Revisiting The "Ice Age" - Albert Edwards Charts America's Descent Into Japan, And The Market's Descent To S&P 400

Tyler Durden's picture

Several years ago SocGen's Albert Edwards coined the term "IceAge" (here, here, here, here) to describe the long, unexciting financial and economic slog that follows any credit bust. Recently, after observing (technically it was Dylan Grice but one can be forgiven for thinking they are the same person) the most recent failure by Central Planners to prevent a mean reversion (which however will certainly not stop them from trying - there is a status quo to be preserved), Albert has dusted off the trusty charts that inevitably lead to a very sad conclusion for the central planning brigade: "The Ice Age theme is now well known. In a world of very low inflation and near deflation, equities de-rate both absolutely and relative to government bonds, which also re-rate in absolute terms. After the obscene extremes of equity valuations seen during the 2000 bubble, we have entered a long valuation bear market which should end in extreme levels of cheapness consistent with an S&P around 400. The unavoidable deep recession associated with this level (not forgetting the inevitable China bust) will drag an already  ?expensive? bond market to even higher extremes. One of the key themes of our longer-term analysis is that at the end of one of these lengthy 15-year phases for the financial markets (shown below), investors believe that the current investment phase will continue indefinitely. That was not the case in 2009 and is not the case now. There is still far too much hope to call a bottom." Ergo the selling of #hope (alas the #change has now replaced fiat paper) by the oligarchs. More important than even confidence, the market continues to run on pure unbridled optimism. Take away the monetary spigot and the hope will collapse faster than artificial "record" corporate profit margins. And make no mistake: Bernanke is all too aware of this constantly reappearing and developing dynamic which threatens to end the debt-funded status quo. And the last thing he will ever allow is for it to materialize, $1000/gallon gas be damned.

Presenting the Ice Age:

Some more thoughts from Albert:

In the aftermath of last week’s stunningly weak economic data the market is now beginning to acknowledge that, like last year, without a further round of QE a relapse back into economic stagnation or recession surely beckons. In the post-bubble world, economic downturns are always the most dangerous phase in the cycle – when the Ice Age blows yet another shiver of reality onto market valuations. Both equity PEs and government bond yields will make surprising new lows for a consensus totally convinced of the extreme cheapness of equities and the expensiveness of government bonds. So, this week we revisit some of our old favourite Ice Age charts to see how far advanced we are in our post-bubble long march.

Zooming in:

The post-bubble long march to Ice Age valuations seems fully intact to the naked eye (see chart below). And as the economic gloom intensifies, this is the stage in the cycle when we need to revisit the Ice Age theme. For the Japanese experience shows that in the postbubble cyclical recovery, the Ice Age?s impact on valuations lies dormant, only to viciously catch out unsuspecting investors as the cycle takes its inevitable turn for the worse.

Japan leads the way:

We know exactly what to expect. Japan has been trudging down this very long valuation path for some 20 years (see chart below). The post-bubble de-leveraging finished around 2003 and yet still onward we trudge across the icy valuation steppes with no end in sight. If western investors think we are anywhere near the end of our own deep freeze, let them think again.

Is there any debate left that the US is different than Japan? The chart below should squash it.

One of our favourite Ice Age charts which has most perplexed clients is the one showing the bond/equity cashflow yield ratio. It shows the US is de-rating in exactly the same way Japan did a decade earlier (see chart below).

What clients found particularly surprising is that the left- and right-hand axis on this chart are on the same scale. Hence despite PEs being substantially higher in Japan at the peak of their bubble in 1990 than the US in 2000, price/cashflow ratios were remarkably  similar, as were bond yields. Indeed the exact ebb and flow of valuations with the cycle have also been remarkably similar, suggesting there is a way to go yet.

Lastly, showing just how much more prevalent "hope" is in the US compared to Europe is the chart showing price as a ratio of trend earnings. Simply said, contrary to the gibberish spouted by Ponzi perpetuating business channels, US stocks are anything but cheap.

We typically show just how far the US equity market is from extreme levels of cheapness using the Shiller or Graham and Dodd PE. Let us look at a similar construct, namely the ratio of prices to the trend of reported earnings (see chart below, we use the trend, rather than actual reported earnings to adjust for where we are in the cycle in a similar way to the Shiller PE which uses a 10 year moving average of reported earnings).

What comes next: a complete market collapse, and 2% yields, before the hyperinflationary wave is finally unleashed by the central bankers, sending stocks to infinty and currencies to zero.

