" of the U.S. is dissolving away like a sugar cube in a hot cup of coffee.


bugs_'s picture

ah but which hand is on their throat?  The Invisible Hand?

firstdivision's picture

The one not giving the reach around to all the banks.

liberal sodomy's picture

"Live long, and prosper"?

curbyourrisk's picture

Can someone get in there and give Ben Bernanke a Vulcan Mind meld.....would love to see what is really rolling around inside that pinhead of his....

Ripped Chunk's picture






That's all I got

Horatio Beanblower's picture

"On this edition of Peter Lavelle's CrossTalk, he asks his guests about the chances of a double-dip recession" -

williambanzai7's picture

By equity investors does he mean cyborgs?

bigdumbnugly's picture
"Equity Investors Are In A Vulcan Death Grip And Are About To Fall Unconscious"

that's because they've been saved in nick of time so often.   they've been conditioned to be dead meat when Scottie isn't there to beam them up anymore.

SheepDog-One's picture

Yes the 'equity investor' of today has been lulled into complacency by the promise that Q/E is infinite. It is not, and the next one will be a huge flash and crash. 

sethco's picture

I would describe this market as Quixotic.

Sancho Ponzi's picture

Hey, that's my territory;)

OT: Today's gold chart looks like an ecg pic of a myocardial infarction.

Bearster's picture

The central bankers have power because we, the people, want them to have it.

Go to any group of people, let's say to make my case stronger, a Tea Party group.  Ask them if they think government wastes money.  "Hell Yeah!" they say.

Tell them, OK, we are going to cut off your social security and medicare benefits.  Every one of them over a certain age (around 50 or so) will scream bloody murder.

Tell them OK, we are going to eliminate welfare and replace it with nothing.  Most of them would object on *moral* grounds--what are the poor going to do??  Sure, they would say, cut welfare and make it more "efficient" but government HAS to give to people in "need"!

OK, let's cut off aid to all foreign countries (perhaps with the exception of one or two strategic allies), not fair, what will they do, etc.

OK, let us eliminate the Departments of: Education, Energy, Transportation, Health & Human Services, Interior, and Homeland Security.  Whaa???

OK, how about ...

You get the idea.  People want government to dole out more than it takes in, and that is the problem solved by a central bank!  It can give the illusion (for a while) that this is possible.  But reality will have its revenge...

Calmyourself's picture

Sure, we are all pavlovian dogs trained to support and dispense Government largesse.  None of us Conservatives would call for means testing of benefits or Norplant in repeat babymakers or the completely dismantling of DOE, Education, HHS etal, the cutoff of foreign aid and the closing of 80% of overseas bases..

Are you familiar with the psychological concept of "projection"?

Maos Dog's picture

I am sorry bearster, but this is bullshit. You have ACTUALLY done this, or is this a projection or a thought argument?

I have BEEN to actual tea party rallies, TALKED to REAL people about a lot of these issues, and I can assure you that these would not have been the anwsers.

Regarding this:

Tell them, OK, we are going to cut off your social security and medicare benefits.  Every one of them over a certain age (around 50 or so) will scream bloody murder.

No matter what the reality of SSN and Medicare is, the fact is that wealth has been stolen from the 50+ year old's all of their lives to pay for SSN and Medicare, and YOU may think it's an entitlement, but they don't share that opinion.

Of course WE know it's a scam and we will never see that money, and that it was flat out theft, but tell that to some 70 year old guy who has paid in for 50 years.

TBT or not TBT's picture

It sounds to me like you haven't done this experiment yourself, you know, asking around at a Tea Party event, what they think of shrinking government payouts and programs.

Young's picture

Bullish flag in treasuries bitchez!

SheepDog-One's picture

Bullish treasury bubble indicator? Wow got to jump in!

RobotTrader's picture

Meanwhile, any fund manager caught at the end of the year without an outsized position in these stocks will likely be fired immediately.


doomandbloom's picture

vulcan, bitchez....

( whats happenin with that Hindenberg omens...)

RobotTrader's picture

Short sellers are now unconcious, trying to bet against these recent IPO's.

Mongo's picture

"if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here" makes it all too clear that the Fed does not care about inflation or unemployment but merely Dow 10,000 hat sales


Utter brilliance!


TD, I love you!

HelluvaEngineer's picture

Someone get back on the market pump - it's starting to go limp.

