We had promised more on the latest missive from Societe Generale’s Albert Edwards – so here it is.
This is evidence, we think, that only Edwards can out-Edwards when it comes to alarmist market strategy report. It’s just marvellous.
First, some context:
The entrenched bias towards bullishness infects virtually all parts of our business and means investing on the basis of forecasts is a waste of time…
Yet there is no big conspiracy about this. It is simply that an equity/economic bear standing out from the crowd runs the risk of being very wrong (so too obviously do the bulls, but funnily enough no-one seems to mind that). Being bearish and being wrong attracts the derision of the salesforce (though not necessarily the clients) which pressurises management to remove the offender. And with so many in this industry living the high spending dream and with huge mortgages yoked around bended necks, it is all too easy to produce forecasts that say nothing in order not to rock the HMS Gravy-train.
Edwards, and his colleague James Montier, however, are determined to describe what they see – even if it makes them look stupid.
The strategy team have long been convinced that once Alan Greenspan’s various bubbles had finally worked their way through the system, the global economy would slide into recession.
The US is leading the way, diving into deep recession as a collapse in consumer confidence induces The Great Unwind. This asset-backed economic Ponzi scheme will finally crash to earth as debt revulsion leaves interest rates impotent.
The UK, Euro and Japan will follow the US down, Edwards says.
And he gives us one hard forecast number that he says we can hold him to:
At its worst, I expect non-farm payrolls to be contracting at a monthly rate of 500,000.
So the SocGen man is talking about a recession at least as deep as the early 1980s, albeit not quite as bad as 1974.
What does that mean?
Oil – $60
CPI – zero in the US, UK and Eurozone
US 10yr bonds – yield bottoms out below 2 per cent
As for equities:
A deep recession will result in a profits slump. Coupled with an Ice Age P/E contraction, we see global equity markets falling some 70% from their Oct 07 peak. I expect the S&P to bottom around 500 (verses the 1,575 peak) and FTSE around 3,000 (imagine where consumer confidence will be if equity prices do collapse).
Y…has a very long tale – FT Alphaville