Aside from how much more sharply the US valuation has recovered from its 2009 low relative to Europe, one other thing clearly stands out. Investors should note how the 2001 and 2008 recessions brought about savage Ice Age de-ratings of US valuations followed by only a partial 50% recovery of the previous valuation losses during the cyclical upswing. If we are about to set out another leg in the Ice Age de-rating, the next icy ?steppe? in valuations could take us closer to 7x ? i.e. what we would typically expect to see at the end of a secular valuation bear market. By then investors would have lost all hope as we sink into deep recession and bond yields plunge below 2%. That will be the buying signal for equities and time to offload our remaining holdings of government bonds back to the Central Banks.

While we agree with Dylan in principal, the question is what is the true pain threshold for Bernanke and more importantly for Wall Street, and foreign investors (read China) in US equities. While there are political and timing games to be played, with both the debt ceiling and especially with the presidential elections coming up, we somehow doubt Bernanke will allow stocks to drop to 400 before doing what everyone knows is eventually coming...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Montgomery Burns's picture

YEA! My vxx will finally turn + 

There is No Spoon's picture

Unfortunately vxx just doesn't work well because of how it's structured - it decays until the synthetic price of the vix goes into backwardation. I have some too, what I do is sell front month or weekly calls against it whenever it spikes, and use that money to buy vix calls and spy puts further out, like september or october. Vix deep in the money calls are cheap right now.

Instant Karma's picture

Agree that the major market averages will continue their long sideways churn for years to come. However, great growth stocks can still make one rich as they burst through the ground and blossom. The stock market long ago stopped being a 15% compounding machine. But AAPL and NFLX and AMZN would have made you rich the past 5 years.

Oh regional Indian's picture

Ice Age indeed.

And if mr Robert Felix and Piers Corbyn have anything to say about it, quite the fractal ice age we are getting into.

And it is a fractal world. Icecold markets, icecold traders. Count on it.

This hot, firey, petra-oleum fired game is at end folks. It's going to be a brutal winter...


snowball777's picture

Seven billion bicycles...all generating electricity.

morkov's picture

IT IS A CLASS WAR!!! forfeit any possibility "the workforce" to buy ownership in any business...some people still think that is a sign of enlightened management...but wait another 12 months.

Doña K's picture

Benny, has something up his sleeve. O'bummer will need more juice come hell and high water to get reelected and the hell with the economy. Be careful, be very careful.

I am afraid that they may monetize stealthily under the cover of darkness.

Next couple of weeks will give us the signal.

Dr Zaius's picture

How secret can it be? Doesn't seem like it would be easy to inject another $2T to $5T into the economy without being noticed. Perhaps I'm not using my imagination.

Of course, this doesn't mean they won't lie and deny what they are doing, even if it is obvious to everyone else.

Quixotic_Not's picture

FWIW, in the former Democratic Republic of the USofA, it was Unconstitutional to issue debt based currency (Art. 1, Sect. 10), but that didn't stop the tyrannical likes of Abe Lincoln or FDR...

The solution is simple, but the sheeple are too stupid...

The state of nature has a law of nature to govern it, which obliges every one: and reason, which is that law, teaches all mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions ~ John Locke 1690

Hell, even the so-called enlightened don't get it...

Whenever the legislators endeavor to take away and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any further obedience. ~ John Locke 1690

Que Sera...

mukuch's picture

They could try collapse the energy prices through whatever means they can. This will at least keep the sheeple "happier" over the summer, maybe give the businesses a little breathing room with input costs till fall when they commence the next round of qe.

BobPaulson's picture

The problem with energy is that it is a real thing used to do useful work so it's a little harder to fake than other things made of paper or silly putty. I'm sure if they could crater the energy market they'd do it with both hands.


Al Gorerhythm's picture

In an election year, the peeps will need to know that they are being saved. What's the point of a Messiah if he can't loudly proclaim his greatness and benevolence? I await the heralding trumpets.

Caviar Emptor's picture

Here's a problem: a crash is supposed to cleanse. It's supposed to purge the economy of failed business models, inefficient enterprises, outdated methods and trends, and usher in an era of new ideas, new entrants and meaningful competition that reinvigorates the economy and starts a new cycle of expansion. 

But the plan since 2007 has been to conserve the old, regardless of failure and inefficiency. That's what they called TBTF. And the rot is still all around us, like uncollected garbage on a hot summer day. It attracts maggots and rats. It's a drag brake on the economy. 

So if we have another downturn, will they allow those who failed to fail? Will they permit the needed cleansing to take place? Or are the stakes now even higher. So high even that they'd be willing to hire an army of Russian mercenaries to fire on protesting, hungry Americans? 

