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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Of course manufacturing is choking!
We have so much crap that manufacturing is probably going to be gagging for quite awhile. What do people really NEED that isn't already out there?
Thing is, most people don't NEED 90% of the crap they already HAVE. And they are starting to realize this.
The coming years will NOT see some big upticks in making stuff...we won't be returning to the consumer-orgy. First, people can't afford it. Second, people's minds are turning away from that way of thinking.
The last time something like that happened was after the Great Depression. The generation traumatized by that went 180...from the Roaring 20's party-on like there's no tomorrow, to the super-thrifty mindset where you re-use, recycle, or do without.
Those people never went back to party-mode, even long after the crisis was over. It took several generations to get back there.
Don't forget, people in reality have very few actual NEEDS. Most of what we have are WANTS, and those can just as easily become unwanted by a generation that had its fingers burned. A generation that decides to prioritize other things.
As a side thought, imagine a world where a big priority was forging relationships as opposed to buying bigger houses...people could actually exchange favors amongst each other instead of money. I need this done, you need that done, no one makes any "profit", but an exchange is made, and both benefit. It isn't a taxable exchange either. When you think about it, all money is is a middleman, who can be cut out without any harm to the transaction. For most of us, who can't accumulate enough money to play high-finance, that is ALL it is...a useless middleman that only provides government with an easy way to tax everything we do by assigning numerical values to stuff.
I'll bet most folks could do quite well if they decided to use the fiat for paying taxes only, and went to barter exchange for most everything else.
It would make IRS audits a lot more fun too..."No, no Mr. Henderson...do NOT bring those chickens in here!...God, I hate this job!"
I like that picture. Women are so beautiful when they weigh less than 200 pounds.
A third crash in the last year of an 8-year president would be an interesting pattern. But I would agree with the assessment, the CAPE work shows there have been 4 P/E bubbles in the last 120 years, each (so far) taking just under 20 years to deflate, each reaching CAPE of 5-7 before terminating. The prior 3 CAPE bubble trends had a roughly similar linear declining line of resistance, so if you draw a similar sloped line from 2000, you hit about the CAPE top of around 27-28 this year. To get to 5-7 CAPE would also put the SP500 about the resistance line that is formed by connecting the last two bottoms. Things rarely work out that neatly, but we'll see.
I don't know how DEEP global recession this year. I DO know, this year will be MORE BAD than my ASEAN 1998 crisis.
Be ready dudes. This year won't be a pretty sights...
I suppose -75% is a possibility. But, if the long-term charts show anything, it's that TPTB should step in long before that kind of carnage.
http://pebblewriter.com/the-century-in-review/
Double post
The Bond markets are in control of the ultimate outcome of the stock market.
If bonds crash, then 666 here we come, regardless of any efforts of TPTB
Last I heard Albert Edwards was still in a can.
I kind of disagree yes there will be some correction but never under estimate the power of blissful ignorance and the fact that humans collectively are as stupid as and as manipulateable as cattle.Other than Fed money this is what keeps things going,only one per cent of investors are actually informed the rest are fucking stupid or ignorant and do as they are told
Accidental duplicate I'm trying to remove. New member and this was my first post. Sorry for the confusion.
Most people out there are not prepared for what is to come. Life savings in their retirement accounts that limit investment options. I never saw an option to short an index in any of my 401k retirement accounts, so the only hedging was between a dollar index fund, bond index fund or diversification between mutual funds, some asset classes, and or company stock.
My diversification strategy is to aquire some PMs, some BitCoin, and trading mostly puts. That and food and water storage which will also come in handy if a hurricane comes my way.
Central banks believe it is their duty and obligation to end the cycle of boom and bust. To ensure no recession is allowed to form, they will juice everything to create wealth effect. They are fine with Bubbles, it is just that they are not fine with corrections or recessions. The last Labor Government in the UK bragged that that they had ended forever the economic cycle of Boom-Bust.
Most Labor members are airheads. Just like the members of Linke or Grünen in Germany. These folks believe that as long as there are enough dumb people who keep working every day and paying taxes, the dream will never end. They also believe that money grows on trees and that printing more money is never going to cause any problems.
Merkel is toast btw. Are you ready for the big Euro plunge?
This is naive. They know what they are doing. Controlled demolition.
My guess is that they'll stop at 666 like last time. Devil take the hindmost..