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Albert Edwards: "I Have Been Wrong – I’ve Been Too Bullish"

Tyler Durden's picture




 

And so with a slight delay, one by one the bears come out of hibernation. Today, SocGen's Albert Edwards is the first to remind us that no matter how high the Fed pushes stocks (as per Bernanke's now own admissions of the Fed's "third mandate"), it means exactly nothing for the economy, and the actual cash flow drivers that in a non-bizarro world validate any bull market, not the straight line bear market rally that has continued to defy gravity and reality for two years now. The catalyst as per Edwards, is once again the recurring threat of a demographic crunch, phrased in a way that only the SocGen strategist can: "Our Ice Age thesis called for a long secular equity valuation bear
market, just like Japan. Most reject the comparison with Japan,
especially with regard to the US having better demographics. Indeed I
felt that beyond the lost decade and secular bear market, the US outlook
was much more upbeat that Japan’s. But now, I am thinking I might have been too bullish....I haven’t really cracked this one but chatting this through with a number of people, I would suggest that although GDP growth may be more closely related to the absolute growth of the working population, asset price inflation may be more closely related to the proportion of workers in the general population. If that is the case, as the former baby-boomers start to retire this burgeoning cohort will tend to liquidate assets. This only exacerbates the secular bear market for property prices (which have already begun to decline again) as well as the equity market. This means that Bernanke for all his efforts may not be able to prevent the secular valuation bear market fully playing out until rock bottom valuations are reached." Oops.

More rhetorical brilliance from Edwards:

The sell-side and buy-side are locked in a steamy embrace, with the sweet scent of optimism acting like a most potent aphrodisiac. Equity bears are now an endangered species, just as they were in 2007. I have long held to the Japanese template for what is now occurring in the US and the UK. I have long believed that a lost economic decade was an inevitable consequence of the gross mismanagement of central banks. Our Ice Age thesis called for a long secular equity valuation bear market, just like Japan. Most reject the comparison with Japan, especially with regard to the US having better demographics. Indeed I felt that beyond the lost decade and secular bear market, the US outlook was much more upbeat that Japan’s. But now, I am thinking I might have been too bullish.

All hail bountiful Ben. There we were at the end of August – with the S&P down some 6% and the economy maybe heading for a double-dip – and lo, with the promise of QE2 coming down the tracks, the market managed to put on some 16% in the final third to leave us up a respectable 13% for the full year. Ben’s November article in the Washington Post explicitly spelt out the policy – “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion”. -link. And so it came to pass. From the end of August stocks rallied. Leading indicators recovered. Spending increased. Jobs picked up. A virtuous circle indeed. Unfortunately, though, policy makers have yet to learn the lessons of the Great Recession. Basing economic growth on loose monetary policy driving up asset prices is simply doomed to failure.

As far as the sell-side is concerned, I feel like the last bear standing. But we have been here before. Nevertheless, beyond the Ice Age adjustment (which still has a long way to run), I had entertained hopes that the US might not fully replicate Japan’s debacle once de-leveraging was complete, due mainly to more favourable demographics. A client kindly sent me the chart below. I am no longer as optimistic as I was – at least not until 2030.

To be sure, a superficial analysis of demographic trends does not highlight the danger lurking beneath the surface:

When one examines the UN data Japan’s terrible demographics are self-evident (see chart below and link). Having said that, contrary to what is generally assumed, rapid population growth is not a sufficient condition in itself for rapid economic growth. But if human inputs alone determined GDP growth, the US outlook is favourable indeed – even relative to China.

But it gets much worse: If Edwards is correct, and it is not the working population but the working population as a % of total population that matters (which is critical considering the recent 25 year low in the labor force participation rate), then all those calling for a divergence between the US and Japanese case studies may be forced to reevalute their theses:

The reassuring picture painted for the US from the chart above contrasts sharply with that on the front page where it looked as if the US demographic situation was every bit as bad as Japan’s going forward – at least until about 2030. The difference is the front page chart  shows working population as a % of the total population. And although the working age population continues to rise throughout the forecast period, the number of retirees rises even faster.

