"When Bad News Becomes Bad News" - Albert Edwards Presents His "Second Most Imporant Chart To Investors"

Tyler Durden's picture

One of Albert Edwards' trademark terms to define the New (and not so New) Normal, is the so-called Ice Age: a period of prolonged stagnation marked by pervasive deflation, deteriorating living conditions and a sliding stock market. It was to defeat the oncoming "Ice Age" that the global central banks embarked on a massive, coordinated (and largely failed) money printing monetary experiment some 6 years ago. Now, in what Albert Edwards dubs his "second most important chart for investors", (as a reminder his "most important chart" is here), he warns that as a result of the central banks to offset broad deflationary headwinds, the Ice Age is once again just around the corner.

From his most recent note, here is what Albert Edwards believes is the chilly chart that is the "second most important for investors."

Inflation expectations in the US have just followed the eurozone by plunging lower. Until very recently, the Fed and the ECB had been quite successful at keeping inflation expectations in their normal range – this despite their clear failure to control actual inflation itself, which has consistently undershot expectations. Investors are beginning to realise that contrary to their confident actions and assurances, the Fed and the ECB have failed to prevent a dreaded replay of Japan’s deflationary template a decade earlier in the West. The Ice Age is once again about to exert its frosty embrace on markets as investors wake up to a new and colder reality.


There were two key parts to our Ice Age thesis. First, that the West would drift ever closer to outright deflation, following Japan?s template a decade earlier. And second, financial markets would adjust in the same way as in Japan. Government bonds would re-rate in absolute and relative terms compared to equities, which would also de-rate in absolute terms. This would take many economic cycles to play out. Previous US equity valuation bear markets have taken 4-6 recessions to complete ? we?ve only had two thus far.


Another associated element of the Ice Age we also saw in Japan is that with each cyclical upturn, equity investors have assumed with child-like innocence, that central banks have somehow ?fixed? the problem and we were back in a self-sustaining recovery. Those hopes would only be crushed as the next cyclical downturn took inflation, bond yields and equity valuations to new destructive lows. In the Ice Age, hope is the biggest enemy.


Investors must pay close attention to the (second most important) chart below. Investors are beginning to see how impotent the Fed and ECB?s efforts are to prevent deflation. And as the scales lift from their eyes, equity, credit and other risk assets trading at extraordinary high valuations will take their next giant Ice Age stride towards the final denouement.



They may be impotent to prevent deflation, but they are quite omnipotent at printing money, either electronically or in paper format, and while so far they have focused on outside money, soon they will shift to "inside" money creation, also known as Bernanke's helicopter paradrop. That will be the moment when the status quo finally uses the nuclear option at pervasive global deflation, leading to a collapse in sequential, or parallel, collapse in fiat.

But even before that, there is something, that to the current generation of traders may be even scarier: a return to normalcy, or as Edwards calls it: bad news being bad news again, something which traders haven't experienced in nearly 6 years.

We believe that as long as inflation expectations remain ?well behaved? then the equity market can continue to interpret ?bad? economic news as good news. At this point we defer on this topic to the world renowned authority on equity bear markets, Russell Napier, author of the definitive book Anatomy of the Bear - Lessons from Wall Street's four great bottoms.


Russell has recently explained that we should watch inflation expectations closely. His work suggests that once 5y US inflation expectations fall to ?excessively? low levels, bad news no longer is seen as good news by the equity market but becomes straight plain vanilla bad news. Russell?s work suggests that historically, once US 5y implied inflation expectations dive towards 1½%, the equity market typically starts to disintegrate (see chart below). US 5y implied inflation expectations.



Russell also warns that those investors who want to stay and party as long as possible in equities at the end of this cycle should keep an eye open for a falling copper price and widening credit spreads. Credit spreads are indeed now rising, especially in the high yield area; they are not yet at the levels at which  Russell believes we should man the barricades - but maybe we should begin polishing our bayonets.

Of course, everyone will ignore the above, as they have ignored all other warnings over the past 6 years, foolishly, because instead of fixing the global economy which is as broken now as it ever was with all the trillions in liquidity instead just making their way into the stock market, and so one has to hold their nose and buy, because at the end of the day there is just one thing that is more important that POMO, and that is FOMO, or Fear Of Missing Out, also known as career risk. In short: the music is still playing, or as Edwards summarizes it:... "amid the inevitable impending global economic and financial carnage, when people, like Queen Elizabeth ask, as she did in November 2008, why no-one saw this coming, tell them that many did. But just like in 2006, before the Great Recession, investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers."

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X.inf.capt's picture


everyday in the USSA...

we get bad news...

keep them afraid,...very afraid...

usednabused's picture

When you say? Why its hard to tell with the head buried beneath the sand.

WhackoWarner's picture

Probably meaningless but I just went to the grocery store today as I am making chili..... and saw a %17 rise in cost of "regular" ground beef..  I have been watching inflation slowly creep in.  But what I saw today was a WTF moment.

What I saw today was a jump in price after months of conditioning.  NOW the price of regular ground beef has jumped to "xtra lean".  And none of that was on display.  so I can only assume the "xtra lean" will now command price of Prime Rib..


Not luxury meats but common household purchase of middle class.


%17 increase overnight.


Going to see that on my paycheck as well am I not? 

moneybots's picture

"%17 increase overnight."


