Albert Edwards Sees Stocks Under March Lows As Bond Yield Go Below 2%

Tyler Durden's picture

Just in case there was any confusion which way SocGen's Albert Edwards may be leaning after the recent however many percent rally in the AUDJPY, sometimes known affectionately as stocks, it is hereby resolved: "My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows." In other words, according to AE the market is well over 50% overvalued.

In a surprisingly pithy note, the strategist reverts back to his favorite formulation of the economic New Normal, which he calls the Ice Age, and specifically the current phase which he compares to the period where the Nikkei used to enjoy 40-50% rallies on no news, even as the general market continued its long term collapse over a span of 20 years:

We are at the most dangerous stage in the Ice Age – the ‘post-bubble cycle’. For although it is clear that leading indicators have turned downwards, the choir of sell-side sirens is singing its song of reassurance. The lesson from Japan was that once the cyclical rally is over, any downturn in the leading indicators should find you stuffing beeswax in your ears to block out that lilting melody so as to avoid the jagged rocks of recession.

In addition to remarking on the recession certainty now implied by the ECRI index (which we are confident will post an uptick this Friday just to plant some seeds of doubt in all those who look to forward looking instead of lagging indicators, A.E. notes the change in analyst optimism, which is also signifying a recessionary advent:

Although the closely watched ECRI weekly leading indicator (WLI) is now in the ?recession? zone, other leading indicators such as the OECD and Conference Board are weakening at a far more moderate, reassuring pace. Yet one of our favourites and most over-looked of leading indicators is the change in analyst optimism. Like the ECRI WLI this too is in recession territory and suggests the OECD and Conference Board measures will also be soon! Appealing as the siren song is, we should all know full well that the sell-side will only call the recession long after it has begun and when it is far too late.

Never one to avoid sarcasm, the self-referential bashing when he ridicules all sellsiders and economists, is quite enjoyable:

There seems to be quite a bit of debate among economists about what the various leading indicators of economic activity are saying. We have always advocated following these leading indicators closely because economists - and indeed analysts, strategists and you and I - are very poor at predicting the future. Hence a lot of what you read is merely consensus extrapolation of the current trend with a very heavy bias towards optimism. Economists though are particularly bad at predicting cyclical turning points ? exactly at the point when investors need to make asset allocation or sector/style adjustments. And we all know sell-side economists will NEVER predict a recession until well after it has started ? there is simply too much personal risk to the individual who makes such a call and is wrong. My colleague Andrew Lapthorne monitors this on a weekly basis and hence, like the weekly ECRI, it has proved to be a very timely indicator. Clearly analyst optimism has slumped recently, most especially in the US, and the recent rate of erosion is fully consistent with an impending recession.


And while we have covered the topic of the ECRI collapse and its implications extensively, AE once again does semantic justice to the summary:

One thing that will become clear as we go through the second half of this year and into 2011 is just how weak the underlying economic recovery has been. Real GDP growth of around 4% was hugely driven by the end of inventory liquidation and contrasts sharply with the paltry sub-2% rebound in final sales (see left-hand chart below). And remember that this apology for an economic recovery includes the impact of the biggest peace-time stimulus on record!

One data point which we had not paid attention to previouslu but which will be closely watched going forward are nominal final sales:

check out the shockingly anemic cyclical recovery in nominal final sales which is running below the pace normally seen in the depths of recession, not in the typically buoyant early stages of recovery (see right-hand chart above)! No wonder we are seeing revenue warnings in this reporting round. This Ice Age descent into nominal deflation will become fully apparent as we move through H2 this year and the cycle slows sharply.

It is not surprising why AE, together with a raft of other deflationists, see the S&P at or below 666, at least in the near term. What happens next is just Ben Bernanke's guess, but it will be quite stunning either way.

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chinaguy's picture

sold off 1/2 my AUD holdings yesterday @ the high

AUD's picture

What!? You bastard.

Just kidding, actually a good time to sell your AUD & buy gold.

