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