The front page chart shows how asset prices in the US topped out 15 years after Japan (i.e. 2007 v 1992), entirely in line with the topping out of the working population as a share of the total. Now I haven’t really cracked this one but chatting this through with a number of people, I would suggest that although GDP growth may be more closely related to the absolute growth of the working population, asset price inflation may be more closely related to the proportion of workers in the general population.

If that is the case, as the former baby-boomers start to retire this burgeoning cohort will tend to liquidate assets. This only exacerbates the secular bear market for property prices (which have already begun to decline again) as well as the equity market (see chart below). This means that Bernanke for all his efforts may not be able to prevent the secular valuation bear market fully playing out until rock bottom valuations are reached.

And lastly, to underscore his thesis, Edwards proceeds to demonstrate the Tobin q and Shiller PE, which as we noted very recently, both indicate a 50% overvalyed market.

And with some key equity valuation measures still some 50% above even their average levels (see chart below), the bear market may be far worse than I had previously supposed.

 

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Mon, 01/17/2011 - 12:43 | 881843 plocequ1
plocequ1's picture

Wow, Thats deep. Tomorrow POMO will make it all better.

Mon, 01/17/2011 - 13:21 | 881970 CPL
CPL's picture

It unfortunately always does.  They've ruined my Direxions ETF Bear shares too many times to count with getting stopped out.

 

It's a bizarro superman universe out there.  Bad News, Calamity, Death, Pestilence, Famine = Great Markets.  When I see dire news on Bloomberg it means it's time to buy on the dips.

Mon, 01/17/2011 - 13:32 | 881993 Thomas
Thomas's picture

"it is not the working population but the working population as a % of total population that matters..."

This is an obvious conclusion that does not warrant the high paycheck.

Mon, 01/17/2011 - 13:55 | 882059 Ludwig Van
Ludwig Van's picture

 

Tomorrow's a TIPS pomo day. Look 'em up on the charts. TIPS days suck -- as in money *out* of the market. (A TIPS day is one of the few on which I've seen option chains register negative numbers on *all* strikes. If this is zero-sum, on a TIPS day it can cease to be put v. call, but put *and* call v. ???)

Tomorrow's also a tone-setting day for a big earnings-report week. Lots of little guys all-in long (it's worked so far), and with options expiration Friday, this week's looking like a slaughter -- led by Vikram of the Citi.

The anecdotal chart of declining Fed credibility remains still unavailable in an undoctored form, the SPX stalking 1300. Looks like a good week for puts. (Not a good week for putz.)

 

Mon, 01/17/2011 - 14:31 | 882141 Amish Hacker
Amish Hacker's picture

A tone-setting day indeed, as 200-plus hedge funds realize they've been holding a call option on Steve Jobs' health.

Mon, 01/17/2011 - 15:54 | 882081 Ludwig Van
Ludwig Van's picture

 

Jahwol, mein herr. I was bearish coming into this day. As virgilcaine said on another thread, "The top is in."

 

Mon, 01/17/2011 - 15:20 | 882263 duo
duo's picture

Not only POMO's going on.  It's also "American Idol" week, meaning the government can do whatever they want and the news won't cover it, and if they did, no one would pay attention.

Any way we can correlate legislative screwing of the people with hours of "American Idol" programming in a given week?

Mon, 01/17/2011 - 18:28 | 882726 CPL
CPL's picture

Bread and Circuses

Mon, 01/17/2011 - 12:46 | 881850 Trimmed Hedge
Trimmed Hedge's picture

Per the futures, the S&P has given up 25% of Friday's gains.

THIS IS THE BIG ONE, BABY!!!

Mon, 01/17/2011 - 12:50 | 881866 g3h
g3h's picture

That is nothing.  Market gets back in a second.

