Albert Edwards Revisits The S&P 400, Still Sees Deflation To Hyperinflation

Tyler Durden's picture

We knew it was only a matter of time before Albert Edwards would follow up to Russell Napier's call for S&P 400 with his own rejoinder. Sure enough, the SocGen strategist (who previously called for an S&P target in the same neighborhood) has just released the following: "Let me re-emphasise our 400 S&P forecast with sub-2% US bond yields" in which he says: "Amid the equity market enjoying yet another Fed induced mega-rally, many commentators have been left grasping (gasping?) for explanations for the continued low level of global bond yields despite the ruination of the public sector balance sheet. Most have latched onto QE2 as the explanation and hence expect a sharp rise in yields from June onwards as the Fed’s buying programme ends. We expect new lows in bond yields." The reason for that per Edwards, is an imminent bout of deflation, which is precisely what the Fed is hoping to create, in order to get the green light for the Jim Grant defined "QE 3 - QE N". Edwards, naturally recognizes this too: "Despite fully acknowledging the ruination of the government balance sheets as years of excess private sector debt are transferred to the public sector, we still expect to suffer another deflationary bust that will take government bond yields to new lows BEFORE government profligacy and the Fed's printing presses take us back to both double-digit inflation and bond yields. For now, we remain heavily overweight government bonds." In other words, just as we have been claiming for a long time courtesy of the Fed's so predictable Pavlovian reaction to always print more in response to deflation, enjoy 2% bond yields... just before they hit 20%.

More from Edwards:

Many think I am mad. But I am not the only commentator expecting a deflationary bust - the sort of bust that will take the S&P down to 400 from the current 1300. I recently watched John Authers of the FT Lex and Long View columns interview Russell Napier, formally of CSLA and a leading stockmarket historian. Russell's views are as interesting as ever and well worth 11 minutes of watching time. His views are similar to mine, although he articulates his thoughts far more clearly than I - Long View: Historian sees S&P fall to 400 - 16 May.

Where I diverge slightly from Russell is that the world he describes sounds pretty recessionary to me. Clearly the S&P falling to 400 destroys household balance sheets and consumption anew. And EM liquidity tightening could causes hard landings. In China, for example, a recent calculation showed FX intervention accounted for around one half of the country's runaway money supply which has helped propel the boom). My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.

The chart below shows that not only is the Fed no longer (and never really) providing price stability but that volatility, contrary to the Fed's active involvement in the Russell 2000 is alive and well... in inflation/deflation expectations.

Yet there is a contrarian read to even near-term deflationary expectations. Exhibit A: China, whose long-imported inflation will have no choice but to come back and bite the US in the butt soon enough for a last push inflationary surge before all hell breaks loose.

But despite the cyclical slowdown in the US reducing inflation expectations, China's inflation problems should not be ignored. To the extent that the Fed's QE1&2 is driving Chinese CPI inflation upwards (and the CPI measure severely understates wider Chinese inflation with the GDP deflator running closer to 10% yoy), it is coming back into the US via higher US import prices of Chinese goods which is in turn impacting core inflation (see charts below).

Albert's conclusion:

We expect a global deflationary bust to reverse the clear inflationary pressures building from monetary debauchment around the world - more so EM than developed. If as last year we see a severe economic slowdown unfolding around the turn in the year, this could rekindle geopolitical tensions as the US is currently suffering a record seasonally adjusted (Datastream measure) trade deficit with China, disguised for the moment by favourable seasonal effects (see charts below). But from June onwards record reported deficits will increase trade tension sharply, especially if as last year we get US growth spluttering badly as QE draws to a close.

Great: so not only can the world expect hyperdeflation followed by hyperinflation, but may as well plug in a little hyperwar in the excel model for good measure.


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baconator3000's picture

So there I was. At the game when none other than I noticed Barack Obama sitting several rows in front of me. I got very excited...a tingly feeling down my leg. Suddenly I saw him get up and get escorted to the back. I got up, wanting to see if I could talk to him about important issues like DOMA and Cisgendered Bigotry legislation. This led me to the restroom. I tried to go in, but a secret Service agent stopped me from entering "Not now" He said pushing me back with authority. The door swung open for a second and I saw the annoited one washing his hands and finishing up. He opened the door, saw me, nodded. I looked down. I felt so awe inspired by this wonderful great man. Born of wisdom.


