Albert Edwards Hits Peak Pessimism: "S&P Will Fall 75%", Global Recession Looms

Tyler Durden's picture

2016 has thus far been a year characterized by remarkable bouts of harrowing volatility as the ongoing devaluation of the yuan, plunging crude prices, and geopolitical uncertainty wreak havoc on fragile, inflated markets.

With asset prices still sitting near nosebleed levels after seven years of bubble blowing by a global cabal of overzealous central planners with delusions of Keynesian grandeur, some fear a dramatic unwind is in the cards and that this one will be the big one, so to speak.

December’s Fed liftoff may well go down as the most ill-timed rate hike in history Marc Faber recently opined, underscoring the fact that the Fed probably missed its window and is now set to embark on a tightening cycle just as the US slips back into recession amid a wave of imported deflation and the reverberations from an EM crisis precipitated by the soaring dollar.

One person who is particularly bearish is the incomparable Albert Edwards. SocGen’s “uber bear” (or, more appropriately, “realist”) is out with a particularly alarming assessment of the situation facing markets in the new year.

“Investors are coming to terms with what a Chinese renminbi devaluation means for Western markets,” Edwards begins, in a note dated Wednesday. “It means global deflation and recession,” he adds, matter-of-factly.

First, Edwards bemoans the lunacy of going “full-Krugman” (which regular readers know you never, ever do):

I have always said that if inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now ?and it is not! The Fed?s pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad). One of the main problems has been the overconfidence with which the Fed pursues their objective. Yet in the run-up to the 2008 Global Financial Crisis they demonstrated their lack of understanding of the disastrous impact of excessively low Fed Funds. Even in retrospect they remain in denial - as evidenced by Bernanke?s recent book. Why can?t these incompetents understand that they are, once again, the midwife to yet another global unfolding economic crisis? But unlike 2007, this time around the US and Europe sit on the precipice of outright deflation.

Next, after reiterating that the “impossible trinity” is called “impossible” for a reason, Edwards talks the RMB and exported deflation:

I have always thought that in order to revive a spluttering Chinese economy, the authorities would have to devalue, but not just because an overvalued exchange rate was squeezing their manufacturing sector (e.g. sector nominal GDP growth of zero in Q3 2015). Instead I felt that an overvalued exchange rate had steadily undermined competitiveness to the point that it had undermined the balance of payments. This was compounded last year by an accelerated capital outflow as anti-corruption measures intensified, and an unprecedented unwinding of dollar-denominated borrowings by Chinese corporates. All these factors have combined to take the Chinese balance of payments into deep deficit.


The BIS and IMF have both shown that rapid growth of EM dollar-denominated debt over the past few years was mainly concentrated in the Chinese corporate sector (unsurprising after years of steady, carry-trade inducing, renminbi appreciation). Hence despite the Chinese economy being sucked into a deflationary quagmire ? best illustrated by a declining GDP deflator ? many dismissed the possibility of devaluation because of the likelihood that this dollar debt would cause substantial corporate bankruptcies.


That risk to the Chinese corporate sector was substantially reduced by the end of last year. The Institute of International Finance (IIF) recently reported a huge unwind of this debt.


This prescient action means that many Chinese corporates have taken the signal from the initial August devaluation seriously and readied themselves for further renminbi fall. Hence China is now in a better position to transmit a massive deflationary shock to the West without damaging its own corporate sector. Indeed we can already see US import price deflation intensifying as the decline in the dollar prices of goods from China accelerates.

What comes next? The collapse of the US manufacturing “renaissance” (and we put that term in quotes for a reason):

The western manufacturing sector will choke under this imported deflationary tourniquet. Indeed US manufacturing seems to be suffering particularly badly already.


"Where will it all end?", Edwards asks, before noting that in previous bottoms, the Shiller PE touched 7X or below, a far cry from the 13.3X seen at the supposed "bottom" in March of 2009. 

I believe the Fed and its promiscuous fraternity of central banks have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis. I believe the events we now see unfolding will drive us back into global recession.


Valuation booms are followed inevitably by busts. But the key point is that these valuation bear markets take the Shiller PE back down to 7x or below.


Since valuations peaked at the most obscene level ever in 2000, we have only seen two recessions and at the nadir of the last one, in March 2009, the Shiller PE bottomed at 13.3x, way above the typical sub-7x bottom. In valuation terms the bear market was not completed in 2009 and indeed after only two recessions there was no reason to expect it to have been completed.



If I am right and we have just seen a cyclical bull market within a secular bear market, then the next recession will spell real trouble for investors ill-prepared for equity valuations to fall to new lows. To bottom on a Shiller PE of 7x would see the S&P falling to around 550. I will repeat that: If I am right, the S&P would fall to 550, a 75% decline from the recent 2100 peak.

Needless to say, a rout of that magnitude would wipe out virtually everyone from Wall Street to Main Street and the malaise would invariably be exacerbated by bouts of flash crashing madness in broken yet increasing correlated markets where "all weather", risk parity strategies are no longer reliable umbrellas when the storm hits. 

With rock bottom rates and a still bloated balance sheet, the Fed would be working with exactly zero counter-cyclical slack, which means there would be no way for Yellen to avoid an all-out unwind of the much ballyhooed wealth effect that's served to restore the 401ks for any Americans still foolish enough to retain a seat at a casino run by crazed PhD economists, vacuum tubes, and modern day robber barons.

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unplugged's picture

what would gartman say?

SoilMyselfRotten's picture

What's the latest directional trend?

Dubaibanker's picture

Oh well...then there is this....reality does Govt wants the truth to get out.....then there is the next slave-in-waiting....until all the slaves revolt....but by then we will have robots...

So then you ask: What will humans do? 

