Thursday, July 20, 2017

Société Générale's Albert Edwards: Just One Aberration Prevents A "Petrifying Bear Market"

Every time I am asked why we post on Mr. Edwards "when he's been wrong so often" I debate whether to explain or just give a glib answer.
The flippant rationale would be we get to go with headlines such as:

Société Générale's Albert Edwards Descends Into A Nightmare World of Dream Demons and Market Depravity
Société Générale's Albert Edwards: "Many Think I am Mad..."  
Société Générale's Albert Edwards Sees Blue Skies, Sunshine, the Lame Shall Walk Again
Of course it's possible I have misinterpreted the meaning of:
"the US economy is on crutches, and they are about to be kicked away"
Société Générale's Albert Edwards Has Some Troubling News He Reluctantly Shares
Société Générale's Albert Edwards Not His Usual Jolly Self (II)
Société Générale's Albert Edwards: "I Have Been Wrong – I’ve Been Too Bullish"
It May Be Time To Put Société Générale's Albert Edwards On Suicide Watch
Société Générale's Albert Edwards: Cry Havoc and Let Slip the...Ah Screw it

And many, many more.
The straight-up answer is: I can't think of anyone else who nailed the deflationary bias in credit markets as well as he has for as long as he has, pretty much the last 15-20 years.
And as far as equities go, absent the extraordinary measures of the world's central banks the landscape would look very, very different.

The biggest criticism you can lay on the guy is he didn't realize what he was up against re: the powers that be.*
Plus that whole Albert-in-the-bathtub period was just stupid.

From ZeroHedge:
One month after he shared his preview of the endgame of this current centrally-planned economic regime (expect no happy ending there, as "citizens will soon turn their rage towards Central Bankers.") Albert Edwards is out with a new note asking whether "H2 2017 will undo the trend of lower inflation, bond yields and the dollar?" and - if the answer is no - he cautions that "investors might give some thought to the fact that we are now just one recession away from Japanese-style outright deflation!"

The creator of the "deflationary ice-age" concept starts off by noting that equities have risen to new all-time highs as weak US inflation data have reduced expectations of further Fed rate hikes. This has driven both bond yields and the dollar lower and in turn EM and commodity prices higher. But, Edwards warns, the trend might easily reverse as the second half of this year progresses.
"This might dampen the impact of recent compelling evidence that core CPI and wage inflation seem destined to remain curiously weak throughout the remainder of this cycle."
But as the SocGen strategist concedes, a far bigger question is how the recent equity highs sit with our Ice Age thesis – is it dead or just sleeping?"

Before he answers that question, Edwards first reminds us that with the latest inflationary print, US core CPI and wage inflation have surprised on the downside for four successive months and argues that "only two data points are sufficient for most of us to be able to draw a trend, but four data points surely provide clear evidence of the decisive re-emergence of a deflationary trend. At the very least this recent data is grounds for a dismissal of the argument that ‘end of cycle’ inflationary pressures might make a brief appearance, before the long-term deflationary secular trend reasserts itself in the next downturn."

Which brings us to the first key question posed by Edwards:
If inflationary pressures are indeed ebbing in the US economy, this begs the question that if the third-longest cycle in US history cannot produce a cyclical uplift in wages and prices, what on earth will happen in the next recession! Investors might give some thought to the fact that we are now just one recession away from Japanese-style outright deflation!
The US is not alone however in failing to spur inflation: as Gerard Minack shows in the chart below, although the number of OECD countries in absolute deflation at the core CPI level has receded, those undershooting a typical core CPI target of 2% are at an all-time high. This, Edwards says, "is quite amazing given where we are in the global economic cycle."
None of the above should come as a surprise: recall that the primary driver of global inflation in the past decade has been - without fail - China, the same China that as we showed recently has seen its credit impulse collapse, and is therefore once again no longer exporting inflation.
Assuming that Edwards is right, and that China will be stuck exporting deflation for the foreseeable future, and that the latest wave of inflation is about to be submerged, that means that Edward's patented deflationary "Ice Age" scenario is about to become the dominant topic again.

As a quick reminder,  Edwards' 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....

 March 17, 2017
*Société Générale's Albert Edwards: Winter Is Coming
Yes, Albert has been forecasting the arrival of the economic ice age since at least 1996 (our links go back to 2010 and probably earlier), but the House Fed has thwarted his House Stark at every turn.
Now he's getting ready to roll but it may be too late for him.
"I fought. I lost. Now I rest. But you, Lord Snow… you'll be fighting their battles forever."
Albert addressing another standing room only investment conference crowd

Okay, that's enough Game of Thrones references for now....