Mon, 01/17/2011 - 12:56 | 881892 HarryWanger
HarryWanger's picture

/ES down 4 pts. Hardly the "BIG ONE"

Mon, 01/17/2011 - 13:03 | 881911 Ferg .
Ferg .'s picture

I wouldn't say the decline in S&P futures is anything to shout about . Nasdaq futures on the other hand have fallen big time in the last few hours .  

Mon, 01/17/2011 - 13:04 | 881916 plocequ1
plocequ1's picture

The 4 POMO dudes  are off today. Tomorrow is another day.

Mon, 01/17/2011 - 13:22 | 881971 CPL
CPL's picture

Futures are meaningless in a government interventionist market.

Mon, 01/17/2011 - 12:47 | 881858 philgramm
philgramm's picture

He's just signaling the introduction of QE3 to QE17.  They have to send out a different chump to tell us they need more money in  between months of pumping the economy...............and by economy I mean mine and your anus.  ani? pleural?

Mon, 01/17/2011 - 12:51 | 881869 Rainman
Rainman's picture

Ben will stick to his story that " the USA is not going the way of Japan " until the last dying fiatsco.

Mon, 01/17/2011 - 12:53 | 881876 Rusty Shorts
Rusty Shorts's picture

Does anyone remember Don Johnson and his $8 Billion dollars in a suitcase?

http://articles.latimes.com/2003/mar/13/local/me-johnson13

Mon, 01/17/2011 - 13:26 | 881984 bonddude
bonddude's picture

Yes. It was mostly foreign government bearer bonds.

No. We never got the REAL story.

After several hours he was released WITH the securities.

Mon, 01/17/2011 - 13:41 | 882026 gwar5
gwar5's picture

Whatever happened to the 2 Japanese caught in Italy, on a train to Switzerland, with $135 Billion in US bearer bonds?

The bonds weren't 'fake'.

Mon, 01/17/2011 - 15:02 | 882209 DosZap
DosZap's picture

gwar.

Yes they were fakes, they idiots that printed them, put a image of an American Space Shuttle on them.

The Bonds were way older than any dream of a Shuttle.

Mon, 01/17/2011 - 18:42 | 882749 chump666
chump666's picture

"put a image of an American Space Shuttle on them"

 

hahahahahahaah....

Mon, 01/17/2011 - 12:55 | 881886 CD
CD's picture

On the topic of QE -- a remix of the original talking bears discussing QE:

http://www.youtube.com/watch?v=UGlX1BDgLBY

Interview with the clip's creator, Omid Malekan on Minyanville

Mon, 01/17/2011 - 13:32 | 881995 bonddude
bonddude's picture

Some Sonoma banker bears discuss their own brand of QE while the bank fails.

http://www.youtube.com/watch?v=damy_0HvyUI

Mon, 01/17/2011 - 12:55 | 881887 the rookie cynic
the rookie cynic's picture

Boomers are getting to the stage where they're taking money out of the market to live on. We've all seen the reports here on ZH. Outflows, outflows, outflows. Bernanke is stuck on the POMO-stick. If he want equities to hold, he's gonna have to keep bouncing that sucker, otherwise Lloyd and Jamie steamy embrace devolves into a bitch slap frenzy.

 

Mon, 01/17/2011 - 13:20 | 881968 DosZap
DosZap's picture

Boomers are taking money out of an inflated fake mkt, and their $$ off the table.

Having been sheared a couple of times, they know they cannot take another haircut(and live long enough to make it up),they have figured out a 25% shear requires a 50% increase to just get back to even.

And their say FU no Mo.

Mon, 01/17/2011 - 14:02 | 882046 Don Birnam
Don Birnam's picture

"No mo ?"

POMO, bro ! 

Just buy the dip. Everything will be groovy.

 

Mon, 01/17/2011 - 14:08 | 882089 SingleCross
SingleCross's picture

In reply to DosZap "Boomers are taking money out of an inflated fake mkt, and their $$ off the table."

