The Most Important Chart For Albert Edwards

Tyler Durden's picture

SocGen's Albert Edwards, who refuses to pull a Hugh Hendry and to "stop looking at himself in the mirror", remains one of the few coherent realists in a world where soaring nominal asset prices have managed to confuse virtually every pundit into believing central bank balance sheet and stock market expansion means an economic recovery. Today he shares the one chart which as he says "the importance of which we cannot emphasise enough", and which he believes highlights the biggest risk equity investors - hypnotized by the Fed's H.4.1 weekly statement and its weekly record high balance sheet - take when they put all their faith in the Bernanke/Yellen grand behavioral experiment.

From Albert Edwards:

One simple chart - the importance of which we cannot emphasise enough - is the divergence of commodity prices and the equity market during QE3 (see chart below). Why is this important? Because the market has firmly got it into its head that QE will always be good news for equities. So if the economy swoons (maybe due to excessive  monetary tightening either via tapering or a strong dollar), equities will look through any short-term disappointment as more QE will save the day. Investors see bad economic news as good news for equities.

I do believe this to be utter nonsense. For in the same way as investors believe, axiomatically that QE will drive up equity prices, they believed exactly the same thing of commodities until 2012. Commodities are a risk asset and benefited massively from QE1 and QE2, so why has QE3 had absolutely no effect on commodity prices? Exactly the same thing could happen to equities if a recession unfolds and profits plunge at the same time as the printing presses are running full pelt. Do not assume equities MUST benefit from QE.

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LawsofPhysics's picture

Ah yes, because the energy required to produce and actually deliver said commodities has decreased...


FAIL.  The answer you are looking for is simple, why hasn't QE3 increased commodities? because that isn't what the Fed is buying...

"Do not assume equities MUST benefit from QE" - No shit, unless of course the Fed is directly buying them.

My god people...

Serfs Up's picture

WTF you talking about?

You mean the kwhrs required to produce a pound of aluminum has fallen since 2012?  Or maybe copper?  It now takes less cyanide and dore refining to produce and ounce of gold?  

Oh wait, or do you mean that it takes less diesel to plant a thousand acres now?  Or maybe the Haber-Bosch process for fixing nitrogen is now way mroe efficient?

Or perhaps I misunderstood you.

LawsofPhysics's picture

In short, a more relevant comparison is the Fed's Balance Sheet and almost any fucking index.

Pladizow's picture

Why comm/equity divergence since QE3?

Corrupt bank proprietory trading desks are not goosing commodities!

LawsofPhysics's picture

Declining wage earners and more unemployed folks not driving, building or doing as much either...

Besides, if proprietary traders want to buy something, it helps if they can get it cheaper.

CrashisOptimistic's picture

My read would be bank excess reserves.

It's hard to dilute the price of commodities and thereby increase that same price if the money never leaves the Fed.

As has been reported here on ZH, the amount of excess reserves on deposit at the Fed by banks is very close to the total amount of QE that has taken place.

The banks can use those reserves as collateral for trading derivatives.  But those reserves are not used to buy commodities.  Hence no dilution.

It's all a charade.

LawsofPhysics's picture

"It's all a charade." - correct.  As far as real demand goes, 7+ billion are still competing for a better standard of living and all the commodities that make that possible, so there is still plenty of demand.

Speaking of reserves, is it time for a "stress test" yet?  What are the american banks current reserve requirements anyway?  Talk about charades...

Bank holidays in 3...2...1...

new game's picture

try demand. world econ slowing in aggregate -. commods need real input demand...

faux econ of levitated financial smoke and mirros - oh yea. 

plus money is chasing return regardless of risk-thanks zirp and keynsian retarded centrally planned goverment bull fk'g shit...


eworrall's picture

commodity prices = paper bets backed by nothing (under force majeure or default) = declining in value prior to US$ devaluation. equities at least represent a claim on ongoing real earnings. Maybe big boys are finally playing the short paper/long real assets game.

eworrall's picture

commodity prices = paper bets backed by nothing (under force majeure or default) = declining in value prior to US$ devaluation. equities at least represent a claim on ongoing real earnings. Maybe big boys are finally playing the short paper/long real assets game.