If Albert is expecting some kind of market crash to reach his lows, I think he is mistaken.

LoneStarHog's picture

"Overvalued" is an old and obsolete term in contemporary markets.

Cognitive Dissonance's picture

Dude, you're looking at this the wrong way. Every stock should be considered as you would yourold comic book collection your mom stored in her basement for 40 years. There is incredible value in each of those 40+ year old comics if only you would remember they are there, just ready to be released from their prison.

There's Gold in them thar stocks boy. Just dig a little.

<yes, I guess I need the sarcasm tag>

fxquant's picture

APPL is my key inflection point. With >8% share of the PC market analysts have touted the improved Imac's as a whoope-deedo. Contrary to popular opinion Iphoine has 28% of the cellular mkt (not the 100% some media types would have you believe), a very good share but NOT the lead dog either.

Yet here is the darling of every analyst having them tripping over their feet in a rush to boost price targets one after another. A major bubble burst in the making?



Cognitive Dissonance's picture

Human psychology has as much to do with analyst's opinions as their statistics. Popular opinion is tough to stand in the way of, particular if you're an analyst who wants some air time and a steady paycheck. Once enough analysts fall in love with a pretty Apple, the others are soon to follow. It happens to all of us and is related to jumping on the band wagon. They take a "fresh" look at their conclusions, tweak a little here and there and bang, they move their projected price 20% higher. Everyone else follows the conga line.

I remember a CFP seminar a few years back (late 2007) that I attended. There was one speaker who was quite outspoken about his concerns regarding housing. After the various speakers had finished, everyone hung around to talk. I immediately found the housing guy and listened to him talk with the various audience members for the next hour. Over that hour, with person after person assaulting his views as crazy or unrealistic etc, he slowly backed off his view and by the end was openly admitting he was mistaken and would amend his position.

It's tough withstanding the flood waters, particularly if you wish to be liked or desired. Or in the case of that critical melting pot of ideas, invited back on CNBC TeeVee.

Ned Zeppelin's picture

Trendy FAO Schwartz manufacturing non-essential adult toys in Chinese labor camps.

johngaltfla's picture

If we see a sub 2% 10 year, watchout and wow.

Leo Kolivakis's picture

Love how this guy bashes economists for not being humble and yet he comes off as an arrogant jerk himself. The market will humble him too. His analysis lacks any conception of the liquidity tsunami driving risk assets higher. The "powers that be" want to reflate risk assets and introduce some inflation into the economic system. They will do whatever it takes to avoid another Japanese type protracted downturn. They may fail, but from my recent comments, you'll see that fundamentals aren't nearly as bad as these bears lead you to believe, and liquidity remains plentiful.

spinone's picture

Central bank intervention has been impressive.  But the amount of debt and other paper claims to future growth and physical assets is tremendous compaired to the underlying assets.  This debt must be continuously rolled over, paid off or defaulted on.  It can't be hidden forever with mark to market fanatasy and regulatory forbearance.  This is the attraction of PM, which is a asset that is not simultaneously another's liability.  Liquidity injections are just tears in the ocean of deflation.

Time will tell.

Ripped Chunk's picture

+ !  Great summary.

Continuing asset deflation will have to be addressed at some point.



43 Steelie's picture

Leo, the fundamentals are terrible.

The first half of your paragraph makes sense and if that is the reason you want to use for why stocks will continue gun higher then by all means stick with it. But please don't mistake this for a recovery. Blame this continued rally on liquidity and leverage, not on long-term fundamentals.

The word "recovery" itself has been inserted into every single economic interpretation by a forecaster for the last 2 1/2 years now. I promise we'll be using that godforsaken word for at least another 3-5. 

obelisks's picture

Leo Kolivakis what Albert Edwards says is interesting and BELIVEABLE as opposed to the crap you write ! There is no one else I can think of on this site as being more of  "  an arrogant jerk " than you ! 

