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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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Wed, 01/15/2014 - 16:24 | 4335065 LawsofPhysics
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...

Wed, 01/15/2014 - 16:25 | 4335092 Serfs Up
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.

Wed, 01/15/2014 - 16:26 | 4335100 LawsofPhysics
LawsofPhysics's picture

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

Wed, 01/15/2014 - 16:32 | 4335122 Pladizow
Pladizow's picture

Why comm/equity divergence since QE3?

Corrupt bank proprietory trading desks are not goosing commodities!

Wed, 01/15/2014 - 16:37 | 4335139 LawsofPhysics
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.

Wed, 01/15/2014 - 16:47 | 4335168 CrashisOptimistic
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.

Wed, 01/15/2014 - 16:56 | 4335204 LawsofPhysics
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...

Wed, 01/15/2014 - 19:29 | 4335717 new game
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...


Wed, 01/15/2014 - 21:38 | 4336233 Radical Marijuana
Wed, 01/15/2014 - 22:36 | 4336459 eworrall
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.

Wed, 01/15/2014 - 22:36 | 4336461 eworrall
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.

Wed, 01/15/2014 - 16:25 | 4335093 HpDeskjet
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!"

Wed, 01/15/2014 - 16:31 | 4335121 LawsofPhysics
LawsofPhysics's picture

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

Wed, 01/15/2014 - 16:40 | 4335148 Headbanger
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!!!??


Wed, 01/15/2014 - 16:55 | 4335193 eclectic syncretist
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.

Wed, 01/15/2014 - 17:07 | 4335234 John Law Lives
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...

Wed, 01/15/2014 - 19:17 | 4335658 kurt
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!

Mon, 01/20/2014 - 13:59 | 4348544 John Law Lives
John Law Lives's picture

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

Wed, 01/15/2014 - 17:14 | 4335257 Headbanger
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...

Wed, 01/15/2014 - 19:11 | 4335628 kurt
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...

Wed, 01/15/2014 - 17:50 | 4335382 ajax
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.

Wed, 01/15/2014 - 18:11 | 4335446 Mercuryquicksilver
Mercuryquicksilver's picture

Unless his IPO symbol is 3DETF

Wed, 01/15/2014 - 20:11 | 4335913 LooseLee
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?

Wed, 01/15/2014 - 16:58 | 4335209 maskone909
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

Wed, 01/15/2014 - 17:08 | 4335237 LawsofPhysics
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.

Wed, 01/15/2014 - 19:00 | 4335599 Nick Jihad
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.

Wed, 01/15/2014 - 19:10 | 4335622 LawsofPhysics
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.

Wed, 01/15/2014 - 19:37 | 4335743 new game
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)


Wed, 01/15/2014 - 20:20 | 4335947 LooseLee
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'....

Wed, 01/15/2014 - 16:25 | 4335094 ArkansasAngie
ArkansasAngie's picture

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

Wed, 01/15/2014 - 16:33 | 4335124 LawsofPhysics
LawsofPhysics's picture

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

Wed, 01/15/2014 - 16:21 | 4335073 Ancona
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....

Wed, 01/15/2014 - 16:28 | 4335103 Rainman
Rainman's picture

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

Wed, 01/15/2014 - 17:19 | 4335273 Doña K
Doña K's picture

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

Wed, 01/15/2014 - 18:13 | 4335453 knukles
knukles's picture

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

Wed, 01/15/2014 - 18:21 | 4335492 Herd Redirectio...
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".

Wed, 01/15/2014 - 16:23 | 4335083 HpDeskjet
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

Wed, 01/15/2014 - 16:33 | 4335125 rubearish10
rubearish10's picture

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

Wed, 01/15/2014 - 16:24 | 4335085 Confundido
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.

Wed, 01/15/2014 - 16:27 | 4335102 wisehiney
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. 

Wed, 01/15/2014 - 16:47 | 4335162 Headbanger
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!

Wed, 01/15/2014 - 16:48 | 4335170 wisehiney
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.

Wed, 01/15/2014 - 17:19 | 4335272 Headbanger
Headbanger's picture

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

Wed, 01/15/2014 - 18:14 | 4335461 knukles
knukles's picture

My pappy always said that about women.

