Albert Edwards: "We Are Returning To 450 On The S&P"

Tyler Durden's picture

Albert Edwards, whose opinion, of all macro economists, is among the most respected by Zero Hedge staff, has just thrown down the gauntlet. In his just released piece he mocks the Black Knight, compares the market to a Polish dude with a bullet stucj in his head, makes fun of koolaid drinking permabulls, and sets his estimate for the S&P... at 450.

Investors cannot move for the weight of broker research comparing the current conjuncture in the US with Japan a decade ago. While bond markets at least, move to discount deflation, most sell-side analysts still say the current situation is unlike Japan a decade ago. They are right. Things now in the US are much, much worse than Japan a decade ago.

Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst.

This lack of awareness reminds me of reports this week that a 35 year old Polish man hadn?t noticed for five years that he had a bullet lodged in his head. Like the equity market in 2000, the Polish man had been partying too hard to notice that he had been shot. The BBC report the police as saying "He told us he remembered having a sore head, but that he wasn't really one for going to the doctor."

As the equity bloodbath of the last decade enters its final, even bloodier phase, investors continued optimism also reminds me of the Black Knight in Monty Python & the Holy Grail - link. Despite being grievously wounded by King Arthur, the Black Knight makes light of his injuries which he dismisses as a flesh wound. The vast bulk of the investment industry fails to appreciate that we are locked in a structural bear market and about to enter Act III.

In case anyone needs a graphic summary of all that was just said, the chart below summarizes it best:

Some more observations:

This year has already seen a dramatic flip-flop in sentiment as the market has begun to acknowledge it is sinking into the deflationary quicksand. For this year outperformance in the US, for example, is over 20 percentage points (see chart below).

Another pet peeve of the SocGen strategist, as demonstrated repeatedly by Zero Hedge when we show that bonds imply stocks should be at about 750-800, is why have stocks not followed bonds down into the deflationary abyss. His conclusion:

So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the nationwide manufacturing ISM slides below 50 into recession territory in coming months. Indeed the new orders data for August, already reported in regional ISM?s suggests the equity market is going to get some sentiment crushing data in the very near term. But never mind the last standing optimist will tell us ? it is only a flesh wound!

Yet all logic aside, we know readers are just waiting for the punchline. So here it is:

The structural bear market has not reached the end. We have long said that the de-bubbling process would end only when equities became very cheap and revulsion in equities as an asset class hangs in the air like a fog. The problem remains more of excess valuation within the US rather than Europe, but that will not prevent the bear market hurting other cheaper markets as much. We will return to the valuation nadir last seen in 1982 with the S&P bottoming around 450 (see chart below).


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OrdellRobbie's picture

support and resistance bitchez!!!

NoBull1994's picture

The problem with this analysis is that 450 in 1982 and 450 and 2010 are two completely different numbers in real dollar terms.  Albert needs to adjust his math for inflation.  My guess is that 600-700 is the bottom.

Roi's picture

He is talking P/E vaulations. The S&P was around 125 in 1982.

thesapein's picture

Nah, we really should stop "adjusting" for inflation every time someone asks. Stop trying to manipulate the numbers around the dollar. It just hides the facts.

Marc45's picture

That's fine as long as you're not referencing or pricing in terms of dollars.  Otherwise, the "value" of the dollar is material.

thesapein's picture

Just stop, please. To "adjust" for inflation you have to make changes to the rates based on a basket of rates that also changes who contents might come and go and which also change in their rates... It's like an orgy of fiat adjustments.

Why manipulate the original data?

If you really want to see what's happening before tying to make it looks a certain way, try a more scientific approach, using real data.

Ripped Chunk's picture

It's actually getting funny the comments that get junked here now a days. Turning into Troll City.

I think I will lease some foreclosed on land from Wells Fargo and  open an amusement park called Troll City just to see who shows up.  Of course the bankers will want a free tour before the grand opening. We can test the acid dousing and Gatling guns in the fun house on them........ 

RichardENixon's picture

I automatically junk anyone who uses "bitchez" at this point, it's gotten so lame.

Ripped Chunk's picture

But I didn't use "bitchez"??  I just assumed I got junked by a Wells Fargo employee.

My response to that is: Bring the whole family for a day of fun at Troll City! Free hot dogs!

Don't want a bunch of little future bankers living to see tomorrow either.

Ripped Chunk's picture

I didn't think you did because neither myself nor the two commentators above who made legitimate remarks that should not have been junked used "bitchez".  Like I said, it's TROLL CITY

RockyRacoon's picture

You used "bitchez" -- I junked you!