HpDeskjet's picture

The Fed is not buying equities either... This is not about the FED, this is about retail (-minded) investors who "believe" the growth story of the FED. They reason: "Hey, the FED would not taper if there is not going to be growth, so buy equities!"

LawsofPhysics's picture

The Fed is not buying equities either - I think ZH already debunked this myth.

Headbanger's picture

Time out!!   The Federal Reserve isn't buying equities directly but they sure are facilitating it!

Just look at how many time ZH has posted a chart of the Federal Reserve's balance sheet overlaid on the S&P !!


So what the fuck are you mooks saying!!!??


eclectic syncretist's picture

The Fed will invest everything into the 3D gold printer I am about to invent and patent.  Ooops!  I might have said too much.

John Law Lives's picture

You may now be considered a "person of interest".  BTW, that buzzing sound in the background might just be a drone with a high-resolution spy cam...

kurt's picture


It's the super high pitch sound that you hear when it's quiet, feels like a pressure just inside your ears, it's slowly microwaving your pineal until you flip the script and fly right. Ooops! Sorry left it on too long and shit... what cancer.

Have a nice day!

John Law Lives's picture

Fortunately for me, there is nothing but a bag of sand inside my skull...  ;->

Headbanger's picture

Dude, talk to me...  Does it do some precision (less than 5 mils) chrome finished hardened molds for casting, oh say... "sewing machine parts"?

Say no more... nudge, nudge...

kurt's picture

Rather than gold plating your gun Uday, I'd look into making your gold look like common bricks. You could them hide them in plain sight when the post apocalyptic goons come pokin' around.  ... nudge, nudge...

ajax's picture



"The Fed will invest everything into the 3D gold printer I am about to invent and patent.  Ooops!  I might have said too much."

The Fed doesn't give a flying fuck about AU - 3D or otherwise.

Mercuryquicksilver's picture

Unless his IPO symbol is 3DETF

LooseLee's picture

....especially when there are millions of morons more than happy to use 'DXY' as 'money. Fools are the followers of the money magicians and are not able to see the 'Truth' of what they follow. Is this 'you' in a nutshell?

maskone909's picture

imo, looking in from the outside it would appear that money goes into equities for fears of inflation, and folks want a return greater than whats offered in CD's and or treasuries (ZIRP). only QE isnt directly effecting inflation as the velocity has fallen off a cliff.  so what happens now?  the fed will pretend to decrease QE, and pretend to raise interest rates.  this could deflate equities markets, sending money into either hard assets(if there is any left) or back into treasuries (which will be trading like penny stocks)


so if there isnt any inflation, why the huge rally into equities? futhermore, why put money into equities if it depends entirely on the feds policy? (pennies in front of a bulldozer).  its looking very very bad

LawsofPhysics's picture

"so if there isnt any inflation, why the huge rally into equities? futhermore, why put money into equities if it depends entirely on the feds policy? (pennies in front of a bulldozer). "  - correct, moreover if "The world Economy is recovering" then why are they so "concerned about deflation"?

Can't have it both ways motherfuckers.

Nick Jihad's picture

Lots of investors (e.g. 401k plans) get to choose between stocks, bonds or cash. Since bonds seemingly have nowhere to go but down, stocks look safer.

Also, lot's of stock purchases are buybacks, which are subject  to perverse incentives - they can pay all-time-high prices without risk of loss, and the company's execs may be selling into the buyback.

LawsofPhysics's picture

Both stocks and bonds are now fully manipulated and can go up or down as it suits the needs of The Fed, the government, and the primary dealers.  Many 401ks also have fixed rate funds.