Wed, 01/15/2014 - 16:26 | 4335087 Dr. Engali
Dr. Engali's picture

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

Wed, 01/15/2014 - 16:46 | 4335166 cognus
cognus's picture

this /\

Wed, 01/15/2014 - 18:23 | 4335498 Herd Redirectio...
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.

Wed, 01/15/2014 - 20:18 | 4335942 KickIce
KickIce's picture

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

Wed, 01/15/2014 - 16:26 | 4335097 lemarche
lemarche's picture


Wed, 01/15/2014 - 16:34 | 4335127 wisehiney
wisehiney's picture

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

But....good bit of pomo today.

Wed, 01/15/2014 - 16:28 | 4335106 madbraz
madbraz's picture

Most important chart - consumer discretionary ($SPCC, XLY, XRT).  Seems to have peaked in December.


In 2007, consumer discretionary peaked in June.  The stock market followed with a peak 4 months later.


Consumer discretionary has outperformed the SP500 by 50% since 2009.  If this driver stops, it will be very hard to continue moving the market higher.



Wed, 01/15/2014 - 16:28 | 4335107 eclectic syncretist
eclectic syncretist's picture

The Fed wants inflation to go up but commodity prices to stay low or fall?  WTF is that all about?

Wed, 01/15/2014 - 16:40 | 4335154 vie
vie's picture

Or do they want to pretend they care about inflation, using "lack of inflation" as an excuse to pump MOAR dollars into the system.  If they cared about true inflation, they would just measure it right like they did before the 90s.

Wed, 01/15/2014 - 16:32 | 4335123 vie
vie's picture

This is garbage.  Of course commodities haven't "benefited" from QE3.  If they had everyone would be feeling the pain of massive inflation.  Seems like it's not much of a leap to believe part of the QE3 program was intentionally holding commodities down so everyone stayed in equities.  Repeat after me, ITS ALL MANAGED.

Wed, 01/15/2014 - 16:36 | 4335138 i_call_you_my_base
i_call_you_my_base's picture

"why has QE3 had absolutely no effect on commodity prices? "

Because the prices are manipulated. I suspect last time around they simply didn't care as much. But they put in the mechanisms to supress the prices knowing that unaltered they would go up.

Wed, 01/15/2014 - 16:40 | 4335149 arby63
arby63's picture

Is it possibly due to a tapped-out consumer?

Wed, 01/15/2014 - 16:40 | 4335151 DOGGONE
DOGGONE's picture

Stick this in people's faces.

Wed, 01/15/2014 - 16:40 | 4335152 luna_man
luna_man's picture



I don't know about the banks...but this "bear" has been holding out since 2009!


got the scars to prove it

Wed, 01/15/2014 - 16:43 | 4335157 katchum
katchum's picture

Or commodities can skyrocket...

Wed, 01/15/2014 - 16:44 | 4335159 Rising Sun
Rising Sun's picture

Divergence started in late 2011.  Over 2 years later and how many have been slaughtered by this???


Nothing matters - economic, technical, employment, food stamps, poverty levels, whatever - it's all garbage - the market is going to go to the moon until China collapses.

Wed, 01/15/2014 - 16:45 | 4335161 buzzsaw99
buzzsaw99's picture

it isn't just qe, it's the zirp that's doing a lot of it. money for nothing, chicks for free. /dire straits

Wed, 01/15/2014 - 16:55 | 4335199 SquawkBox
SquawkBox's picture

Commodities went flat about same time the Chinese stopped feverishly loading up their trucks. The chart may be as much about China as it is about QE.

Wed, 01/15/2014 - 16:56 | 4335203 youngman
youngman's picture

If the Fed wants inflation..just raise the rates..then the banks have to pass that on thru to the customer...and voila...they raise prices to cover the higher costs....might put a damper on home sales though...but they can subsidize them as usual...lets get more ZIRP...lets make it 5% and get it moving on up

Wed, 01/15/2014 - 17:02 | 4335223 Spungo
Spungo's picture

Shouldn't the bailouts drive up the price of gold? I bet guys like Jamie Dimon have gold plated cars, they have little specs of gold in the gas, the mirrors are gold, the license plate is gold, the windshield wipers are gold. The car weighs 20 tons but you know you're a fuckin badass when you drive it.