Ripped Chunk's picture

Rules are rules. Lets take the SEC for example.....................

Dr. Sandi's picture

You used "bitchez" -- I junked you!

Damn your ring-tailed logic.

cougar_w's picture

Exactly. Inflation is part of the problem.

"The doctor says I'm quite fit ... for someone who has terminal cancer. My weight loss is therefore a good thing. By the time I'm actually dead, I'll be in perfect health for a person recently deceased."

thesapein's picture

awesome metaphor!

Might I add that you could be seen as healthier in comparison if most every one else were also suffering from disease.

cougar_w's picture

And there are whole segments of the cosmetics industry and all of plastic surgery devoted to achieving nothing else. No slam against the terminally ill, but it's illusion.

Propaganda works at many levels.

rosiescenario's picture

...amazing what a course of 5FU can do to any weight issues one might have had....

chindit13's picture

Once you are dead, the rate at which your health is declining will slow to zero, which represents an inflection point, now known euphemistically as a "Green Shoot", and in the funeral industry as "Pushing Daisies".

I am now convinced that Lazarus did not actually rise from the dead and walk, but only that his rate of decline slowed.  I then went to the Mormon Church archives, which have the world's best genealogical records, and found that one of the descendants of John (Gospel of John) is Steve Liesman.  It all began to make perfect sense.

hangemhigh's picture

s&p 450 actually takes us back to august 1994 which is when abby joseph cohen first made her bones and this massive ramp in equities really began.  the dow at the same time was about 3600.

were we to return to those numbers (sp450 / dow 3600) it would mean 'reversion to the mean' in spades........  

spinone's picture

Thats returning to the mean.  Reverting to the mean is when the line goes below the average low enough, and stays there long enough to keep the mean the same over time.  The area of the curve above the mean has to equal the area of the curve below the mean of the CAPE.  Or else the mean has changed, and everything is different this time.

anony's picture

Bet your sock drawer has precisely 7 pairs of perfectly folded anklets.

Helix6's picture

Won't happen.  The CPI in 1993 was 145.  Now it's 218.  450 * 218 / 145 = 676 in today's dollars.  If you can believe the CPI, that is...  I tend to think it's much higher, giving an equivalent S&P of around 900.

masterinchancery's picture

The fundamentals in 1982 were soooo much better than they are now, with p/e's of solid stocks at 4-5.

torrente's picture

Never forget inflation that time was double digit heavily affecting DCF valuations.

ebworthen's picture

Two years ago I calculated that when we played out the 1929-1932 scenario (a loss of ~79%) we could end up at DOW 2,900 and S&P of ~326.

It happened then, it could happen now.

Except that now, lots less people know how to grow and raise their own food and we hadn't yet then prostituted our manufacturing and industry out to our biggest competitor.

Yikes's picture

Looks like I picked the wrong decade to stop drinking.

JenkinsLane's picture

Looks like I picked a bad day to quit smoking.  

Henry Chinaski's picture

Got completely out of smoking in 2006,then doubled down on vodka. 

Lately, I drink vodka like it's my job.

Ripped Chunk's picture

Don't worry, it's drink like a pirate day (ever day)

Rusty Shorts's picture

 - yeah, I've put away several barrels of beer and wine since joining ZH a year ago...wait, WHAT, it's my ZH birthday Bitchez !!!!

Ripped Chunk's picture

Oh Yea!

Vodka! It's always for breakfast now!

ColonelCooper's picture

And it's always seven in the morning.


Occams Aftershave's picture

Yes, put away some cash for a rainy decade.

dukeness's picture

Looks like I picked the wrong decade to stop sniffing (bullish) glue.

Hard1's picture

hahahaha same here!!! and smoking....I guess I'll just pick it up again Cheers!!!

rosiescenario's picture too, and I'll double up on the snuff dipping...that should helpspeed the end of the 'lost decade'...maybe I can get it down to 200 dayz???

rosiescenario's picture too, and I'll double up on the snuff dipping...that should helpspeed the end of the 'lost decade'...maybe I can get it down to 200 dayz???

Gimp's picture

Everytime I start shorting the ponzi masters pump it up, pump it up. Classic squeeze, trap, balls stuck in the golf ball washer.

I will watch and wait as the big PONZI could go on for a while before any sign of collapse.


papaswamp's picture

hey they have to keep it pumped up until election time.

giddy's picture

...and knowing that helps guide decisions...