I rushed in looking for maybe a souvenir. Maybe a pen. Anything to remember this encounter. I checked all the stalls carefully. Suddenly I saw it. The handicap stall. Water still the flowing...with odor of feces..Possibly fried chicken and watermelon.


"The great one used this..I statue should be erected at this spot"! I said to myself outloud.

 How Lucky I am to be here. Whats a poor immigrant like me doing in a place like this!? I looked around...nothing Disappointed. And then  I saw it. Sitting in the toilet. Floating like a rubber ball in an electrical grid. The president left a gift. A big turd. Two of them. The toilet didnt properly flush. I got down on my hands and knees...looking face down.


Not sure what I wanted to do next. Suddenly, I impulsively reached down and grabbed the Turd. Placed it in my mouth. Still warm, I let the liquid swish around in my mouth. Pure delight knowing that it came from the great ones body. It was a part of it was a part of me. I orgasimically shoved more and more of the turd into my mouth and chewed it and one point gagging. It was all worth it. I proceeded Swishing it around like a fine wine with little bits dribbling down my goattee and onto my shirt. Such a wonderful expierence. I took the last bite. The best! The softest piece. The president must of been constipated somewhat. I was saddened when I finished it off. But then my spirit was lifted when I looked down. Two more smaller turds. One shaped like florida the other like hushpuppie. I grabbed them. Shoved them in my pocket for safe keeping, I knew someday these may be worth something..


And that was the greatest day of my life.

LRC Fan's picture

I laughed.  I cried.  I puked.  Amazing!!!!!!!!!

Derpin USA's picture

It was the best of turds, it was the worst of turds, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

jeff montanye's picture

turning and turning in a widening gyre

the falcon cannot hear the falconer;

things fall apart; the center cannot hold;

mere anarchy is loosed upon the world,

the blood dimmed tide is loosed and everywhere 

the ceremony of innocence is drowned;

the best lack all conviction while the worst

are full of passionate intensity. 


steve from virginia's picture

He was doing great ... until he got to the 'goatee' part and thought ...




LRC Fan's picture

CNBC should hire Lee Corso for a guest appearance on Squawk next week.  Pulls up a chart of the S&P and shouts "NOTSOFAST!!!!" and a picture of a bear getting shot by Ben Bernanke pops up on the screen.  As the futures ramp to test the 1400 level. 

Grifter's picture

Can't stand Corso, but that was funny as hell.

FreeNewEnergy's picture

Buy bonds, bitchez!

??'s picture

here is the video from the FT referenced by Edwards

I recently watched John Authers of the FT Lex and Long View columns interview Russell Napier, formally of CSLA and a leading stockmarket historian. Russell?s views are as interesting as ever and well worth 11 minutes of watching time. His views are similar to mine, although he articulates his thoughts far more clearly than I - Long View: Historian sees S&P fall to 400 - 16 May.


Long View: Historian sees S&P fall to 400



kaiserhoff's picture

Was just sipping coffee on the Wilmington (NC) waterfront, reading one of those popularization of economics tomes which infuriates but occasionally informs..., glanced up and realized the place was empty.  I was the only one within two hundred yards who could reasonably be mistaken for a tourist.

Discretionary spending ain't happening folks.  Batten down the hatches.

francis_sawyer's picture

That's because they sunk every last dime into LULU & NFLX on RobotTraders recommendation...

Expect the place to be buzzing when they finally top tick "infinity"

Tense INDIAN's picture

ever wondered why LIFE sucked so much for most of the time...its because we are not in control...

LRC Fan's picture

Aaaand we rocket 20 pts immediately off the open.  Wheeeeee!

