Wednesday, September 7, 2016

Société Générale's Albert Edwards Sees Opportunity, Broad Sunlit Uplands Ahead

From Barron's Stocks to Watch:

Albert Edwards: No Alternative to Stocks? Just Wait For the Next Bear Market
Societe Generale’s Albert Edwards is back, and the notorious perma-bear comes bearing warnings for investors who have bought into the notion that there is no alternative to stocks:
One thing we constantly hear from clients is that despite equities being very expensive, they are the “cheapest“ of a very expensive array of assets, all inflated by super-loose monetary policy. Bonds (both corporate and government) and property are seen by most investors as even more ludicrously expensive than equities. So the argument goes, ‘there is no alternative’ – aka ‘Tina’ – other than to buy equities as the default option. The excellent performance of equities since the last recession, most especially US equities, has underpinned this belief. But relying on Tina, in the Ice Age, is one of the biggest investment mistakes you can make.

Our Ice Age thesis in 1996 called for an end of ‘the long bull market’ financial era and that we would enter the mirror image of the 1950-1965 period. We were, as usual, too early and the ‘long bull market’ and positive correlation between equity and bond yields continued until the end of 2000. But what we expected to occur did occur eventually and from 2000 equity and bond yields de-coupled and equity yields rose (PEs fell) despite bond yields and interest rates continuing to decline. It was indeed a mirror image of the 1950-1965 period, dubbed ‘the culting of equities’. The so-called Fed Model was finally broken…

One thing we learnt from Japan is that the equity secular valuation bear market takes many economic cycles to unfold and ends when equities are ‘dirt cheap’. US equities did not get dirt cheap in March 2009 at a Shiller PE of 14x they just got cheap. To be dirt cheap they needed to half again from the 666 level they reached....

That's Albert, always looking for the silver lining.
And since I ripped off a guy who talked good for the headline I'll end with him too:
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”