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SocGen On Life, The Universe And The Impending Burst Of The Biggest Central Bank Created Bubble In History
Albert Edwards and Dylan Grice's latest must read slideshow:
We have just had the worst decade’s performance for equity investors on record. Relative to government bonds, equities have been an even bigger disaster. Surely after such a terrible decade for equity investors things can only get better?
On a ten year view, equities may indeed prove to be a good investment. On a 1-2 year view, however, we still see much pain to come. After what we have been though so far, where the bulls? optimism has been crushed in 2001/2 and in 2007/8 surely there must be a heavy weight of self-doubt yoked onto the shoulders of the bulls ? but apparently not!
The lesson from Japan is that while de-leveraging plays itself out, the global economy will remain extremely vulnerable. The Great Moderation is dead. It was built on a super-cycle of private sector debt. We know from Japan, we now return to what was before, i.e. highly volatile and unpredictable cycles. Recession will quickly follow recovery.
US equity valuations did not reach revulsion levels in March this year. After some 15 years of gross overvaluation do we really believe that this valuation bear market that has been in place since 2000 will finish with equities looking cheap for only three months? Long term-valuation measures suggest equities will fall substantially below March lows.
Government bonds are now an extremely poor investment. On a 10-year view, the insolvency of government finances will surely end in substantially higher inflation. Yet on a 1-2 year view, we believe the key threat remains deflation. Markets will react aggressively to this as the cycle stalls in 2010. Expect sub-2% bond yields to accompany new lows on the equity market next year. Thinking the unthinkable has paid off over the last decade and should continue to do so.
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well, when?
US equity valuations did not reach revulsion levels in March this year. After some 15 years of gross overvaluation do we really believe that this valuation bear market that has been in place since 2000 will finish with equities looking cheap for only three months? Long term-valuation measures suggest equities will fall substantially below March lows.
I agree completely, we never had our capitulation in equities. We were robbed of it by the Fed.
Government bonds are now an extremely poor investment.
These guys said they were a buy in a worst case scenario. Which is it?
http://www.zerohedge.com/article/worst-case-scenario
1-2 yrs they are definitely a buy. 10 yrs or more, you wont get a good return, likely.
My fellow investors, ZH friends one and all, going forward we must understand what we are confronted with. I would suggest that the old way of investing is finally dead, what was left of it died a slow death over the past decade in the US.
I am sorry to say, that there is no nationalism or allegiance that warrants any special investment consideration at this point. The question is, how to maintain and grow real wealth, with regards to on an international based portfolio. There is no safety in your investments beyond what you create by effectively identifying intrinsic value, and diversifying risk.
That being said, lets look at the report.
There is a lot of good data, and arguments articulated effectively. However, the predictions are somewhat sketchy.
Let me elaborate:
To accurately predict the US economy for a time frame beyond 5 years is just ridiculous. I would also suggest that a two year prediction, at this time, is also practically worthless. We have entered a period of global economic volatility, and as a result, investment strategies continually evolve based on events. The minimum reevaluation period is probably closer to every quarter barring no significant triggers.
Some report examples:
1) The report mentions the dangers of deflation, during the process of debt de-leverage, and about the long term probable transition to inflation. But, what is not said is the speed and depth to which the transition may occur. I believe that the next inflationary transition will be very compressed relative to historical norms. Probably, around 3 to 5 months, with depth also pronounced.
2) There are many differentiating factors between the US and Japan to really extrapolate meaningful economic time lines. The US can hardly afford a lost year, let alone a lost decade. No, the US economy is significantly different from Japan. Specific parallels are unwarranted, and do not properly address the special volatilities of the US economy. Yes we can learn from Japan's experience, but the magnitude of US mal-investment, and abhorrent fiscal policy, is very pronounced.
3) Implied was the contribution of Government intervention in creating GDP growth. But, it did not really address the impact of when this stimulus is removed. How will the real underlying economy react? Massive intervention eventually makes a difficult situation worse, and does so by redirecting good investment and creating more debt.
Mark Beck
Truly thoughtful and intelligent remarks, Mr. Beck. SocGen, after all, doesn't have the best of track records.