Yes, I am a boomer and started taking $ out of the stock market in 2005, using it to 1) pay off debt, 2) purchase PMs, 3) make contrarian investments, and 4) prep.  Most of my $ had been in Textron - I worked for a subdivision and have since taken early retirement.  I was fortunate to have dodged a huge bullet by getting out early.

After a few bank transactions that I knew would be reported I was "randomly" selected to participate in the US Census SIPP (Survey of Income and Program Participation).  Every 4 months I get a government call or visit with detailed financial and other questions that you might not believe.  So, it might be that I'm "on a list" or it's quite a concidence.  Either way "we pays our money and takes our chances."

I have really enjoyed contrarian investing and doing it myself.

 

Mon, 01/17/2011 - 14:20 | 882111 SingleCross
SingleCross's picture

In reply to DosZap "Boomers are taking money out of an inflated fake mkt, and their $$ off the table."

Yes, I am a boomer and started taking $ out of the stock market in 2005, using it to 1) pay off debt, 2) purchase PMs, 3) make contrarian investments, and 4) prep.  Most of my $ had been in Textron - I worked for a subdivision and have since taken early retirement.  I was fortunate to have dodged a huge bullet by getting out early.

After a few bank transactions that I knew would be reported I was "randomly" selected to participate in the US Census SIPP (Survey of Income and Program Participation).  Every 4 months I get a government call or visit with detailed financial and other questions that you might not believe.  So, it might be that I'm "on a list" or it's quite a concidence.  Either way "we pays our money and takes our chances."

I have really enjoyed contrarian investing and doing it myself.

 

Tue, 01/18/2011 - 02:11 | 883506 blunderdog
blunderdog's picture

I was a SIPP victim for awhile.  My advice is to stop communicating with those people ASAP.

Mon, 01/17/2011 - 12:56 | 881889 nm1
nm1's picture

The average American's argument is that since the stock market is comprised of companies that actually make real products, the rising prices cannot be a mirage of Uncle Ben's making.  They are in fact reflecting a supposed real (rising) demand for the products that these companies are making and selling.

I await your responses as my heart bleeds for the average American.

 

Mon, 01/17/2011 - 13:02 | 881909 Oh regional Indian
Oh regional Indian's picture

The average American is an automaton. No better. A slave of training and propaganda.

Chock-a-block with one liners borrowed from some sit-com writer, relayed ad infinitum through re-runs so they are engrained as funny, or sad or definitely appropriate responses to those carefully crafted "reel" life sit-uations, mimicking life, mimicking art, mimicking life, mimicking art... ouroborus.

ORI

http://aadivaahan.wordpress.com/2010/06/14/know-thy-self/

Mon, 01/17/2011 - 13:06 | 881922 Cdad
Cdad's picture

nm1,

My response is your comments are an oversimplification of the business cycle, thus allowing you to post a bullish message in 40 words or less.  You don't seem to understand the inventory rebuild cycle, and how that ends when organic economic growth is not present [as is the case in the US].

As well, you leave certain terms in your comments ambiguous.  For example, you say, "the rising prices..."  What prices are you talking about?

You mention rising demand...but you make no attempt to explain that this supposed rising demand is a blip bounce off of a death cliff of falling demand which, like unemployment, is almost certain to be structurally impaired for years to come.

I think you barely make an argument at all.  That is my response, anyway.

Mon, 01/17/2011 - 13:43 | 882031 SheepDog-One
SheepDog-One's picture

Trillions in money printing from butt-wranglers Bernanke and Geithner 'driving up prices' due the dollar being trashed is not 'increasing demand for products', just means things people need to live are going up in price. Doesnt reflect a thing on the ability of bankrupt americans to PAY higher prices.

Mon, 01/17/2011 - 13:49 | 882039 SheepDog-One
SheepDog-One's picture

And never forget that great american economic foundation, the $10 rice burrito!!

