Albert Edwards Hits Peak Pessimism: "S&P Will Fall 75%", Global Recession Looms
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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To quote Rorshack at the end of The Watchmen:
"Just DO it already! DO IT!"
Rorschach: not done stealing yet.. Your not a dirty serf, yet..
As a sidenote, not all earlier valuation bottoms occured in a deflationary crash. In the late '70s early '80s it was just that profit margins of companies had been eaten away by inflation.
There is no way in all hell they will let the market crash before the election and Obama is out of town. At all costs Obama can not be blamed. I actually pity the next President and wonder why any sane person would want the job right now.
Except Hillary, I don't pity that bitch one bit
I have the same suspicions. Obama gets out unscathed. Trump is elected. The country immediately descends into the worst depression the country (world) has ever known. Trump is a single term President and then either Hillary or a Hillary clone and full-blown New World Order to "restore prosperity".
Hey, I went to art school....I got an imagination.
I can handle depression and pestilence ,but I don't know if I can handle that smug bastard Obama sitting in the U.N. or some damn University telling us all how none of this happened while he was in charge.
And maybe,just maybe, if we are really sorry and beg him he will lead us out of it. He doesn't even have to be President, just smartest man ever super-czar
He will always be surrounded by lots and lots of guns, so he has that going for him .... he will never cop to his place in the dustbin of history. Over time, only we can put him there.
There won’t be a world order if we collapse.
Upvoted you but I am not so sure. Chaos gets harder and harder to control, especially that generated offshore.
Holy Apocalypse !! .... I nominate Albert as Grand Marshal of the Doom Parade !
Sure, the real value of stocks declined 60 plus percent. Over 15 to 20 years, with plenty of short-term rallies. There will still be money to be made in buying dips and selling rallies.
I suspect SocGen has to explain why it has investor funds locked up in French government bonds at near-zero rates rather than invested in economies whose best years are ahead of them, not behind them.
Fair to say they can't handle the truth (viz. propping up Paris and keeping Marine Le Pen out of the Elysee at any price).
Nature abhors a vacuum tube.
maybe, but nature loves a vacumm.
I dont think people are using vaccuum tubes all that much anymore.
I mean, unless they are die hard analog recording engineers or just like it for vocals and the occasional lead instrument.
Just sayin'.
Millions of guitarists and hi-fi enthusiasts disagree. In fact, some of the surviving tube makers are putting money into R&D into analog tube tech to reproduce the 'musicality' of some of the old classic amplifier tubes.
If you look at prices toneheads are willing to pay for NOS and used tubes you'll see why.
You can't have rock and roll without distortion and as much as digital DSP can emulate almost any tone, it still doesn't sound as 'real' as an overdriven pre-amp and power tube.
really...is that an opinion? Best go to ebay and see how wrong you can be when you don't know the facts.
Ebay ain't where it's happening there junior. The boys at the studio are for the most part pulling up Guitar Rig 5 Pro on their laptop and coming in direct. Occaisionally somebody cares enough to heat up their Avalon ..... maybe.
To the extent that the 'tone jockeys' are swapping tubes in and out of their old heads, it don't matter anyway as the gigs are mostly going to the DJs. I'm not saying I like it, I'm just explaining how the real world works nowadays.
Best go try to make a buck with your Strat and Twin Reverb and find out how wrong you can be.
Oil backed US petro-dollar.
Oil under $30. Going lower.
Worthless US dollar.
My tentative prediction.
30% correction followed by another 30% correction.
Imports doubling in price.
US dollar rejected for international trade.
Gold backed trade notes demanded.
All before September.
How to trade it?
Long nail guns and despair.
I know he's really just a puppet, but damn I wanna see all this happen under Obama's watch badly.
Long nail guns and despair.
Not a bad trade idea, but for now I'm staying with my long virgin goats position.
You act like there are libertarians around the world waiting to punish the dirty dirty dollar, but the truth is that the every other country just wants to be the next one at the global tiller.
At least you put a date on it. ;)
What are nail guns for?
"If..."
Gold to $2,500-3,000 if he's right.
...more like $10,000...
The dollar would be decimated in a scenario like that.
what does it do to the price of scotch?
If correct I suspect gold will be priced in Yuan soon enough.
And a troy oz may fetch as much as 6000 -8000 US "shit" dollars.
And that those "shit" dollars will buy about half what they buy now, while being totally rejected outside the USSA's borders.
USA has its problems, but it's a lot worse in many other countries. Fiat currency is ultimately backed up by force. As long as the USA has the biggest guns, the USD will exist just fine.
Every time they print these articles on http://www.marketwatch.com/ it always turns out to be a stellar day for the stock market indexes. The same has been true in the past. A great guide for day traders who get in at the open on the day articles like this one are printed. Conversely when the state how undervalued the market is on http://www.marketwatch.com/ it usually falls the same day.
Let me buy another put on Facebook expiring in Jan 2018.
This is all i can think of https://www.youtube.com/watch?v=MEWTTbtl82s
Where are the alternative investments that will cause this 70% drop? This story is missing the full perspective.
The most popular investment will be the "bail-ins" that are necessary to keep your governments hard at work and the boomer's pension dreams alive another year.
It's for the children or grand children.
.gov could drain and confiscate whatever they need to keep their turd economies afloat and soon they will have to because .com is not bringing it!
Perhaps it's time to buy some SPXS shares?
No worries the unaudited Federal Reserve and their Plunge Protection Team will buy stocks and save the day !!!
Hussman is saying 40-55% decline, but with a bit better analysis.
Hussman, Gartman, trade against them.
No audit allowed on the Fed.
No audit allowed on gold reserves.
Says it all really. Clearly there is something to hide.
Gartman says modestly short so we must be modestly long.
Becky Q. says Gartman's is short.
In a free market he might be correct . . . for this to happen the central banks would have to lose control or if a major war broke out. . . Both are possibilities or certainties . . .
oh no not again! Still haven't got the courage to call it a DEPRESSION ! Next we will be hearing about green shoots all over again and the next one to call recovery will be shot at dawn
Albert Edwards is now thinking of Captain Nemo's Nautillus, once the S&P dives to foggy bottom.
'its down there somewhere like a Spanish galion... Full of doubloons which will save the reset...Gold, gold, gold...'
cluster market,no free-fall
Sell everything ahead of stock market crash, say RBS economists.
Where will it end??? When people stop rewarding lyin', stealin' and killin'.
But of course, that won't happen.
You know, I say bring it on, sooner the better. Let the market clear, let the gamblers get spanked. Only one problem: Central Banks that will likely NEVER admit they are wrong, and they will print, monetize, helo-money-drop, QE, ZIRP and NIRP until there are no places to hide. Hard to believe, but I think the Federal Reserve will burn the dollar a zillion times before ever admitting they were/are wrong.
We are fast approaching the "all bets are off" scenario...it will approach slowly, then all at once.
if the s&p fell 75 percent, it would still be overvalued by 25 percent.
AUDIT THE FUCKING FED NOW!!!
According to our Sales Manager the massive economic slowdown that’s occurring right now is because it’s an election year. LOL!
The FED manipulating electoral politics? They wouldn't dare! /s