Rational Psycho's picture

Who needs Russian mercenaries? They have plenty of home-grown thugs who are more than willing to fire on their neighbors if their masters call them terrorists and they get the adrenaline rush of pulling the trigger.

Quixotic_Not's picture

The USA has plenty of sociopathic mongrels, already on the .GOV payroll, that would shoot their fellow 'MeriKans.

Hell, the (D) & (R) Free Shit Empire™ will probably created a national holiday (certainly there'll be at leasts a big parade in NYC) to commemorate the cleansing of the patriot scurge...

Hedgetard55's picture

Good post but this idea that the business cycle can be short circuited has been around since the late 80's and early 90's under Greenscam. Remember during Slick Willie's reign the Dems claimed they had conquered the need for a business cycle and recessions.

HitTheFan's picture

The issue surely is that those who 'failed' : banksters, GM, AIG...the list goes on, they are the ones pulling all of the strings.

So, no, of course they will be bailed out again, and the transfer of wealth from taxpayer to the corporate elite goes on and on and on.

Til hyperinflation, but they will be hedged for that day long before their wealth is destroyed like everyone elses.

How would the likes of the IRA deal with this conundrum I wonder? Talk does no good. Voting is pointless. Some of you Americans need to get yourselves organised, you know what I am saying?

zaknick's picture

Well said though I would point out that their monopolies go back to the old robber baron age which they've outdone now.

The other point is that in order for you to be free and justice to be meted out, they have to lose their cherished perpetually genocidal DoD & MIC; their Praetorian Guard.

So there will be blood unless individuals act of heroism get through the MSM to rally sympathizers which might even be within the armed forces.

On the other hand, can you imagine an online forum aptly titled We the People where all of the nation's biz is discussed, voted and enacted. Where in order to contribute to your country all you have to do is EASILY reach out to your countrymen and gain votes and change anything? All monies, contracts, policies transparent and fully accountable? Responsive to only a majority of the people?

That is how it's supposed to be.

BobPaulson's picture

Seems idealistic.

To me the scariest thing is that somehow I even doubt if improvement is possible in a virtual world. Somehow the pathological liars and parasites always get to the cookie jar first because of the deadly combination of overpopulation (precludes real person to person relationships), advanced psychological science in contolling the masses and media and communications that are always a deceptive veil between reality and the people.

The ONLY safeguard is to be extremely vigilant and perceptive; that is beyond the capabilities of the median person in our society.

I know that sounds like a bummer. Open to rebuttals.

Dugald's picture

Why import any army. When you have ghetto's full of people, who, if paid well, will happily shoot down fellow The tricky  bit is disarming them all after the job is done.

BobPaulson's picture

Need a suicidal foreign war for that, not difficult at all. The Eurasians and the Eastasians are always there threatening the safety of Airstrip 1.

Monedas's picture

I agree with those who think QE3 will be renamed ! Three strikes and your out ! Any ideas on the new name for QE3 ?

Dr Zaius's picture

Of course, it will be Charlie Sheen style of winning.

Seymour Butt's picture

They won’t call it anything. That way it never happened.


Re-Discovery's picture

"Financial Repression" (Banks buy bonds.  Dont lend. Bill Gross' new mantra.)

Spigot's picture

Well, form following function, they would need to name it for what it does. So, I would assume, since the action will be a complete B*F'ing of anyone holding US$ or fixed rate obligations (as creditor) a la your prison cell "mate" who just took an un-natural liking to you the new inmate, it might be something like "The Golden Johnson/Long John Silver Precious Insertion and Stabilization Program" or GJ-LJS PISP. In this case the precious will indeed be only the friend of those who stand behind it...

doesmybuttlookfatinthis's picture

Cash de(sup)pository  insertion?

Ponzi Unit's picture

Yes, BTFD, but the dip could be only partly completed at this point, with much more room to the downside.

I took delivery this week of what the vendor called a very large order of silver rounds. Regrettable timing; I overpaid. That said, I am comfortable, and expect  the big bull move to materialize after further weakness in all commodities, PM's included.

Oligarchs' Kabuki: first the bad numbers, then the selloff, loss of momentum, then QEn and four more years of the Debt Brother from Planet Doughnut.

slewie the pi-rat's picture

something in this has left me unsure where numbers ends and ?deuteronomy? begins.  like QE(n), itself...

the old econom is struggling along day-to-day (aren't we all?) while we test the upper limits on the price of a bushel of corn.  the oligarchs and central banksters have created a freaking monster and they are now trying to wean it while they listen attentively for its first words...

