Maybe Albert’s Crazy Forecast Is Not That Crazy After All

Tyler Durden's picture

For years, the so-called experts laughed at SocGen's Albert Edwards who not only steadfastly claimed that his "Ice Age" thesis is in play with central bank intervention only kicking the can - something that no longer works as Deutsche Bank so poignantly explained when it begged over the weekend for no more "easing" - but that once the realization and revulsion to artificially inflated markets hits, the "S&P will fall 75%" as he predicted in mid-January and we duly noted.

But while the pundits were laughing, they have been surprisingly quiet lately. Why? Because it appears that Albert may have the last laugh after all.

As SocGen's "other" realistic strategist Andrew Lapthorne writes, "Maybe Albert’s crazy forecast is not that crazy after all!" Here is why:

Global equity markets continued their difficult start to the year, with the MSCI World index off 2.5% last week, leaving it down 8.4% in 2016 and 15% lower from the highs seen last May. Sadly despite these declines, equities are still some way away from “average” valuations.


Albert Edwards sees the possibility of a 75% decline from the peak if all his fears were to manifest themselves. Now many view this as an incredible and somewhat outlandish forecast, yet it is not that unreasonable in our view. For example, in the chart below reproduced from last week’s risk premia note we look at the potential downside if MSCI US & Europe were to mean revert to their average P/E since 1970. This equates to 14.7x for the MSCI US and 13.3x for the MSCI Europe based on operating EPS as defined by MSCI.


We also look to see what the decline would be if we went back to crisis reported P/E multiples, which we put at roughly 12x for the US and 10x for Europe (though both have been much lower). These types of declines would leave indices down rough 60-65% from peak, and would send leverage ratios skyrocketing.


The job of risk management is to think the unthinkable, to stress test your assumptions to even include the worst case scenario. It does not take a particularly bearish set of assumptions, say a 25% decline in EPS and an average P/E multiple, to generate significant equity market downside. Yet, we’d argue most would assign a very low probability to such an event. Surviving a crisis and avoiding permanent losses of capital are key in delivering long-term outperformance, so even if you consider such downside forecasts "perma-bear" nonsense, they shouldn’t be dismissed out of hand, especially in a world where corporates are carrying record levels of debt.


Hardly the stuff one should smile about, and yet...

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Truther's picture

Gold & popcorn....

KnuckleDragger-X's picture

If it drops 75%, out comes the end of the world single malt.......

cpnscarlet's picture

I was saving my bottle on Don P 1999 for when I turn 65, but you may have a good idea.

SuperRay's picture

Lloyd said Bernie's attacks on the banks were dangerous. Lloyd, you don't know what dangerous is. Watch out, your chauffeur's mother might lose all her money and he might finally make the connection to you, thanks to the Bern.

BullyBearish's picture


FL_Conservative's picture

From Albert's lips to God's ears.

yellensNIRPles's picture

If it drops 75%, out comes a kazoo, a party hat and some sparklers. 

38BWD22's picture



No one can really do a good job of predicting the future, but anyone who is prudent would be also scared schnittless now.

Gold and popcorn counts as diversification too.

Wait What's picture

the one prediction you can count on, though, is that ZH will suffer an 'outage' as soon as the fecal matter starts flying. that will be the sure sign that he who panics first, panics best.

Truther's picture

Right on. And others thought TPTB never read ZH?

So Close's picture

Great interview with this guy by Raoul Pal at

ejmoosa's picture

For the first time yesterday, I saw Zerohedge trending on Alexa...everyone is starting to take notice of ZH.

BarkingCat's picture

great, more dumb ass posters coming.

new game's picture

vaporized fiat wealth! oooouuuuuu that smell, lynard skynard...

Soul Glow's picture

Stocks are way overvlued.  But almost everything is wat overvalued at this point.  Only gold is undervalued.  And silver.

jakesdad's picture

mathematically one of three things has to be true:

1.  gold is overvalued
2.  silver is undervalued
3.  centuries old gold:silver price ratio was wrong

which one of those seems most likely?  hell, which one of those three seems even remotely possible? 

cpnscarlet's picture

"2.  silver is grossly undervalued"

Fixed it for ya

Soul Glow's picture

No you are using bad logic.  Gold is undervalued and silver is amazingly undervalued.  Gold should be at $2k right now and the GSR would put silver at $133.  

Sanity Bear's picture

he's talking silver relative to gold


should be ~16:1, but it's not

brushhog's picture

Might be a little of each, or both might be undervalued to different extents or over valued to different extents. Remember, past performance is no guarantee of future results.

Reichstag Fire Dept.'s picture

Au:Ag Ratio

They may move in concert but a hard ratio is a thing of the past...Ag has found many more industrial applications than Au since the both were considered and used as money. 

Tinky's picture

Sure, and Au may be poised to assume its greatest role ever as "good" collateral.

BarkingCat's picture

the gold - silver ratio is bullshit.

12357111317's picture

My guess: In most of history, nations used gold for exchange of debts, and common people used mostly silver for exchange of goods.  Nowadays nations still use gold for exchange of debts, but common people rarely use silver.  If common people start using silver again, ratio may approach historical norm again.