We will close green.  The last 2 days I was shocked that we were red.  No way we start the week with 3 down days.  Bank on a ramp up either at noon or 2pm depending on when the PPT is done eating lobster tails at lunch. 

snowball777's picture

I hear you are singing a song of the past
I see no tears
I know that you know it may be the last
for many a year

You'd gamble or give anything to begin with the better half
But how many friends must I have to begin with to make you laugh

Will you still have a song to sing
When the razor boy comes
And take your fancy things away
Will you still be singing it
On that cold and windy day

You know that the coming is so close at hand
You feel all right
I guess only women in cages can stand
This kind of night

I guess only women in cages
Can play down
The things they lose
You think no tomorrow will come
When you lay down
You can't refuse

Alcoholic Native American's picture

hyperinflation my ass.  We haven't seen it yet and they flooded the rich with more money.  Trickle down economics fails so spectacularly it keeps hyperinflation from happening.

anony's picture

Depends on your definition of hyperinflation.

My Hershsey's Kisses with almonds are twice what they were last year.  My various grains are three times what they were.  It costs $4.00 for a simple copper coupling for a plumbing need that was a dollar in 2008.

There isn't thing I can buy that isn't up 400% in the last few years, with the sole exception of a house that won't sell without 50% decline in sales price.  Not exactly hyperinflation but a double whammy to the middle class nonetheless.

tmosley's picture

You can't see the forest for the trees.

This situation is unfolding just like any other hyperinflation.  Just a bit slower due to our reserve currency status.  If you want to see what we "should" be experiencing now (ie if we didn't have the reserve currency), look at China.

This won't last.

huggy_in_london's picture

really?  its just like "any other hyperinflation"?  Explain please.....

tmosley's picture

Ever increasing government involvement in the economy, funded by money printing, leads first to general economic depression with deflation ruling across most of the economy (except in hard currencies), followed by rapidly rising food and energy costs which force the governments to print, causing a feedback loop in the price of basic commodities and hard currency, until the currency is revalued or abandoned.  The government responsible never accepts responsibility, instead blaming speculators (such actions are recorded as far back as the end of the Western Roman Empire).

This has happened numerous times in numerous places.  Only three times has it happened quite like this (all those times were in Yuan China, well out of range of Western cultural memory, and out of living memory for most in China).

Janice's picture

FYI ~ for all you who want to diss the Comrade-in-Chief

Homeland Security be coming for you!

Alcoholic Native American's picture

Social engineering troll squads are a real growth industry. Let's hope they hire from here instead of outsourcing.


Mr.Kowalski's picture

Sorry, but the returns on the US 10yr will never hit double digits. The CDS's written on the 10yr interest rates are apocalyptic.

kaiserhoff's picture

We'll never get there with current policy, but how much more broke can the broke banks be?

I'm a deflation/depressionist, but incentives have never been more screwed.  Why would any bright young person do an honest day's work, when he could be a $100,000/year lifeguard at Newport Beach.  When real work becomes a bad joke, I think all rational bets are off.

anony's picture

Or a $100,000 a day Goldman Suckster.

SheepDog-One's picture

Ive always said inflation can only go so high during record unemployment and bankruptcy. Who can pay for inflation?

huggy_in_london's picture

It is too simplistic to draw a comparison to zimbabwe.  The US can produce all that it needs for domestic consumption (all that is essential lets say).  It is not a small open economy where the ccy can easily be manipulated by speculators.  The reason why the US have embarked on qe1, qe2 etc is simply to move the ccy in a game of brinkmanship with the chinese.  Now should the chinese ccy get forced higher, either by rampant inflation or through a deliberate policy choice, then the situation in the US would ease markedly.  I'm not a buyer of this hyperinflationary story.  There might be one or two countries which could be candidates for it (the UK is one) but the US is not imo.  Keep in mind, the money supply continues to contract, velocity is not expanding... had to have a real hyper inflation when all you have is higher bank reserves.

tmosley's picture

Zimbabwe was the breadbasket of Europe, but her people still starved.

The US will be Zimbabwe writ large.

kaiserhoff's picture

Yes.  The monetary theory is fine, but there is no mechanism whereby higher prices get translated into higher wages.  That's the missing link.  When even Wallmart is losing to the Dollar Store, that should tell us something.

