"Investors Should Be Petrified" Of The Coming Ice Age: Here Are Albert Edwards' Scariest Charts

Congratulations to Albert Edwards who this morning announced that he has once again placed first in the 2017 Extel Survey of analysts in the Global Strategy category, for the record 14th year in a row. As he adds "it is particularly gratifying that clients still seem to highly value our thoughts, especially during these cyclical intermissions in the Ice Age, when equities outperform government bonds." This year's victory appears to have been especially hard won because as he adds "you have to have a thick skin in this business, especially when our press office forwards our online press cuttings. Some of the reader abuse can get very, very personal. How do  they know this stuff about me? The comments surely can't all be from my former partner!"

Of course, this being Albert, not even his record victory can brighten up the mood much, and the SocGen strategist then adds that "the current QE-inflated, cyclical equity bull market may have gone on way longer than we expected, but equities have only just managed to catch back up with global 10y+ government bonds (see chart below). The secular equity bear market will inevitably reassert itself and that performance chasm will open up again."

So, inspired by the record victory, Edwards is briefly reprising some of his favourite "Ice Age" charts, traditionally a source of rationality in an otherwise insane market, and lately, world.

* * *

The macro underpinning for our Ice Age thesis is the West's slow replication of Japan's 1990s descent into outright deflation. Each cyclical recovery sees lower highs in both inflation and nominal GDP growth rates and the inevitable recession, when it comes, wreaks increasing levels of havoc in financial markets.

But when we put together our Ice Age thesis over 20 years ago, what distinguished it from other more recent similar ideas, such as Lawrence Summers' Secular Stagnation thesis, was the massive change in financial market valuations we thought would accompany the new increasingly deflationary backdrop.

The big Ice Age call was that the tight positive correlation between equity yields and bond yields that market participants had enjoyed since 1982, driven by ever-lower inflation, would break down. The "long bull market" (see chart below) had been a mirror image of the 1965- 1982 period when yields on both assets had risen together. The Ice Age thesis, drawing on our observations of Japan, predicted that while interest rates and bond yields would continue to fall, equity yields would decouple and begin to rise on a secular basis. For those with a historical perspective the Ice Age would be a mirror image of the 1950-65 period, which had been dubbed in the 1950s "the culting of the equity market" - a term popularised by George Ross-Goobey - link. In the Ice Age, government bonds would rerate relative to equities, with the latter declining in absolute as well as relative terms.

One important implication of the Ice Age thesis was that widely used metrics from the 1980s and 90s, such as the bond/equity earnings yield ratio, would break down. Hence you should no longer buy equities when this ratio fell to 0.8 as they would be undergoing a secular de-rating.

These ideas seemed mad back in 1996, but having witnessed events in Japan through the 1990s we understood that the same forces would prevail in the West. Indeed on some metrics, what happened to the US bond/equity yield relationship closely mirrors that of Japan.

So why is it then that the US equity market has raced to all-time highs? Has the Ice Age thesis broken down? To be sure we saw strong cyclical rallies in the Japanese Nikkei within Japan?s own equity Ice Age secular bear market, but nothing as explosive as this.

The counter-argument to the Ice Age thesis is not just the unusual longevity of the current equity bull market- link. The key is that equity yields have re-coupled with declining bond yields (see chart below). If this is, as we strongly believe, an aberration and the equity yield reconnects with the red dotted arrow, then investors should be petrified of the next equity bear market.

Comments

hedgeless_horseman Sanity Bear Wed, 06/07/2017 - 12:55 Permalink

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In reply to by Sanity Bear

Tall Tom MCDirtMigger Wed, 06/07/2017 - 10:10 Permalink

Yes they are. As to those invested into the fraud and the corruption well they need to be petrified, both scared and petrified, as their imminent destruction is at hand.. As for me nothing can look better than the collapse of the fraud, deception, and the corruption. Who in their right mind would be invested into this trap....this crap? Those are beautiful charts. I agree with you. They are beautiful.  What is with the negative vibes of these others, man?

In reply to by MCDirtMigger

LawsofPhysics Wed, 06/07/2017 - 09:36 Permalink

Oh look, more technical analysis in the central bank CASINO!LOL!!!  Not a damn thing changes so long as a mechanism for true price discovery is not allowed.

besnook LawsofPhysics Wed, 06/07/2017 - 11:55 Permalink

this is true price discovery. the equity market is saying the dollar isn't really worth that much so the price is inflated in nominal terms relative to value and the bond market is saying the dollar is the last value in town in a collapsing real market. the yuan/renmimbi is propping up the value of the dollar, not the other way around.

In reply to by LawsofPhysics

Thom Paine Wed, 06/07/2017 - 09:36 Permalink

This kinda has me fucke up.Got money - where the fuck to put it.Gold silver yeh... but Dont get caught with too much there.One change of govt law or tax could fuck you right up there.

Justin Case Thom Paine Wed, 06/07/2017 - 09:49 Permalink

"One change of govt law"Don't see that as reality today. That would just create panick buying. People back in the late 20's believed in Gov't, was acting in their best interest and pions were patriotic. Today is complete opposite, people are protecting themselves from Gov't. Not the majority but far moar than the 30's. Internet is openning people's eyes to the criminals in DC.

In reply to by Thom Paine

Consuelo business as stusual Wed, 06/07/2017 - 10:57 Permalink

  +++++  Been trying to drop the same 'warnings' here & there amidst all the hoopla over crypto-this and silver-that which seems to be so en vogue lately. "A measure of wheat for a penny, and three measures of barley for a penny; and see thou hurt not the oil nor the wine." A situation of food shortage along with skyrocketing prices could take place literally with a season.

In reply to by business as stusual

business as stusual Justin Case Wed, 06/07/2017 - 09:59 Permalink

That has yet to be determined, there is a confluence of events that could make this new mimimum into a true ice age. Those factors that could make this event a doozy are still developing. It is a kind of wait and see situation. The most important aspect of this, is that it is cyclical. It has occured over and over through history. All governments are aware of it, but no one is informing their population to prepare.Agenda 21 anyone?

In reply to by Justin Case

Atomizer Wed, 06/07/2017 - 09:55 Permalink

Well that fucks up the intent of Paris Accord. Honestly, back in the 1970's.. we were taught about the next ice age. It's all about making money for fear.I'll post if can find video on this device. 

innertrader Wed, 06/07/2017 - 10:22 Permalink

TYLER - Remember when you put up the Live Cattle Charts and showed the apparent HUGE OVER NIGHT drop in price?  The FACT is, that OVER NIGHT drop wasn't a "drop" at all.  It was the transfer from one Futures Contract, which are determined by MONTHS, to the NEXT Futures Contract. Example:  The expiration of APRIL Live Cattle Futures Contract, transferring to the JUNE Live Cattle Futures Contract.  APRIL Expired and JUNE became the front month.  In this example, the JUNE Contract had been trading at a HUGE discount due to the FUNDAMENTAL difference in the Time Period.  I can get into a Fundamental example if you like, but it would take some time AND space!THEREFORE, the Drop that showed in your "Future Chart" wasn't a DROP AT ALL!  What you really need to look at when charting Commodities is not necessarily the actual Futures Contract, but the CASH COMMODITY MARKET.  There is another option, which I can explain if you would like.  However, like the fundamentals, it will take longer.THE POINT being, is that when looking at charts that seem obvious, as shown here, you had better know EXACTLY what you are looking at and FULLY UNDERSTAND IT. SETH RICH!TRIUMPH with TRUMP!!!