Confused Indian's picture

Its not a limp. Its an act to pretend that markets are natural. When common man has no money, no job, he must not be trading. So, these traders must be banks, funds etc who must be assured of a "bailout" in case they lose all they have in the markets, in this heinous attempt.

HelluvaEngineer's picture

that wasn't quite the metaphor I was going for

Confused Indian's picture

But they did listen to you it seems. ;-)

Now, additionally they are playing, "Its the time to Disco" in White House.

sethco's picture

They're losing it now. Blew their load too early today. There's always viagra though.

SheepDog-One's picture

'Saddle up, regulators'!!

rle1221's picture

plenty of ink, plenty of paper .... the fed can do what it wants

Confused Indian's picture

Is there a provision in law to punish such economists or policy makers to be executed when they destroy the whole nation, based on policies they consider "correct", and giving no ear to other possibly valid opinions?

Blistering Barnacles's picture

a most valid,well put and common sense question Sir.  you don't sound confused to me?

Gromit's picture

You can buy a DEC 11 SPY 50/45 bear spread for .30c - 

that's a 16 to 1 bet on Edwards' S & P 450 prediction.


Aghast in Midlothian's picture

While I'm no big fan of the Republicans, I hope the midterms give them control of one (or both) of the chambers of congress...I've never seen a time when investigations (into PPT, Fed, SEC, Freddie/Fannie, etc) were needed more. So long as the investigations serve truthfinding, and not political advantage....probably a pipe dream...sigh.

Rogerwilco's picture


Do you really think there will be meaningful investigations? Politicians know who butters their bread. A few Dems will be marched into the coliseum and fed to the lions for entertainment, otherwise its just business as usual in DC.

ZakuKommander's picture

Indeed.  If the Republicans wanted to block Benny Boy's recoronation they could have done so.  

Rasna's picture


What makes you think there will be investigations?

Reagan created the PPT!

Were there investigations under Bush II, with the Repubs in control of both houses?

There is not a dimes worth of difference between the Dem and Repugs...
We have a ONE party system, the Republicrats, who serve the Corporate plutocracy, and are hell bent on destroying the American middleclass and redistributing the wealth UPWARDS... How are those unfunded Bush tax  cuts working out for ya?  My guess is Gates and Buffett are pretty happy along with the Banks and corporations who benefitted from the tax cuts and $Billions in free TARP/TALF that they bought Treasuries with and speculated (cough... Goldman ...cough) with...

Cruel Aid's picture

Picture a time... when the electorate got completely fed up and voted in, over the course of 6 years, a new group of citizens who were desirous of serving the country and then moving on with their lives. Leaving behind a future free of gainful political career employment, corruption and crony capitalism.

Or an asteroid wipes them out.

One of these could happen!


Beard of Zeus's picture

It irritates you that taxpayers would get pissed that they receive nothing for the masses of taxes they have already paid in to SS/medicare system?

The rest of your examples are red herrings. I doubt most people would get upset at stopping welfare, foreign aid, Dep't of Education, etc.

Caviar Emptor's picture

Albert Edwards and I agree. Greenspan tipped his hand on several occasions in interviews and speeches since this crisis began revealing that it is Fed doctrine to reflate the stock market in order "reliquify". 

I go even further than Albert Edwards in what I see as the motivation for doing this.

He sees it as a way to cheerlead a recovery, increase "con_fidence", and of course there's the quick wealth effect for stalwart 401K holders who didn't sell out at the bottom.

I think that in this severe economic crisis that paralyzed capital and credit markets that the stock market has been used as an ATM for corporations and banks, a backdoor bailout of the Fed's cronies using taxpayer money. 

Flying under the radar and attracting suspiciously little attention was the record, repeat, record issuance of secondary equity offerings during 2009 and ongoing record junk bond issuance. These were the tools that corporations needed to replenish their cash, fund operations and most importantly roll their maturing debt. Without this method of bailout there would have been large numbers of corporate bankruptcies. Banks received a huge benefit as they both issued the new equity/debt and traded it in the secondary markets using risk free money from the Fed. So they had marching orders: keep the new stock moving up. Usually large dilutive secondaries cause a proportionate plunge in stock price, but not in 2009. 