The government will substitute chicken for hamburger in the CPI. 

X.inf.capt's picture

soylent green...

wait till that shows up...



TheEndIsNear's picture

Soylent. Twenty one meals for $85. Not sure if it's green though.

tbone654's picture

a guy was syphoning my gas tank at the grocery store...  caught him red handed...  he looked like he needed the gas just to get home...  oh well...

Hohum's picture


That's bad but imagine if meat production weren't subsidized.  Whoa!

ClassicalLib17's picture

You're still worried about saturated fat intake?  What do you use your computer for?  Only investing and blogging?  Saturated fat is essential for your survival.  Read the facts

TeamDepends's picture

Don't tell anyone, but the PPT look as if they just competed in the Iron Man Triathlon.

stant's picture

They were threatened being transferred to secreat service. Wookie div

Kaiser Sousa's picture

"His research in the 1980s on the Great Depression also proved to be a useful roadmap for how links between the financial system and the economy break down in a crisis.

The work, along with work by others like Douglas Diamond at the University of Chicago’s Booth School of Business, is seen by many academics as being at the leading edge of research in the field. Mr. Bernanke is the 25th most cited economist on the Ideas website hosted by the Federal Reserve Bank of St. Louis, just behind Nobel winner Paul Krugman and ahead of previous Nobel winners including Edward Prescott, Daniel Kahneman and Robert Shiller. Having led the Fed through a crisis, Mr. Bernanke will forever be a lightning rod for the central bank’s role in the great downturn of 2008. Supporters believe he steered the economy from disaster; critics say the Fed caused the crisis with low interest rates and then took reckless chances after it had happened. Regardless of your view on this question, he has an academic legacy to stand on.

What do you think? Does the former Fed chair deserve a Nobel? Write to us and we’ll report back on your feedback."
-By Jon Hilsenrath


Nick Jihad's picture

Bernanke will forever be a lightning rod for the central bank’s role in the great downturn of 2008.

Hah. That's only if he's not forever a lightning rod for the great collapse of 2015.

Yen Cross's picture

     This rice paper house (equity market) is one ~Ebola puke~ away from caving in on itself...

 JFC, look at all the "lower highs" and "lower lows" over the last 3-4 weeks.

Rehab Willie's picture

scorched earth here we come.

DOGGONE's picture

Why nobody see ...?

BECAUSE "The Public Be Suckered"

Bell's 2 hearted's picture

"soon they will shift to "inside" money creation, also known as Bernanke's helicopter paradrop."




will not can not happen 

moneybots's picture

"...amid the inevitable impending global economic and financial carnage, when people, like Queen Elizabeth ask, as she did in November 2008, why no-one saw this coming, tell them that many did."


The FBI warned congress of massive mortgage fraud in September, 2004.

The problem wasn't that no one saw it coming, the problem was that people that they warned, didn't want to hear it, as they didn't want anyone to spoil the party.

Congress was also warned by experts, not to dismantle Glass Steagall.  Again, they didn't want to listen as they didn't want anyone to spoil the party.

10,000 real estate appraisers who petitioned the government about appraisal fraud, were also ignored.

When the Great Depression arrives, listen to them say no one saw it coming.  Again, they will be lying.


taketheredpill's picture




Business media may spin the TIPS Breakeven breakdown as somehow being related to Gross leaving PIMCO (and PIMCO selling some large TIP positions in Total Return Fund ) but the breakdown in breakeven yields started well before Gross left.



moneybots's picture

"Investors are beginning to see how impotent the Fed and ECB?s efforts are to prevent deflation."


They are a little slow witted, eh?  Credit bubbles burst and burst bubbles are deflationary.



Alexgee's picture

I guess Edwards can't spell, I wonder what his most "imporant" chart is -sarc
And why should we care what the elite thinks?

Alexgee's picture

I guess Edwards can't spell, I wonder what his most "imporant" chart is -sarc
And why should we care what the elite thinks?

Sorry about the double post :)

dragoneyes74's picture

Pretty textbook reversal today off critical support levels in all the indices that held the weekly uptrendline in the ES by making a higher low from the August bottom.  It was an easy spot to cover a short, but I don't mess with NFP anymore so the algos can fight that out on their own.  Even though there are doctoral dissertations that can be written on the reasons this market should go down, until that weekly uptrendline in the ES gets taken out, which held rather triumphiantly today, the bears will have a gnawing doubt in the back of their minds that we're about to watch the newest release of the Shortnado franchise, and they will be vulnerable to yet another squeeze.  My plan is simple.  It's all about the downtrend lines off the highs.  If the bears have any chance of taking control of this market, they need to defend those areas and not let price get back above the 50-day EMAs.  

My view is the next couple weeks will set the tone for a long time.  Is the market actually worried about QE ending and pricing in the "talked about" possible rate hikes next year, or does the ZIRP & FOMO bull market psychology still rule the day?  The bulls did what they had to do today and so it feels like the opening credits of Shortnado 7, but I'm open to a new movie anytime now.  If they force a squeeze, it will once again prove that nothing matters because there's no other acceptable place else to chase a yield than the stock market and the bubble will get bubblier.  

It's do or die time for the bears.  Take out that weekly uptrendline in the ES and I'm happy to join forces with you.  Otherwise, you'll force me to get my bull costume back out of the closet and reluctantly run with the crowd.