ATG's picture

Leo, in what deluded alternate reality do you dwell?

The adjusted monetary base slowed at a -90% rate this year, the money multiplier is consistently below One for over a year, and M3 is down -10% the last year.

What liquidity Leo?

Are you also long gold?



Helix6's picture

Agreed.  I've heard the dire predictions about S&P 600 or DOW 4500 twice now, once right at the March 2009 lows, and once at the DOW's first recent excursion below 10000.  Both times, the pronouncement turned out to mark a market low.

Not that I don;t think the market can go lower, but S&P 600?  I guess anything's possible, but I'm not putting my money on it.

THE DORK OF CORK's picture

I have to admire the Central banks defence of a absurdly unsustainable postion and their ability to sustain the Ponzi scheme in the minds of the populace.

They seem willing to sacrifice any amount capital or even fictional capital to keep their crazy dreams alive.

Maybe BB is a maniac but the man must have balls of steel or even gold to lie in such a cavalier and flippant manner in front of every prole and functionary with the patience to listen.

THE DORK OF CORK's picture


jcrows's picture

this explains gold's "weakness" (not), yet again.

this ice age he speaks of is the continuing freeze up of liquidity for anyone not called goldman sachs_ and the most liquid asset to free up a freeze up is_au_not aud

jkruffin's picture

As I said yesterday,  this rigged market has a long way to fall off the cliff.  The data coming out is horrid, and soon the leech and scum prop desks will turn on each other, and the mayhem will begin.  Circuit breakers will be blown every hour.  There are no bids to stop the free fall when it begins.  No one else is in the market other than crooks.  Smart retail has been long gone since the flash crash.   The danger of melting a market up like they have on such low volume is inherently hazardous to one's wealth.

virgilcaine's picture

low 2's on the 10's.  Every asset know to mankind is in some state of a bubble and is global.

chunkylover42's picture

Is there a way to subscribe to or download Edwards' research notes without being a client?  I checked the SocGen website but couldn't find anything.  Feels like this is a guy I should be reading more often.

dark pools of soros's picture

maybe sell milk and bread from your SNAP payments for a subscription  ya freeloader

arnoldsimage's picture

please watch this short video. very important...

ATG's picture

Cybersecurity Act RINO Collins, Lieberman and Rockefeller support allows the President to turn off the internet four months, thereby disappearing virtual money at will, leading to deflation, corporate bank foreclosure and repo on unprecedented scale. Might explain why they're sitting on $2 T in cash...

RaymondKHessel's picture

I see stocks GOING TO THE MOON

ATG's picture

Your binoculars, microscope, spectacles or telescope may be on backwards.

Check settings before wasting wealth, health and joy...

wawawiwaa's picture

Mr. Edwards might want to double check his PV formula which implies that the lower the cost of capital the higher the multiple. So before they blamed the low rates to create bubbles.. now they expect the low rates to create crashes... He should stick to writing. 

ATG's picture

Higher multiples associated with lower i rates lever prices down faster with falling earnings...

steve from virginia's picture


Edwards is right, who cares why?

Economists are wrong; why listen to them?

It IS different this time; the decline in availability of primary materials is the constraint on growth, not interest rates or money claims on other money. A primary material constraint - in the current case crude oil - is attacking our wonderful pet automobiles. Auto use supports our commercial economy; a shrinkage of a small fraction of auto sales/use is fatal.

Real estate and retail sales are automobile- enabled.

When prinary resource constraints move from automobiles to agriculture ... things will get interesting very quickly. Nobody can say they weren't warned ...

(being able to do something about it is another story ...)

Commander Cody's picture

This Edwards guy is overly optimistic in my view.

freshman's picture

Is AE saying that the analysts optimism is a leading indicator? I thought it was a HUGE contrarian indicator.... very confused.

ElliottMan's picture

Good grief! A mainstream analyst who actually tells the truth!! He must be feeling ill! You certainly won't get an interview anytime soon on CNBC with an attitude like that, old son!