Mon, 01/17/2011 - 15:08 | 882225 DosZap
DosZap's picture

Sheep,

Funny you bring up the burrito.Just snagged another 25# bag or rice and pintos.

Every supermkt trip adds more surplus reserves.

Mon, 01/17/2011 - 13:08 | 881931 Rogerwilco
Rogerwilco's picture

GDP = consumption + gov't spending + investment + exports - imports.

delta GDP = 2.7%, delta gov't spending = 11%

You do the math

Mon, 01/17/2011 - 14:56 | 882197 the rookie cynic
the rookie cynic's picture

I'd add a 2nd mirage to the stock market activitity you mention. Most Americans believe the following: cash is safe. This is another myth they'll wake up to, but only after it's too late for most of them.

Mon, 01/17/2011 - 13:01 | 881901 Rogerwilco
Rogerwilco's picture

Cash flow matters? Who still believes in that old cliche? POMO and overstuffed burritos will take us to the promised land.

Mon, 01/17/2011 - 13:44 | 882035 SheepDog-One
SheepDog-One's picture

Hooray for $10 overstuffed rice burritos! Its what america is now built on. That and IGadgets.

Mon, 01/17/2011 - 13:02 | 881908 alexwest
alexwest's picture

whoa,, no wonder all banks are insolvent.. if economits are jsut plain stupid

###
If Edwards is correct, and it is not the working population but the working population as a % of total population that matters (which is critical considering the recent 25 year low in the labor force participation rate),
###

cant believe.. YES FUCKING VIRGINIA, ITS NOT FICKING KANSAS ANYMORE..

what is the point in people if THEY'RE FUCKING UNEDUCATED, umeployed, poor / stupid / hungry? its what America became..

if demographics were only reason to be prospered for country, why china is so fucking poor ( 500$ annual income), why is in INDIA still dead bodies in fuckign river Gang and people shit/eat/wash same places ??

on contrary richest countries are small coutries where GOVERMENT UNDERASTAND main asset is PEOPLE, who are THE BLCOKS OF NATION... Switz, Singapore, Sweden , Dania, Finland etc eetc.. most happy, most rich , most advanced in the world...

alx

Mon, 01/17/2011 - 15:15 | 882243 DosZap
DosZap's picture

Also the most ehthnically PURE nations on the globe.

Tough as hell on immigration, and citizenship.

Mon, 01/17/2011 - 13:05 | 881918 jakethesnake76
jakethesnake76's picture

i'm sorry but is there a bear club which he is part of , what's the name of that club, or do you have to live in a certain area to be a bear ? Or is it some media group ? 

Mon, 01/17/2011 - 13:08 | 881923 Sudden Debt
Sudden Debt's picture

And that's happening all over the world. The governments have seen this comming and this is why they spurred mass immigration hopping they would buy all these assets and keep the price up.

They seemed to have forgotten that the immegrants don't have the good jobs and can't afford those assets. (unless they deal dope)

 there will be a oversupply for the next decades to come because the population gets smaller and smaller. And the once that should buy it, have almost no money so they will pay a nickle on the dollar for those assets.

 

Mon, 01/17/2011 - 15:26 | 882290 AnAnonymous
AnAnonymous's picture

What has spurred the migration is the transportation of resources from A to B. Always been the case. People who can follow the resources.

Has been the case since hunters-gatherers drivel through countryside to town exodus to now: people follow the resources.

Mon, 01/17/2011 - 13:11 | 881929 101 years and c...
101 years and counting's picture

i believe Mr Edwards predicted an S&P of 450.  If that was "too bullish", what is the new target?

Mon, 01/17/2011 - 13:14 | 881950 nm1
nm1's picture

Cdad:

Yes, my comment was an over simplification, but it was a direct quote I lifted from someonewho had money in the stock market) and who believed that they were in fact getting "richer" based on the rising prices of the stocks in her 401K plan.

What is the inventory rebuild cycle?