Peronally, if I was a 401k sheep, I'd be taking the hit now and buying physical assets and buying real estate.  Especially if I had kids.  maybe even invest in my own bussiness, at least they would have a job that way.

new game's picture

law-spot fucking on-exactly what i am doing-fucken - eh nice post from my little world.

i drained the 403b and paid the price and now it is mine to put in a safer place-hard durrable usable assets.

like porn shops, head shops, bottle shops and message parlors...s/(this line)


LooseLee's picture

Unfortunately, decades of brainwashing by the MSM and Wall Streeters that equities are a hedge against inflation is only true in limited circumstances. Equities main reason for owning is in the cash stream of dividends they produce. How many companies are 'borrowing' to pay dividends because they do not have enough 'cash flow' to pay them?. Have a look at 1973-74 for equities performance when real inflation was the norm...Again, the blind lead the blind and they all fall into the ditch is an eternal 'Truth'....

ArkansasAngie's picture

There is always the issue of demand.  Demand for commodities can't be faked continuously like demand for paper

LawsofPhysics's picture

Define "continuously".   Has GS not had tankers of oil sitting in ports before?

Ancona's picture

A voice in the darkness. He will be ridiculed......until it happens. Then, he'll be interviewed and quoted by everyone. They will all claim to have listened to him all along....

Rainman's picture

Be one step ahead of everybody and you're a genius ....two steps ahead and you're a crackpot.

Doña K's picture

The difference between a genious and a madman is 2 IQ points

knukles's picture

And another 3 IQ points if you can win the spelling bee.

Herd Redirection Committee's picture

God, I have felt 5 years ahead in recent times... It definitely makes you look  like a madman.  Then luckily a Snowden will come along, a scandal will be unearthed, and all of a sudden everyone is pretending like "We knew all along the Fed wasn't a government institution and central banks exist to serve their private shareholders".

HpDeskjet's picture

If you plot S&P Earnings vs S&P level, you get a similar graph.... This market is complete bs, but i do not know what will crack it. Some idiots at the "strategy" department of my asset manager also went longerererer risk recently because of the "growth pick-up"... GDP growth (poor anyway) =/= Earnings growth idiots

rubearish10's picture

Nobody knows what will crack it, except it's will be then called a "Black Swan".

Confundido's picture

"...Thus, despite the

gigantic efforts of the Fed, during early 1933, to inflate the money

supply, the people took matters into their own hands, and insisted

upon a rigorous deflation (gauged by the increase of money in circulation)—

and a rigorous testing of the country’s banking system

in which they had placed their trust.

The reaction to this growing insistence of the people on claiming

their rightful, legally-owned property, was a series of vigorous

attacks on property right by state after state. One by one, states

imposed “bank holidays” by fiat, thus permitting the banks to stay

in business while refusing to pay virtually all of the just claims of

their depositors (a pattern that had unfortunately become almost

traditional in America since the Panic of 1819). Nevada had begun

the parade as early as October, 1932..."


"America's Great Depression", M. Rothbard.

wisehiney's picture

My Great Uncle took his pistol to the local bank and "robbed them" of the exact amount of money in his account. He never heard anything else about it. 

Headbanger's picture

I greatly hope you have that wonderful pistol!

However, my condolences to the staff and their descendants of said bank for such necessary action of withdrawal by such means in those times!

wisehiney's picture

I am sorry to say that I do not. But I DO have this here hand cannon for when I must do the same.

Headbanger's picture

Dang.  But as always, a clean, lubed and loaded hand canon, is a happy hand canon.

knukles's picture

My pappy always said that about women.

Dr. Engali's picture

The commodity markets aren't a policy tool. The stock market is. Why is that so darn confusing?

Herd Redirection Committee's picture

I think there was more stockpiling going on in QE 1 and 2, now the banks are trying to shake out the weak hands, out of PMs and commodities, now that they are cheap (relative to stocks) again.

KickIce's picture

Commodities must be kept in check or the ponzi falls apart.

lemarche's picture


wisehiney's picture

Big pullback tomorrow or friday. Over $2 billion in ipo's out over two days.

But....good bit of pomo today.