From their graphs, which I did appreciate, I came to two conclusions: (1) falling back on Hawley-Smoot argument denotes really poor statistical analysis and econ history skills, (2) those Chinese should really have stuck to the ship building industry (Zheng He's ship was incredible!!!).
Do you ZH guys and doll have access to the brain that is Louise Yamada ? she seems to be of one mind with SocGen on the market valuations..She said S&P would be 400-600 . She said it last year on FastMoney when Dylan Ratigan was still running the show. What does she say today in light of Dubai and Greece eating away at the fringes of Big Ben's Gingerbread House ?
Louise works with technicals, not macro-fundamentals (ala Dubai and Greece default risk).
This hyper simplistic analyses are annoying. What do we compare? Cap rated indexes which are constantly swapping stock leadership. EPS, which have been through so many accounting gyrations that earnings today aren't remotely similar to earnings 20 years ago?
The simple fact is, who cares what "the market" does. Anybody who has invested in paper assets over the last 10 years is a moron. They underperformed real assets by 300-400%.
People define "the market" to mean "shit they have in their IRA". That's not "the market" it's "a market". IMO, 90% of the stocks in America aren't worth jack shit. Who cares what Microsoft earns. They're not giving the money to you, they're skimming it off the top to senior management.
The S&P 500 is probably worth about 400. If it makes it to 2,000, it'll only be because gold goes to $6,000 an ounce, Silver to $60 an ounce and soybeans to $50 a bushel.
Very nice rant.
I've said for quite a while now that the 1.9% dividend yield on the S&P tells you all you need to know about earnings quality.
Welcome to "Enron Nation".
My advice to those citizens (aka consumers/investors) of "Enron Nation" is: feel free to speculate to to your heart's content, but don't be surprised if you wake up one morning to find that your portfolio of Ponzi Paper has dropped in value by 50% while you were asleep.
I just received an "opinion piece" from my hedge fund, and would like to post it. Can anyone tell me what the trick is? Transfering a document to ZH is a first for me. Thanks.
Set up an ID
As global equities rip higher this morning, the vampire squid replies: "We're so sorry, Uncle Albert."
Follow up to the "request for information on how to transfer a document to the ZH boards" - the hedge fund I regefer to isn't mine, it's a firm that I invest with.
I am so sick of hearing the saying "Markets can stay irrational longer then you can stay solvent" but it is so true. This market is "Waiting for Godot". I need a fucking correction!
"Short people got no reason to live."
--Randy Newman
Everything just sucks! It sucks!!
Keep these SocGen presentations coming! Great stuff.
Mark Twain letter to Treasury Secretary...
Riverdale-on-the-Hudson, OCTOBER 15, 1902.
THE HON. THE SECRETARY OF THE TREASURY, WASHINGTON, D. C.:
Sir,--Prices for the customary kinds of winter fuel having reached an altitude which puts them out of the reach of literary persons in straitened circumstances, I desire to place with you the following order:
Forty-five tons best old dry government bonds, suitable for furnace, gold 7 per cents., 1864, preferred.
Twelve tons early greenbacks, range size, suitable for cooking.
Eight barrels seasoned 25 and 50 cent postal currency, vintage of 1866, eligible for kindlings.
Please deliver with all convenient despatch at my house in Riverdale at lowest rates for spot cash, and send bill to
Your obliged servant,
Mark Twain, Who will be very grateful, and will vote right.
I can't believe they really think 10 year equity returns from today's levels might be good if they also expect stocks to go below the March lows. Let's say the S&P 500 goes from 1100 to 1700 in 10 years, which is 4.45% compounded. Add about 2% for dividends to get to a total return of 6.5%. But if the S&P takes a year to go below the March lows, roughly 10% below to 600, to go to 1700 in the following 9 years is 12.25% compounded plus 2% for dividends to get to 14.25% total return for 9 years and 6.5% for 10 years. I don't get the sense that the SocGen guys think we'll flush out all the excesses and set the stage for the next bull market in equities in the next year or two. Look at the Japan experience. So I think their equities may prove to be a good investment with a 10 year view is a cop out.