Wed, 01/15/2014 - 17:24 | 4335289 Seeking Aphids
Seeking Aphids's picture

The commodities market has always been a reliable guage of where we are at in any economic cycle...right now it says we are in a recession (depression?). That is correct. All the SP 500/DJ froth is just that. QE and ZIRP have put the easy money into the hands of investors and they have used it.....end of story. The real global economy, however, has been at a standstill as we are going through a global rebalancing of epic dimensions. Once we are through it we will all see it...right now we are in the middle of a process that is confusing to being in a washing machine and trying to figure out which way is up.....can't do it until it stops (not that I have had that experience but I do have a good imagination and I like to use it from time to time).

Wed, 01/15/2014 - 17:30 | 4335310 SmallerGovNow2
SmallerGovNow2's picture

VERY well put SA...

Wed, 01/15/2014 - 18:05 | 4335425 LawsofPhysics
LawsofPhysics's picture

The problem being that all the while real commodities are still required to simply to maintain current standards of living and the status quo.  More are required if the population keeps growing...

Rock, meet hard place.

Wed, 01/15/2014 - 19:12 | 4335633 forwardho
forwardho's picture

Rock, meet paper.

It surrounds and smothers.


Wed, 01/15/2014 - 18:02 | 4335417 magne13
magne13's picture

Thats because a secret deal was cut at the Eccles building between all of the primary dealers.  The POMO must be recycled into equities, all commodity based businesses were not to be expanded and or bought in the open markets and all Excess Reserves are to remain as such, excess reserves and not to be loaned,  Primary Dealers are not allowed to sell equities. AT ALL.  All of this central planning has made investing pretty straight forward, LONG Index funds, no worry, WHAT Could possibly go WRONG?

Wed, 01/15/2014 - 19:36 | 4335744 OC Sure
OC Sure's picture

Could it be that interest rates had been driven down so low that the cost of production became so cheap that more producers came on line and the supply of commodities (at least the industrial metals which the chart indicates) increased enough to push prices down? When interest rates finally do rise, won't marginal producers be forced offline as they are unable to service their debt thereby reducing supply and leaving prices nowhere to go but up? This will be the chain reaction; the central banks will raise rates claiming that they fear rapid price increases, marginal producers will begin to go offline forcing prices higher, uh oh! bettter raise rates more, uh oh less supply, uh oh, uh oh...

Wed, 01/15/2014 - 20:42 | 4336037 Falling Down
Falling Down's picture

Think of it this way, too. It makes it easier for the central planners to dole out green rectangles to their cronies.

We have to face reality, here. Barriers to competition have been erected, and they're so high now that smaller players, and those "not in the know", are shut out of markets/marketplaces.

That way federal, state, and local politicians and their string-pullers can 'justify' getting in front of the cameras, and with a straight face tell us "public-private partnerships" are the "future".

If you're an entrepreneur or a small business, good luck getting a loan, these days. If you're connected to the matrix you can get just about whatever your Big Guv-loving heart desires, from federal grants to tax breaks to states throwing money at you to "create jobs". 




Wed, 01/15/2014 - 19:53 | 4335839 LooseLee
LooseLee's picture

One of humankind's most beloved and revered Spiritual Leader, philosopher, and Mystic is credited with this wise aphorism, "The Blind lead the blind and they all fall into the ditch".  Basically he is referring to those who worship at the altar of the damned (e.g. Bernanke, et. al., the politicians, corporate leaders, etc.). Anyone who 'follows' the centrally planned 'anything' by 'anyone' has essentially sold their 'soul' to the 'dark side'. In summation, anyone 'long' this 'lie' of a 'market' has not only commited treason as well as blasphemy, but assured themself a nice warm spot in what the 'Christians' call 'hell'.  Reject what I say as 'nonsense', but then be prepared to reap what 'ye have sown'...Your day of reckoning is nigh...and for those who want to bring dogmatic 'religious sectarian' argument into this perception, please realize that the 'Buddha', Krishna, et. al never created any 'religious' belief but merely spoke 'The Truth'. Only those who did not understand had to formulate a 'system' to hide behind because they were not interested to reject the 'status quo'---the only possible way for peace and prosperity to reign in this world.

Wed, 01/15/2014 - 20:53 | 4336079 besnook
besnook's picture

this quandry is what supports the sandp. where will i put my money if i sell my stocks?

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