... eeeeEEEAT ...mmmMMEeee!

cosmictrainwreck's picture

begs the question....who eats whom?

snowball777's picture

news flash: several dining philosophers die, attempting to resolve paradox from shortage of cutlery, film at 11.

THE DORK OF CORK's picture

The reason we are in such a pickle is that the last time we saved money / energy in the late 70s early 80s we blew it on useless monetarist tosh.

There is little point in having a world of conservative Austrians who save energy only to see it blown on mindless consumption.

Without vision on the other side of the equation you ain't got nothing.

Neo Keynesian puritans have far more ideas in this Minsky moment then the false Gods of Libertarianism.

We need a Goal

"either this thing goes up or it goes down "


topcallingtroll's picture

You are right. They definitely have more ideas. That is the problem.

THE DORK OF CORK's picture

Department of homeland security budget 2010 : $44,457 million

                                               budget 1966 : $705 million 

Department of energy budget 2010 : $30,778 million

                               budget 1966  : $2,343 million

NASA budget  2010 : $18,906 million

Maximum NASA budget in real terms (APOLLO DEVELOPMENT PHASE) 1966 : $5,993 million

three chord sloth's picture

Sorry, Dork... you're wrong.

You seem to have a pretty good head on your shoulders, but you also seem unable to break free from the crippling effects of mal-education, implanted by a system that pretends widespread prosperity and human dignity flow from the wise and enlightened hands of a properly educated technocratic elite. And, coincidentally, that elite looks and sounds just like the college professoriat.

There is little evidence of long-term success in the technocracy. Every elite-driven system, including a so-called meritocratic one, eventually succumbs to the blindness of the self; the belief that "if everyone only acted/thought/felt like me, everything would be fine...". Then is born the system based on coercion, repression, and if left to run it's natural course, the meat grinder.

The neo-Keynesians have absolutely nothing to offer, by the way. As readers of ZH know, the return on debt has gone negative. [] All debt-based solutions will do more harm than good. The multiplier is gone, and debt, like everything else, is subject to the laws of diminishing returns. We can't borrow our way out of this.

THE DORK OF CORK's picture

Give me a break

How many kids will the department of Homeland security inspire ?

What has the department of energy done in the last 40 years ?

It is you who has been propagandised by the club of Rome agenda and their little pet projects and ideologies that they resurrect every few years.

From the John Birch society to more sophisticated mind fucks they have destroyed the ambition to explore in the west.

I am sick to my tits of the Peter Schiff's of this world - Its time to let go of these useless shackles - they were not even locked to begin with.



three chord sloth's picture

What the hell are you talking about?

One minute you're bitching about libertarianism, the next you're tying them into the Dept. of Energy? Homeland Security? And the friggin' Club of Rome?!?!

None of those are libertarian wet dreams, and all were created by the university-created technocracy that believes the world need them to "manage" it for the dim-witted masses. Y'know... the folks I was complaining about in my reply to you.

mess nonster's picture

I "think" you're saying that NASA will save us all...

Go back to licking the window on the nut-bus. If you want salvation, learn a 19th century trade, like coopering or blacksmithing.

That's where we're headed, not into space (unlike you).

THE DORK OF CORK's picture

Mess boy you haven't a fucking idea - 19th century regression is not very practical with 6-7 billion on the planet...... your romantic ideas of the past if conveyed into the world of today will lead to war and pestilence

 You are another poster child for the lack of ambition withen America and the west in general.

Never stop dreaming


snowball777's picture

LOL, nice; if you're gonna dig holes and fill them, make sure they're a Hohman orbital transfer away.

THE DORK OF CORK's picture

The above observation is correct - but if you are going out - its better to go out in a blaze of glory

tarsubil's picture

I like the premise but what is the point of putting a man on Mars? We proved we could travel a little bit in space decades ago. And the Apollo missions became boring really quick afterwards. Because? There was no point. It was just to say we did it. It was like building the pyramids. Work for work's sake. We developed technologies but that was after using a lot of wealth ordinary people created through hard work. We have no idea if computers and the internet would have been created faster and better in a truly free market. And just imagine if we had, I don't know, attempted to get something from space rather than just send a couple tourists to take pictures and collect rocks? Send up some machines that can build something like a mine or a power plant that produces something we here on Earth could use. That would be a collosal effort but I think that would be a goal that would actually pay off and go somewhere besides planting a flag on another planet and saying "yay, we did it!"