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Investors Are Losing Faith And "Markets Will Riot" Warns Albert Edwards
Submitted by Robert Huebscher via Advisor Perspectives,
Albert Edwards admits that his “über bear” reputation is well deserved, at least with respect to equities, an asset class he has dismissed for the last 10 years. His bearishness has not abated, and for the coming year, he fears that “deflation will overwhelm the west.”
Markets, he said, will riot.
Edwards is the chief global strategist for Société Générale and he spoke at that firm’s annual global strategy conference in London on January 13. Andrew Lathrope, the firm’s head of global quantitative strategy, and Dr. Marc Faber, the publisher of the Gloom Boom & Doom Report, also spoke.
Global markets face three risks, according to Edwards: bearishness in the U.S. government bond market, a flawed confidence that the U.S. is in a self-sustaining recovery and undue faith in the relationship between quantitative easing (QE) and the equity markets.
Deflation is the main threat, though, according to Edwards. “This is the year the markets really panic about deflation. You haven’t had that panic yet.”
Edwards said that U.S. equities are “stuck in a secular-valuation bear market” and have been inflated by QE. Though he did not predict a recession, he said stocks would react very negatively if one were to happen.
“The market embraces a recession by going to a new lower low on valuations,” he said.
He offset that pessimism with a bullish view on the U.S. bond market. He said the 10-year yield could go below 1% and “converge on what is happening in Japan.”
“Markets move on extreme surprises,” Edwards said, “and when expectations are so firmly held and they are shown not to be the case, you get these extreme moves.”
Let’s look at some of the candidates for surprises that Edwards identified and the path he expects major economies to follow.
Edwards’ three big risks
The net short position on the U.S. 10-year bonds is at a very high level, Edwards said, similar to the level at the beginning of 2014.
Edwards predicted an “extreme move down in yields” even if those bearish views are “justified fundamentally” – meaning if the U.S. economy were to significantly weaken.
Falling oil prices are driving yields lower, Edwards said, but he disagreed with the consensus view that oversupply and OPEC production are to blame. Weak demand, particularly from China, is playing a bigger role than most people assume. He provided the chart below, which shows that iron ore prices have fallen almost in parallel with oil prices:

Oil prices are just catching up with other commodities, Edwards said. He added that the same pattern is present in the relationship between oil and copper prices.
“A lot of the oil price weakness really does reflect what is going on in China,” Edwards said. “To the extent commodity prices are slowing because of weak growth in China, it’s a global demand effect.”
Edwards acknowledged that much of the published data on China are unreliable, but he said that its growth will be “far weaker” than the 7% level it has experienced for the last couple of years.
Edwards cast doubt on the view that the U.S. recovery will be self-sustaining. “If anything comes along to question that axiom, especially at these very elevated valuation levels,” he said, “you don’t even need an actual recession – just a near-recession can cause a very outsized reaction in the financial markets.”
One reason for his skepticism is the length of the recovery, which is already 64 months old. He said the lesson from Japan is that once the “bubble bursts,” as it did with the financial crisis, then a deleveraging cycle sets in and cycle lengths return to normal – much shorter than the current recovery.
Leverage among U.S. corporates reinforces Edwards’ skepticism. Lathrope presented data showing that corporations have levered up. They have used most of their profitability to fund share repurchases, and capital expenditures have been funded through debt issuance.
The profit cycle is worrisome, according to Edwards, because profits and margins are “struggling” in the U.S. Edwards said this is not evident from analyst data because corporations “cheat” in their reporting. It is evident, however, in data from more reliable sources that provide statistics for the whole economy like the IRS. Flow-of-funds data from the Fed support the slowdown in profits, Edwards said.
Profits are important, according to Edwards and Lathrope, because they are the biggest determinant of year-on-year growth in business investment. Even though business investment is only 15% of GDP, Edwards said it is the most reliable predictor of recessions in industrialized economies.
“Recessions are not caused by consumption, government spending or exports – none of those things,” Edwards said. “It is caused by the business investment cycle.”
Deflation from China
China is the tipping point that could drive a downward move in U.S. profits and trigger a recession, Edwards said. More specifically, he said the danger is in China’s real trade-weighted exchange rate, which is too high to support the level of growth China needs.
China’s reported 10% year-on-year growth in exports is “suspect,” Edwards said, and it will need to weaken its currency to drive growth. It is having issues versus competitive economies. This is why, for example, the U.S. has been on-shoring some of its manufacturing. The strengthening of the U.S. dollar is adding to this pressure.
In addition, overinvestment is leading to deflation in China, Edwards said. Its PPI has been in deflation for 35 months, similar to what happened prior to the Asian crisis in the 1990s.
Japan’s QE is adding to China’s woes, according Edwards. He said Japan’s QE is certain to devalue the yen and will likely cause the ECB to engage in its own QE program. As Lathrope pointed out, Germany and Japan are direct competitors with very similar export sector compositions.