Answer: Simple. What they are doing currently. Killing each other. 


Kazakh central bank asset manager fired after saying oil fund in jeopardy
janus's picture


agreed & always good to see you posting.

as to the question above, "What's the latest directional trend?"

answer:  all-out, full-scale arrmageddonish warfare.


Four chan's picture

"oil will never see a 20 handle" 2015

90's Child's picture

These recessions are manufactured.

It's just so those in power with money can fleece the middle class and then profit on the "recovery".

GMadScientist's picture

Can't buy while there's blood in the streets with no blood in said streets.

Urban Roman's picture

In unrelated news, the 3:30 ramp has been replaced by the 11:00 ramp.


Max Steel's picture

Hey DB can you do me a favor ? You commented on one of the zh article describing how Japan and China economies are different and how it's foolish to equate them. You wrote 5-6 points but i went through your comments and unforutnately zh isn't showing your older comments. If possible, can you go through your comments and share the particular article or those points again ? Thanks

And can i contact you anywhere else apart from this forum, your own blog or facebook page  or any group , mail id etc ?


Jim in MN's picture

You'll know the trend when the Dow:Gold ratio meets at (my call) 5,000.   1:1 will be the washout. 

How many millions will die in an effort to prevent it?  THAT is the more pertinent question.

silver surfer's picture

Gold Oil Ratio now at 34.60 barrels of oil per once of gold just broke the high from 1973 at 33.63..... watch out!

RSDallas's picture

He would say I'm bullish one day and then bearish the next and then bullish the next and then bearish..........

Winston Churchill's picture

He used to be indecisive, but now he's not so sure.

TideFighter's picture

"Do you have Sir Albert in a can?"

Let him out (old joke, sorry)

Number 9's picture

Next time you tell it you might want to get it correct.


It is Prince Albert.

WillyGroper's picture

no, but the refrigerator is running. ;)

GMadScientist's picture

Please consult this sinusoidal chart which is 135 deg out of phase with reality.

Gordon Freeman's picture

That's about the size of it--has Edwards ever actually got a call right?

__Usury__'s picture
__Usury__ (not verified) Gordon Freeman Jan 13, 2016 12:42 PM

he was calling for S&P to go to 400....May 2011..


he will be soon enough

2ndamendment's picture

He and Cramer are having coffee discussing recent events. They'll get back to you shortly on their CNBC "Trade of the Day."

-.-'s picture

"Republicans and Democrats Agree: We Hate Wall Street"

Bullish, bullshit.


I hate the WSJ -.-

The Wizard's picture

BS is right. What happens to a slave when they hate their master? I still don't see anyone going to jail for all of the corruption.

Why are all these Chinese billionaires missing? Do they fear for their freedom, unlike billionaires in the West?

GMadScientist's picture

Like an addict hates coke. I really wish *snort* I *snort* could *snort* stop *snort*.

Agreed on Rupert's fag mag.

DeadFred's picture

It won't drop under 700, at least this year.

RiverRoad's picture

Aww, but they had so much fun with making it 666.

DeadFred's picture

=68.2% drop of 2134 high from ~100 low in 1978 and =2/3 of high. Gotta love a double number like that and so will the bottom callers.

asteroids's picture

Everyone repeat after me "The stawk market is not the economy and vice versa". Anyone who has been a bear since 2009 and has been short knows this for a painful fact. When the FED and boyz finally run out of money, then the markets will enter a real bear market. Something we haven't seen in a long long long time.

Helix6's picture

What is it about "whatever it takes" don't people get?  They will print up however many dollars it takes to prevent that from happening even if they have to cut down every tree in America to make the paper (metaphorically speaking, of course).

GMadScientist's picture

There's a problem with your theory and it explains that last sentence too.


Number 9's picture

How in the hell do you run out of money when the policy in crtl p at 0% foawevah?

RiverRoad's picture

If Goldman can get Cruz on the ticket they'll ramp it up just before the election.

toady's picture

Now that is a gutsy call. I didn't see a recommendation for how to trade it though.... buy the dip?

FlipFlop's picture

You mean "buy the 70%" dip?

Edwards has been consistently wrong for 6 years; he might be partially right this year.


Buy Sep puts???

toady's picture

I'd probably buy somewhere between 550 and 500...

Helix6's picture

I doubt it.  Outside of the crash of '29, there has only been one DJIA decline greater than 50%, and that was just after Pearl Harbor.

Of course, this time couold be different.

r0mulus's picture

QE4 or WWIII before that has a chance of happening...

Wulfkind's picture

I think I'll just go buy some chips and dip and enjoy the shit show.

BandGap's picture

Bought 25 ounces of Canadian silver just for the hell of it.

Bilderberg Member's picture

Basically the article is saying vote Donald Trump or watch for a 50% unemployment rate.

-.-'s picture

Nah, Mr. Trump fervently believes in a structuralist interpretation of the natural rate of unemployment and will therefore present his natural and socially acceptable rate as somewhere approximate to 2.5%UE.


Donald is a true friend of the Bard College, the Levy Institute, and a contributor to H. Minsky's living trust. 


D. Trump has been Pintrest'ing his Crayola™ drawings outlining his "opti-concept" of the economy based on employement policies and an ELR government support strategy. 

NotApplicable's picture

No politco can avoid what's coming. They can only make it worse.

BandGap's picture

We should be looking for a leader who will best serve us after the last turd has gone through the fan. No one on the planet is going to stop this shitshow.

How well do the candidates stack up in terms of handling a broken country because that's what they "win" with the presidency. A "fundementally" changed America.

God Bless all of us.

Dr. Spin's picture

it could be 20 years before the last turd makes it through the fan...


E.F. Mutton's picture


Full Retard?