Ice Age

"The late Margaret Thatcher had a strong view about consensus. She called it: “The process of abandoning all beliefs, principles, values, and policies in search of something in which no one believes, but to which no one objects.” The same applies to most market forecasts. With some rare exceptions (like our commodity analysts? recent prescient call for a slump in the gold price), analysts don?t like to stand out from the crowd. It is dangerous and career-challenging. In that vein, we repeat our key forecasts of the S&P Composite to bottom around 450, accompanied by sub-1% US 10y yields and gold above $10,000."

If You Don't Believe In Global Warming, Please Forward This to Your Friends Who Do

From Albert Edwards: "In 2005 when Alan Greenspan was being hailed as a “maestro” I wrote that his policies would ruin the world and history would judge him to be “an economic war criminal”. I now think Ben Bernanke’s policies will prove even more ruinous than Sir Alan’s (yes unbelievably he still retains his honorary knighthood). Hence we are lowering our equity weighting to 30%, the minimum possible. The last time I did this was 8 May 2008.... I'm reading some insanely stupid stuff at the moment. Okay, I know some of my writing is pretty insane, but when I read direct quotes and commentary about Bernanke's policy of driving up asset prices in general and equity prices in particular, I almost want to cry over the ludicrousness of this position. The Fed is pursuing the same road to ruin as it did between 2003-2007. I'm becoming more and more convinced that, Gloom, Boom, & Doom's Marc Faber is right when he says that "the Fed will destroy the world."

Whether it is the EU running to the G-20, nations in Asia, the IMF or Spain and Italy and their brethren calling for Eurobonds the distinction is easily made; you pay or you pay or you pay because I cannot. That is the cry in the wilderness as politely, very politely, quite politely everyone says, “No thank you.” The curtain is going down on the show and the normal pleas are being made to keep the spectacle in operation but the pocketbooks are closed and Germany and the rest are not going to bet the family farm when the final act draws nigh. The Elves in the boulders cackle and the “invisible people” move on and sigh as the ending of one more chapter is inscribed in the Book of Life.

How to Adapt to Any Climate Change – Global Warming or Cooling – and Save Money In the Process

The black swan is probably the most widely misunderstood philosophical term of this century. I tend to find it being thrown around to refer to anything surprising and negative. But that’s not how Taleb defined it. Taleb defined it very simply as any high impact surprise event. Of course, the definition of surprise is relative to the observer. To the lunatics at the NYT who push bilge about continuing American primacy, a meteoric decline in America’s standing (probably emerging from some of the fragilities I have identified in the global economic fabric) would be a black swan. It would also be a black swan to the sorry swathes of individuals who believe what they hear in the mainstream media, and from the lips of politicians (both Romney and Obama have recently paid lip service to the idea that America is far from decline). Such an event would not really be a black swan to me; I believe America and her allies will at best be a solid second in the global pecking order — behind the ASEAN group — by 2025, simply because ASEAN make a giant swathe of what we consume (and not vice verse), and producers have a historical tendency to assert authority over consumers. But black swans are not just events. They can also be non-events. To Harold Camping and his messianic followers who confidently predicted the apocalypse on the 21st of May 2011 (and every other true-believing false prophet) the non-event was a black swan. Surprising (to them at least) and high impact, because it surely changed the entire trajectory of their lives. (Camping still lives on Earth, rather than in Heaven as he supposedly expected). To true-believing environmentalists who warn of Malthusian catastrophe (i.e. crises triggered by overpopulation or resource depletion), history is studded with these black swan non-events.

An Oregon University professor has controversially compared skepticism of global warming to racism. Sociology and environmental studies professor Kari Norgaard wrote a paper criticising non-believers, suggesting that doubters have a ‘sickness’. The professor, who holds a B.S. in biology and a master’s and PhD in sociology, argued that ‘cultural resistance’ to accepting humans as being responsible for climate change ‘must be recognised and treated’ as an aberrant sociological behaviour.

Nothing that we haven't said already many times, but always good to hear someone, in this case SocGen's Albert Edwards, observe what is patently obvious - namely that the start of every year now sends a consistently wrong signal that the economy is improving due to seasonal adjustments that no longer are applicable in the New Normal. This coupled with the liquidity boost that takes places just prior to each and every run up completely explains why 2012 is not only deja vu, as it continues to be a carbon copy replica of 2011 (when the market peaked in late April), but is really a treja vu, mimicking the action of 2010. After all it was none other than Reuters who in its puff spin piece tried to caution readers that we have been here before: "This time last year, the U.S. economy was adding jobs at a similar pace of more than 200,000 a month between February and April...Growth was nipped in the bud by the Arab uprising, which sent oil prices soaring. In 2010, prospects had looked even stronger. Between March and May, companies were adding a net 309,000 new jobs each month, and first-quarter growth came in at a 2.7 percent. The rebound proved temporary." And yet here we are, wondering if this time it's different. It isn't. Albert Edwards explains: 'With bond yields breaking out to the upside and the equity bull run continuing, investors are back to their same old hopeful habits. Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011." And here is why Edwards will once again be unpopular with the permabull, momentum chasing crowd: "Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011."