“The big story will come when the Yen decisively breaks down through 121,” Edwards said. “Then you will get another round of deflation being sent from Japan to the rest of the world. Japan has had enough importing everyone else’s deflation for the last 20 years. They are giving it back to the rest of the world.”
China will be forced to devalue its currency, Edwards said.
Will markets lose faith?
Edwards said the leading indicators for the U.S. economy are not signaling an imminent recession. “It is the fear of recession which I think could hit the markets,” he said.
He said that some of the data reported over the Christmas period – the PMI and durable goods – were “weakening off very rapidly.”
“If that happens at a time when you’ve got this extreme level of bearishness in bond positioning,” he said, “that is easily going to drive the 10-year down very rapidly toward 1%.”
But if that were to happen, wouldn’t the Fed react by restarting QE?
While QE has been kind to U.S. equity investors, Edwards warned that it has not been as generous to owners of commodities.
“It was axiomatic for commodity investors up until 18 months ago. The QE was good for all risk assets including commodities,” he said. “And then it stopped. It stopped because of fundamentals – the fundamentals being China.”
QE might help equities if the fear of recession or deflation can be avoided, he said. But if profits fall into a “crevasse,” Edwards believes the markets will react.
“It doesn’t matter how much QE is spewing out of the US,” he said. “The markets will lose confidence that the policymakers are in control of events, just as they did in Japan in 1990. They lost faith that the policymakers were in control. This is the biggest risk out there.”
* * *
And some final words of parting from Albert himself:
"While the western world frets about the imminent deflation threat investors seemed relived that headline Chinese real GDP was unchanged at 7.3% yoy in Q4. But in focusing in this data they miss the sharp slowdown in nominal GDP growth which decelerated to 7.8% yoy from 8.5%. That means economy-wide inflation in China as measured by the GDP deflator fell from 1.1% yoy to a mere 0.4%."
"The market has missed, once again, the fact that the greatest clear and present deflation threat to the west comes from China. Like Japan they will eventually be forced to export this deflation westwards."
"The weak oil price, which many commentators see as "good deflation" is in large part a Chinese demand led phenomena that is effecting the whole commodity complex. Weak oil prices are telling us China has a major deflation problem - as witnessed in the Q4 GDP inflation data - and just as in the minutes before a tsunami the tide goes out and all seems quiet (ie good deflation) only later will we, in the west, realise that this is a prelude to being overwhelmed by a deflation tidal wave cascading from China to the west."
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"Global markets face three risks, according to me:
1. Nominating the oldest and ugliest female from the tribe of ewoks
2. Giving a printer to said oldest and ugliest female ewok
3. Allowing said oldest and ugliest ewok to support the administration of the holy terror himself, the long legged pimp daddy from the tribe of the chaldeans
sounds you have no faith left, no?
Perhaps should ask where has Albert been, investors still have faith left to lose?
The market can remain irrational longer than Albert can remain liquid.
It's done with a combination of cesium-137, Roundup herbicide and microwave Hot Pockets.
Fight the darkness
"Markets Will Riot" LMAOWe already know that without any help from G Soros and Jessie Sharpton the sheeple won't even look up.
So who gives a shit?
Law has become a business. Health care has become a business. Unfortunately, politics has also become a business. That really undermines society.
George Soros
so what can we do to make business just a children's game?
old naughty
Interesting that your highlighted the word faith. That catch-word got my attention, but not the way you put it.
However, what I found disturbing, but not surprising is that: This presentation told me nothing new.
So, let’s see what the thread will bring us.
EI,
i did not intend to highlight the word faith...
merely to highlight the losing of faith, whatever it means to whoever.
Thanks for your feedback though.
Kind thoughts.
Yes, let's see where it goes...
Faith....
is just hope in drag ...
What is an 'ewok' , my Christian Brother?
https://www.youtube.com/watch?v=TlYaupCTzBY
Or the Sonn tribes men further south ?
Earlier today I posted this on another thread here at ZH and I think it is quite appropriate to repeat.
"We know both are subject to various manipulations . G&S by bankers and fed (same people basically) and BTC by thier own insider thieves? Not sure how many times BTC has been robbed from insiders but quite a few from outright electronic thefts and manipulations. So the flaws are far too great in BTC IMO. When all is said and done the metals have in fact proven they are the basis of all money ? If not why are they manipulated so egregiously by the money masters? So the trick is , as always , TIMING and your entry baisis ? and that takes a lot of patience , and understanding of the macro potato and all the illusions we all live under here in USSA today ! They are many.