Perhaps the Fed and Greenspan can pat themselves on the back, thinking that they "saved the world" in 2009. But they're not prepared to face the consequences, the "side-effects" of their massive, bold but ultimately reckless policy. The problem with the world that they re-created is now several fold: First, bailouts and socializing losses create big inefficiencies. The money that corporations and banks received are not being redeployed into the economy productively, nullifying the "multiplier" effect. Massive interventions are also really a form of social engineering: This crisis was not a New Deal, it's a doubling down on the Old Deal! In the 1930s, economic policy by the US government was to bolster the middle class, not take from it. Finally, and most importantly, what the world did Not need now was dollars, more dollars. It's the only thing that there's just too much of! The price to be paid will be inflation right in the middle of a post-bubble depression with lower incomes, employment opportunities and real estate values. Oh the poor middle class.....

Spalding_Smailes's picture


The Time for Bearishness Has Passed By Kevin Depew Sep 07, 2010 10:50 am





As you may be aware, some market forecasters are viewing the actions of the past couple of days as something akin to "The Last Days of Pompeii." All of the DeMark qualifications still read like a foreign language to me, but it feels like your DeMark indicator readings are in contradiction to that. Am I reading you right?

Using monthly range projections, the probabilities are right now that we close above the monthly projected highs for INDU, SPX, UKX, NDX and RTY.

The Nikkei has recorded a TD Sequential 13 buy signal on the monthly chart.

The S&P 500 cash index daily chart is coming off a DeMark TD Sequential buy signal.

In general, the weekly charts have all held critical TDST Down levels (a measure of trend) with the one exception being the Nasdaq Composite. One interpretation is that this index is a canary in a coalmine of sorts, but another way to look at it is that the sheer number of stocks in that index are making it look weaker than the rest of the market as breadth remains fairly weak, typical of the end of a secular bear market.

Meanwhile, the range has tightened for SPX. We're now in a range of 1165 to 1095 and have been very volatile trading through those upper and lower levels so far without qualifying breaks of that range. Because of the consecutive up closes we cannot break the top of that range today or next week until we have a down close. But we're getting closer to possibly making a decisive move.

The probabilities, based on my interpretation of the DeMark indicators, are that the move will be to the upside.

As mentioned on the Buzz and Banter (subscription required), I'm more optimistic right now than I've been in 10 years based on a combination of things: DeMark indicators, sentiment, general apathy and cynicism, etc.

A friend of mine on Friday, after the jobs report, said he couldn't remember a time when he was more right about the macroeconomic data and more wrong about stocks. I wanted to point out to him that you can't buy or sell stocks based on the economy. In the real economy things are very bad and will get worse for the foreseeable future. In the early 1980s, I remember my father, an independent pharmacist, struggling to make ends meet as the economy

took a toll. It was tough. My mother even went back to school at that time so she could find work. But the stock market was booming. Stocks are not the economy.

Let's look at it another way. What if in 1999, with the Nasdaq at 3500 or so, I told people that over the next few years we'll see the following:

1. The dot-com bubble will burst;

2. Stocks of companies that didn't go out of business will cut in half;

3. The first wave of a credit collapse will begin with the bankruptcy filing of a major telecom provider;

4. Terrorists will destroy the World Trade Center and try to destroy the Pentagon;

5. The US will wage a war on multiple fronts in both Afghanistan and Iraq;

6. Iran will develop nuclear weapons;

7. Oil will triple in price;

8. Real estate will collapse causing home prices to decline nationally by 20% or more;

9. At least three major banks that among them have been around more than 300 years and which employ 100,000 people worldwide will collapse;

10. Fannie Mae and Freddie Mac will be placed in conservatorship;

11. General Motors will be purchased by the US government; and

12. Gold will rise from $200/oz to more than $1,200.

I could go on, but the point is that all of that has already happened. My opinion is that the time to be bearish has passed. It's time to move on and prepare for something different.

It's now universally accepted that a "black swan" trigger event will cause things to collapse even further. Perhaps. But I have my doubts. I believe a "black swan" at this point is more likely to be an unforeseen positive catalyst. Remember, a "black swan" is not by definition a bearish event, just an unforeseen event.

The reality is I don't know what will cause companies to hire again, or profits to improve, or stocks to go higher. But having endured all that we have for 12-13 years now, and being unable to find any positive content about financial markets in either the media or even among hedge funds and strategists (sell side excluded), I think we've seen a pretty good bear market.