 

 

 

Mon, 01/17/2011 - 13:17 | 881963 Sub Dude
Sub Dude's picture

This guy had a similar idea several years ago:

http://www.thegreatbustahead.com/

Mon, 01/17/2011 - 13:37 | 882010 Arthur
Arthur's picture

SSEC  Shanghai Composite   2,707.102:00AM EST    84.24 (3.02%)

Mon, 01/17/2011 - 13:45 | 882037 DavidC
DavidC's picture

Japan's problems occurred while most of the rest of the World was in a bull market (the US and UK being prime examples).

Japan's problems continue. The demographic 'time bomb', which has been known about for a number of years, and the other problems associated with the West are occurring in a secular bear market. Any 'recovery' seems more and more predicated on what China will (or will be able to) do. For all the talk of recovery, the US, UK and Europe continue with very low rates of interest and monetizng debt - if we're in a recovery why the need to continue?

I could go on.

DavidC

Mon, 01/17/2011 - 13:48 | 882042 monkeyfaction
monkeyfaction's picture

Let's face it, the market has gone up in a straight line since the beginning of December and is starting to look very overbought on a technical basis.

'Buy the dip' has become a feedback loop. You see it on literally every comment section of every financial website - 'Buy the Dip! Buy the Dip!'. It has become so mainstream that there are actually no dips now. Peoples' belief that the Fed will prevent any kind of pullback has become more powerful than QE2 itself.

This can only end one way, and when this feedback loop stops, there will be a large pullback that happens very quickly. After that, I guess the market will carry on melting up, having taken the money of those who bought in near the top or on leverage.

I guess what I am trying to say is, even if you are bullish to the moon you should not be too suprised to see some kind of pullback soon.

 

Mon, 01/17/2011 - 13:52 | 882056 SheepDog-One
SheepDog-One's picture

And the only reason to be bullish to the moon is simply the belief the tree grows to the sky and can never fall over 'because the FED wont allow it', well what goes up must come down even the FED knows that.

Mon, 01/17/2011 - 15:32 | 882308 DosZap
DosZap's picture

Yeah, Buy that Dip!,buy n hold.......

And your guaranteed to wind up yet again with a bloody arse, and a pocketfull of IOU's.

Mon, 01/17/2011 - 14:09 | 882090 Devout Republican
Devout Republican's picture

If the market does crash its because nasayers such as yourselves have turned form the Lord.

Mon, 01/17/2011 - 14:25 | 882123 lizzy36
lizzy36's picture

Sarah Palin/Jesus 2012 FTMFW.

Mon, 01/17/2011 - 15:31 | 882304 lumen ex lumine
lumen ex lumine's picture

Amen to that.

Mon, 01/17/2011 - 15:34 | 882313 DosZap
DosZap's picture

Hopefully you jest.

Mon, 01/17/2011 - 16:01 | 882375 Ludwig Van
Ludwig Van's picture

Obviously a jest.

 

Mon, 01/17/2011 - 20:44 | 882979 lumen ex lumine
lumen ex lumine's picture

Thanks Ludwig.

 

God forbid someone should take me seriously.

Mon, 01/17/2011 - 18:47 | 882759 chump666
chump666's picture

china soon-to-be outta control slowdown will take out overbought US indexes...

bond yields will go into obit, major USD rebound, commod markets copper/gold bubble imploding.

that is your stock correction, 3-6 mths i reackon.  straddle play call/put with a fat leverage.

Tue, 01/18/2011 - 00:27 | 883410 Coldfire
Coldfire's picture

Albert Edwards is one of the nicest, most stylish fortunetellers. You'd still be throwing your money away by trading on his output, though.

Tue, 01/18/2011 - 15:14 | 884680 kalasend
kalasend's picture

"And so with a slight delay, one by one the bears come out of hibernation. "

I've been reading ZH for some time and I don't get the perception that bears have been in hibernation. So are there different species of bears? By the way, the last specie lost me a fortune. Is the new specie any better?

 

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