BarkingCat's picture

there is no historical norm. Everyone keeps referring to the ratio set by the US government during the days when US used gold and silver as money. That was one nation and only a brief moment in history.

Another thing to keep in mind is that until the 20th century the US was not even a major power. Not economic nor military. The gold to silver ratio in the US was not something that had any effect on the world in those days.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Soul Glow Feb 8, 2016 11:46 AM

The article earlier today about the JPM genius strategist that has called market movements had me confused.  His idea was that the market would shift from momentum to "value", where are the "value" plays in this market, can someone name me a few stocks that are undervalued based on their current pricing or is he just talking about relative pricing.  I would say an "undervalued" stock today is overvalued by ~10% based on a reasonable forecast of the future, not quite a buying opportunity in the market yet as I see it but I might be overlooking something major.

SuperRay's picture

The big sucking sound you're about to hear will spare no stock, except maybe miners

falak pema's picture

His smile is that of a poacher turned game keeper.

Do you believe his sincerity ?

Mary Magdalena went that route.

So who knows where lies sincerity in the heart of man until it ...bifurcates or not.

new game's picture

no matter, because he is insignicant to me...

thismarketisrigged's picture






Truther's picture

In other words, "spread you fucking legs Janet, here comes PAPA BEAR"

yogibear's picture

Nasty and Caustic, not even the most desperate bear would consider Janet.


Not My Real Name's picture

One way or another, the Dow/Gold ratio is going to one ... or less.

Bunga Bunga's picture

Be careful, you laughed at Peter Schiff too.

yrad's picture

Has this guy not heard of the PPT?

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Feb 8, 2016 11:41 AM

The question I have is with central banks propping up the markets to keep it afloat, how much of the stock market do you think the Fed and other central banks will control by the time the market can fall 75%?  My guess is they will have 95% of it (off the books of course).

BlueStreet's picture

If Yellen were to keep her fat, stubby fingers out of it maybe. Will be happy for 1400. 

moonmac's picture

My current Backlog Report for our factory is half as many pages as during the Great Recession. When all these massive Fed bubbles pop it will make the previous ones look like soda-pop fizz!

ebworthen's picture

What happened in 2009 after 8 years of leveraged CDO's and MBS's collapsed?  S&P 666!

It's not crazy to predict to see it there again or lower, it is expected, programmed even.

End Central Banking and hang the money-changers already!

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) ebworthen Feb 8, 2016 11:52 AM

If the S&P 500 goes below 1500 I think there will be a "holiday" with markets closed for a week at least.  We haven't breached 1800 yet and people are already talking about a recession, this is barely a downturn in the market and people are panicked.  If there is any type of real sell off the enitre market will either gap down like LNKD as all investors request their money back or markets close until a fix can be determined to keep it propped up.

s2man's picture

yep, dropping to 666 again would be a 64% drop from today.  right in the common-'tater's range.

GotGalt's picture

I got my limit orders in for S&P around 1000.  May end up buying too soon, but oh well. 

gm_general's picture

Of course its going to happen, but if you are expecting it to occur on a "Day After Tomorrow" time scale, I would think its going to move a bit slower vs. your expectations, and it will be with intermittent bear market rallies to make your hair curl, for your amusement and humiliation.

SuperRay's picture

That's what everyone is saying, but the leverage is so massive and the sentiment so extreme, anything is possible (meaning a bid less market that just collapses).

Chuckster's picture

Hi GM!

You may be right!  It also could happen in a matter of hours.  Yellen's rate hike had to have been a psychological ploy to try to convince people that things are getting better.   Desperate move that didn't work.  I think the bow is strung and things could go quickly at any moment.  I want to see all these self-appointed  assholes on TV (CNBC Bloomberg) with a befuddled, shocked and  constipated look on their faces trying to explain what's going on.


I been waiting for a 500 point down day on the DOW.  That would tell me the worm has turned for sure.

Chuckster's picture

His Ice Age = my Dark Ages 2.  75% maybe an underestimate.  Grab your toes!  With all the stock and bond markets crashing and pending bankruptcies....think of all the dollars going to dollar heaven.  Even the Fed won't be able to print enough dollars(probable massive keyboard foul-up) to replace the dead and gone ones.  Earthquakes and lightening? No!  I see Mad Max and outright panic in the streets.  Farmers will be the lucky ones (as long as they stay on the land).

38BWD22's picture



Anyone wanting to grab their toes might want to bend their knees too.

Hey, we older guys sometimes have back issues!  <== don't overthink that...

BarkingCat's picture

don't have to have back issues. I was never very flexible that way.

Chuckster's picture

Ref: Everyone's lack of love of bankers on ZH.

Ref: farmers staying on the land.

In my hometown in northeast South Dakota during the 1930's.  A.W. Powell was the local banker.  Farmers were going broke left and right.  A.W. Powell's bank was holding all the paper.  A.W. would have the farmer come to the bank to discuss their financial problems.  A.W. would tell the farmer that he had to foreclose and if the farmer didn't give him any trouble foreclosing then he had another farm that he owned and he would let the farmer farm it for a share of the profit.  A.W. wound up owning most of the farms in the area during that decade.  This is generally called Chinese usury.  I have often wondered if A.W. went to New York City or Chicago and learned this concept from other bankers doing the same in their area.