Make no mistake, I'm early in this and we probably still have further downside to go, but people are already protected and shielded
against that. Most people are either out of stocks and in bonds, or just out of financial markets altogether.

If I thought we were going to see a societal collapse of the magnitude some forecast, I wouldn't be writing this content, but actively looking to move my family somewhere safe. I may wrong, but I'm putting my money where my mouth is, literally, by staying here. Only time will tell, but the pessimism right now is deep and entrenched. This is the polar opposite of the entrenched bullishness in place prior to the debt crisis and real estate crash.

In 2004, at Minyans in the Mountains in Crested Butte, after my presentation a number of people were polite in saying they appreciated it but that they thought I was wrong to be so bearish.

In 2007 Todd Harrison and I attended a CNBC banquet at the Mandarin Oriental hotel where Maria Bartiromo presented Alan Greenspan with a Lifetime Achievement Award. Yes, just let me repeat that so it sinks in: In 2007 Todd Harrison and I attended a CNBC banquet at the Mandarin Oriental hotel where Maria Bartiromo presented Alan Greenspan with a Lifetime Achievement Award. Barely a half hour later, we're standing in the reception area where we strike up a conversation about real estate with senior economics reporter Steve Leisman. I told him I thought home prices would eventually fall by 20% or more on a national level. He disagreed. But I don't mean he just said, "I disagree." He said, "You're crazy." And he meant it. The point is not that Steve Leisman was wrong. For all I know he changed his mind the next day. The point is that entrenched bullishness produces responses such as "you're crazy." Entrenched bearishness works the same way, only from the other extreme.

If the end of this bear market is typical (and I believe it really will one day end), then after the mean reversion bounce that took all stocks higher in 2009, there will be individual stock advances that occur beneath the major indices, and those who are selective will outperform the broad market while the Greenspan years of capital misallocations get sorted out. Apple (AAPL) and Goldman Sachs (GS), for example, strike me as poster children for the kind of stocks most likely to underperform in the coming years.

My strategy is to be selective in stocks, and over the next couple of years, slowly reduce cash holdings in case I'm horribly misguided
in my burgeoning optimism. I have no need to use leverage because I've been well-protected over the past decade.

I may be wrong about all of this, but the only people who need to seriously worry about being wrong are people who make all-or-nothing bets. The market doesn't have to be all or nothing. I'm less concerned about the S&P 500 going to 400 than I am with how long it will stay there if it does go to 400. A week? Two months? A year? Then what?

People love to predict them some crashes, boy. They just love it. I know I do. It's exciting! Capital loss is so psychologically damaging, even if the loss is only temporary and for a few days, that those who call for crashes are like rock stars. But no one likes to talk about what happens after the crash. Why? Because it's so boring.

Rogerwilco's picture


Equity values still correlate with income streams. Unless your black swan has found a way to lay golden eggs, I see no rational way to maintain what is now illusory income growth in many sectors. The pencil, for now, is balanced on its point. That is not its lowest energy state.

Spalding_Smailes's picture

Kevin Depew has made many good calls over the years(early) hes not always bullish ...


Yes, it's here. Welcome to the Depression. No, don't drop whatever it is you're doing. Don't get up. It's not going anywhere. It will wait. It's just going to sit over here in the corner and read a magazine while you do whatever it is you need to do.

A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality.

     By Kevin Depew Jul 16, 2008

Ben Graham Redux's picture

He's wrong, very wrong.  Everything he writes makes sense for a different time but not now.  This isn't the 1980's where we had an asset base just waiting to be revitalized.  Today we don't have an asset base, only miles of houses and supercenters.  Depew is guilty of what a lot of market participants are guilty of - choosing the wrong analog.

Turd Ferguson's picture

This is exactly right, BGR. Depew has fallen into the same trap for which he criticizes Liesman...the belief that the basic fundamentals of the global economy haven't changed. But they have and that is where he fails.

There can be no Keynesian rescue this time. There is no further room to inflate and borrow our way back. The S&P is indeed headed to 450 but not overnight. It will be a long, slow torturous decline. There may be some hidden opportunities along the way to purchase undervalued equities but, on balance, "investors" in stocks are going to get crushed.

The end of The Great Keynesian Experiment is upon us. Prepare accordingly.