Janice's picture


I believe that you are correct, with the exception of a currency crisis.  You've seen it before, when there is a hint of a natural disaster, people run to the store to get water and paper plates.  If we have a currency crisis and people believe that the dollar will devalue, then everyone will want something tangible for their cash.  They will begin to convert cash to goods, increase the velocity of money and drive prices up.  Buy today before prices really get bad!  Hyperinflation.     


mayhem_korner's picture

Hyperinflation ONLY happens as a function of a currency crisis.  Natural disaster reaction is not a currency crisis.  It's a (perceived) crisis of staple items, but the currency isn't threatened.

What is happening, and is the only road to hyperinflation, is that the masses lose confidence in the currency, and race to convert it to needed staples and other stores of value.  Once panic sets in, the conversion rate/money velocity skyrockets.  The currency nosedives toward zero as commodities/staples skyrocket.

BUT...durable goods typically FALL in price because priorities dictate spending all available currency on staples.

The notion of productive capacity being related to hyperinflation is mis-placed. 

Look what's happening now - all the tell-tale signs of a brewing hyperinflation:

-Enormous money printing to monetize debt

-Folks abandoning mortgage payments to preserve currency for staples

-Accelerated investment in PMs and other stores of wealth

-Denial by the gov't of its inability to rectify the sovereign debt situation

-Guns & ammo sales through the roof

-China, Russia, India, Brazil, Iran, S. Arabia, all establishing alternate currency trades

-Utah recognizing gold and silver as tender

-Car dealerships stacking inventory to the rafters and discounting

-etc. etc. etc.


We are in the last lurch before the full brunt hits.  Once the money velocity dike starts to spill, we will have a scene of ugliness none of us has seen previously.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Exactly.  From Von Mises - The Crack Up Boom

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.


Tuco Benedicto Pacifico Juan Maria Ramirez's picture

"And", we still have about 1,500,000,000,000,000.00 in derivatives that must be unwound!


Tuco Benedicto Pacifico Juan Maria Ramirez

earlthepearl's picture

What is the time-frame for this forecast 1-year, 5- years, 6 months??

SheepDog-One's picture

In these days whenever I see these stories saying 'This will be the case by around 2020', I know the real timeline is by next month.

ssp2s's picture

Commencing between now and September.  But whenever it starts, it will move quickly.

Sudden Debt's picture

That would do miracles to the housing market once again...

People with a variable morgage better start preparing and if they still can: CHANGE THE MORGAGE TO FIXED RATE!


mist929292's picture

If this deflationary spike happens, will the dip in gold & silver be worth buying?

ssp2s's picture

The chance of a lifetime.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

In my humble opinion, yes.  Although nominally gold and silver might go down, perhaps substantially, in a severe deflation, in purchasing power terms it should hold its own.  And that's the whole idea behind holding precious metals, to get from point A to point B without losing your purchasing power.


Tuco Benedicto Pacifico Juan Maria Ramirez

Problem Is's picture

Nice post Tyler... worth the read.

Lord Peter Pipsqueak's picture

What a tool.So Bernanke isn't going to press the nuclear button and print the dollar into oblivion.Wow,thanks for that,we can all sleep sound in our beds.

AldoHux_IV's picture

I don't agree with the order in which these things may play out-- it all really matters when the sovereign debt bubble pops and you see the trigger happening at the money market level. IMHO, I don't see that happening until the masses begin to really ratchet up the protests against unncessary austerity measures at the benefit of the debt market but detriment to the individual-- in other words, when people realize that austerity/stimulus/bailouts really don't help them and only serve the top2% will you see these corrupt instiutitions reverse their rhetoric and seem like they're on the side of the masses because self-preservation outweighs genocidal policies i.e. the fed will actually pretend to care about the peasants.  In the meantime, it's currency destruction until true price reveals its deflated reality.

LudwigVon's picture

not only can the world expect hyperdeflation followed by hyperinflation, but may as well plug in a little hyperwar in the excel model for good measure.


skip90291's picture

I really feel like a lot of the comments are doing us a disservice. I think this serious article deserves some serious analysis, not songs. I mean, I don't think anyone has actually explained the position of Edwards or Russell here. The position seems positively loopy: bond yields are down because of QEII, so when QEII ends, bond yields will go down. Huh?! How can you have it both ways? Some of the highly intelligent readers probably have something more intelligent to add here.