"We are a hair's breadth or, more exactly, one recession away from a market panic on outright deflation -- a panic that will send the central banks into a printing frenzy that will make their balance sheet expansion so far seem like a warm-up act for the main show." Albert Edwards

While the bulk of tangential themes in Albert Edwards' latest letter to clients "The Ice Age only ends when the market loses hope: there is still too much hope" is in line with what we have been discussing recently: myopic markets focused on momentum not fundamentals ("It's amazing though how the market can get itself all bulled up and becomes convinced that we are the start of a self-sustaining recovery. And funnily enough there's nothing more likely to get investors bullish than a rising market"), short-termism ("One thing you can say for the market is that it has an extremely short memory"), and that so far 2012 is a carbon copy of 2011 ("One thing you can say for the market is that it has an extremely short memory. Let us not forget that the performance of the equity market so far this year is almost exactly the same as we saw at the start of 2011 (in fact the performance has been similar for the last 5 months"), his prevailing topic is one of hope. Or rather the lack thereof, and how it has to be totally and utterly crushed before there is any hope of a true bull market. And just to make sure there is no confusion, unlike that other flip flopper, Edwards makes it all too clear that he is as bearish as ever. Which only makes sense: regardless of what the market does, which merely shows that inflation, read liquidity, is appearing in the most unexpected of places (read Edwards' colleague Grice must read piece on why CPI is the worst indicator of asset price inflation when everyone goes CTRL+P), the reality is that had it not been for another $2 trillion liquidity injection in the past 4-6 months by global central banks, the floor would have fallen out of the market, and thus the global economy. In fact, how the hell can one be bullish when the only exponential chart out there is that of global central bank assets proving beyond a doubt that every risk indicator is fake???

As everyone who follows earnings seasons knows all too well, one of the traditional games companies play with sellside research analysts is to push earnings estimates lower just ahead of earnings announcement only to beat by the thinnest of margins, setting off a buying rally in the stock that more than offsets the gradual decline it may have experienced in the preceding run down. This observation is one half of Albert Edwards' note to client from this morning. He says: "It’s that surreal time of the quarter, just ahead of the reporting season, when US companies cajole compliant analysts into reducing their profit forecasts so that on the day the company can record a positive earnings surprise. Companies place so much store on beating analysts’ estimates that they play this ridiculous game of guiding down analysts numbers in the weeks or even days ahead of the announcement, only to beat depressed forecasts by a penny on the day (see chart below). The angle in the press and in analysts’ reports is then that this constitutes ‘good news’ despite, more often than not the outturn undershooting the market estimates of only a few weeks previous. Nuts!" The other half focuses on how this particular earnings season may be different, and why unlike previously, earnings downgrades may be for real this time: "We show that in contrast to expectations of a second half recovery, economic leading indicators are actually signalling the reverse, as is our favoured measure of analyst optimism. Hence the recent spate of profit warnings – which have resulted in a deeper than normal round of downgrades – may be the beginning of something far more undermining to equity prices over the next six months." So is this time, especially in the absence of the artificial boost to everything that is QE, any different? With earning season imminent, we will finally find out just how well the corporate sector (not having represented the actual economy for a long time) can stand on its own in the absence of monetary fiscal and stimulus for the first time in years.

"What may be the science story of the century is breaking this evening" ... and it provides a window of opportunity for sanity in the climate change debate ... including getting away from the next financial scam ...

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.

There is a great deal of uncertainty among investors about what the future of the U.S. economy may look like – so I decided to take a stab at what’s likely to happen over the next 20 years. That's enough time for a child to grow up and mature, and it's long enough for major trends to develop and make themselves felt. I’ll confine myself to areas that are, as the benighted Rumsfeld might have observed, “known unknowns.” I don’t want to deal with possibilities of the deus ex machina sort. So we’ll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain – at least from the perspective of one human lifespan. It’s pointless dealing with geological time and astronomical probability here. And, more important, there’s absolutely nothing we can do about such things. So let’s limit ourselves to the possibilities presented by human action. They're plenty weird and scary, and unpredictable enough.

Why is it that the average investor has a firmer idea of what his next $50 clothing purchase should be than his next $5,000 stock purchase?