Simplistic you say ? I think more realistic. I look around the world and every CB and regime is saying the same thing ? We have tried all manner of stimulus and that has not really worked , in fact it has brought us massive debt? I imagine even those greedy fools realize it cannot be repaid and that is why their tone is starting to change and we see all manner of comments of "what now" ? That is the prevalent sentiment world wide as well as fear from geopolitical events and circuimstances. Couple that with Russia, China and many others moving away from USD as trade currency and petro dollar as fast as they can and we are seeing a new set of dynamics taking shape in the world. USSA is still stuck on stupid with their many lies and massive illusions and you know what happens when you believe your own bullshit ? You fuck yourself or another way to say it is you are the greater fool ? We are there and have been for a long while. Just politico morons playing out their roles of bread and circuses holding it all together with tenuous electronic manna ! "
The dynamics have changed and are still changing. Much of this article points to that phenom. And no question confidence is what is failing and fast amongst the control freaks thenselves, that the illusionist can maintain the many illusions ! It is all failing and that is the new paradigm. Just a matter of time as it picks up momentum. And it will.
I mean, you're not wrong, but you're a huge loser to make fun of someone over something they can't control (i.e. such as how they look). Might as well make fun of retards, too, yeah? You sound like a good guy. A real patriot. America should be proud of you.
roadrunner moment, willie coyote(ussa) can defy gravity only so long. deflation bitchezz
long chutes...
so would tonight's SOTU include a "beep beep", i wonder.
correction deemed :state of the fascist farce - sotff
This guy has avoided equities for the last 10 years but we're to believe he is now correct? C'mon Tylers ...a little credibility please.
One day to soon Vs a lifetime of poverty, kicked by your children because you blew it, man.
This Edwards fellow is pure genius, I follow him religiously, just like the Phoenix Capital newsletter. Gold Jerry! Gold!
deep edgers
Well go ahead to eat grass for another 10 years with this guy. Riots are probabilities and so are confluence of disasters. The path to obliteration of paper assets is non-linear. Yes..glossy spins on fears sell these days for guys with no skins in the games.
So does the breakout in gold confirm the theory the SNB was short gold long euro since mid 2011?
Obama's SOU or more appropriate STFU will save the markets.... kidding ;-)
what markets?
"Will lose faith"?!
I lost all faith in the markets, the currency and our criminal cartel government in 2008. Should have been much earlier, but I wasn't paying attention like I should have.
Edwards has been saying this for years. Literally years. Of course he might be right at some point. But is that point now? I think you'd be better off flipping a coin.
Being early is indistinguishable from being wrong
Watch the BOJ anouncement. (sp)
I'm taking a nap/
every time i read a headline that says '...since 2009' or '...in 6 yrs' it only confirms what this chart is saying, loud and clear:
http://research.stlouisfed.org/fred2/series/T10YIE
PUSSY RIOT!
The 401K's are going to be spanked... hard. We're gonna be poor.
17 trillion waiting to be harvested.
money where mouth is -403b drained back to cold hard fiat in my hands to do gods work.
3D printed guns w/o serial numbers??
serial numbers aren't going to matter with nobdy to enforce anything ?
>>>403b drained back to cold hard fiat in my hands to do gods work.
What with the US economy nearing escape velocity, and the dawn of a New American Century at hand, there's a chance that Investing in America is the way to go.
But I still feel very good about cleaning out all my US retirement accounts, paying Uncle Sugar his cut, and removing the proceeds from the country. Very good.
Riot, yeah right. The ijits on Wall Street take even more prozac than the traitors in DC.. If it threatens the mistress or the hamptons house they will do what their told. This is a MASS ponzi everyone is in on it and everyone depends on it. All of them when asked will take the blue pill...
Which is why they are so surprised when one of their own (Swiss) jump the fence and run off the reservation....
I'm not at all convinced that the SNB did this without direct orders from the man. It doesn't fit the paradigm at all. Time will tell.
Hell, he was not a good Tribe man. Milestones
WHAT MARKETS?
The FED is the MARKET.
Another asshole trying to explain what is going on in the markets with last century thinking.
I don't know about you guys, but I won't get fooled again. NONO!
Never knew HFT servers ran on faith.
I talked to my Ed Jones kid today, and when my liquid $70k came into play he steered me away from worry. Swiss Francs are unimportant, etc. God I love America. The happiest place on Planet Stupid.
What markets exactly will riot?
The biggest threat is that TPTB will purposfully create a crisis so dire that all the lapdogs and sheeple will beg them to please take away what little they still think they have.
How's that for faith, dear Albert?
this is the consensu view everyone is saying they are bulish bonds US rates will go to 1% and they are against the consensus. See PIMCO / Doubleline.. all the US and EU banks .. all saying lower rates even though their near zero.
Zero rates will mean banks required collateral holdings will start to show negative returns
brokers will show negative returns on client deposits.
over production ie like oil due to excessive liquidity which will lead to too much supply in various industries and thus deflation. They know that... The BOJ will have to tapper and te FED will have to tighten to avoid above.. they love the consensus is long it will make it easier to pop...rates are zero but they have to go negative year right..
leader of the trend-snb-negative, nice, i want some...
deflation bitcheez!
@ tok1
I have no doubt you know your stuff and you have many talents. Articulating your thoughts in a clear and concise manner however is not one of them. You should work on that, you'll get a lot more "up votes" just like the one you got from me now.
Markets haven't reflected price discovery of assets for a long time, ever since Greedscam started passing around the Punch Bowl to infinity, since then it has only gotten worse. Equites are not priced by fundamentals of the economy, but by central bank liquidity dumps. If markets DO panic and riot, it won't be from falling oil or any other tangible asset. It will be from FEAR, FEAR that central banks won't or can't keep feeding liquidity to boost share prices higher or maintain their present bubble level. Let one shred of doubt about the central bank's powers take hold, then YES, the Riot will happen. Pussy Riot.
snb cracks in that faith transformed to fear. yes. adding: the zirp demand brought fwd and credit gone bad - fracking oil pardymn gone zirpped. what next? auto's, strip malls, all commodites like iron works, aluminum, copper ect. and will it be able to be support ed by declining growth? nirp is the answer, ha...
faith>fear> reality, just in time for 2016 elections. beam me fwd to 2017...
Wall St businessmen were surprised today when Police busted up their Riot with Tear Gas and Clubs.
investors, laugh my ass off. no such thing anymore.
Here's a real knee-slapper: what do you call the last six years of a depression:...A Recovery!!!...get it?
Hey! I get where Tyler is going.
Anyone ever flown a 707-300 ?
TurbojetX4 13,500x4
HI/ Bipass turbofans<> different
Haven't flown the 707 but know a lot who have. Have time on 747-2/3/SP 737-3/4/8 and A330. Yes they are all different.
How can a central bank software application lose faith?
Get ready for the massive $usdx drop.
The $usd is dead!
The FRN is dead?........Happy days are here again......!!
Fuck their money and their system
The most recent bubble started sometime around the bombing of Pearl Harbor, masterminded by Samuel P. Bush. Prescott S. Bush took full advantage of this action and we see their tree still today.
That bubble ended in 1971 with Nixon.
The credit fueled echo bubble began soon after 1976 – the year the Senate confirmed George H. W. Bush as CIA director. Later the Bush family was flushed from the shadows of the CIA into presidency.
As you know the credit echo ended with George W. Bush canceling the free market system.
Now we see another Bush, John E. Bush (“Jeb") on deck.
To think 100 years ago most people lived much different than today. Many had no electricity, modern plumbing, kitchen appliances, telephones, superstores, grocery stores with food from all over the world, air travel, vehicles and the list goes on and on. You wonder how people managed to survive in past centuries, many in extreme climates. Somehow, they did survive.
Today, most do not have a clue what hardship really is. Most so called hardship today is usually the self imposed kind. I am referring to the developed world. Many won't work jobs they feel are beneath them and they somehow get away with it. Homeless are given cell phones, modern medical care is available.
Enjoy the ride folks. If the apple cart ever turns over and the power grid is ever knocked out, life in the deserts and cold prone areas will become hell on earth.
Will it happen? Who knows,
It’ll look like India around these parts. People thrive there in India – 1,250,000,000 and growing. You’ll be fine if you aren’t killed in the first week or so while the bulk dies from dysentery.
Lighten the folks in the following pics with Photoshop - the future:::...
Filthy India Photos, Chinese Netizen Reactions
http://www.chinasmack.com/2010/pictures/filthy-india-photos-chinese-neti...
That was just sick.
I will never again go to a doctor with an Indian last name just because of the possibility they may still practice the home culture of wiping their asses with their bare left hands.
Nah. Just don't go to a one-armed indian doctor.
I have friends that only drink water from Fiji. Think about that. I drink out of a tap and don't care if the tap is in the toilet. What does not kill me makes me stronger.
I think I smoked Albert Edwards at a poker game once...
bankist colonialism not getting any further off the ground?
Should be "Gamblers are losing faith and the bookies will riot".
I guess there is something to be said about extermination. Bloody hell! Let's just keep fucking like rabbits till the whole fucking planet looks like that!
But no problems with overproduction of US debt. Overproduction of oil killed the price but that just can't happen with US debt, how does that work?
QE 4 is being tossed out occasionally by St Louis Fed head, James Bulltard.
Seems as though QE 4 is a certainty or else the Fed's Ponzi game collapses.
Larger QEs each time. QE 4 $170 billion/month this time?
Under the QE4 program, that FED will buy Student loans, but under the premise the student become their eternal slave.
basically he is saying there ain't any more BS left.
squirm a bit
tic toc
Yawn.