Edwards: Have We Really Learnt Nothing?

Edwards is not the one of these .... He sees the world different and writes about the US equities today:

Another 25%+ downside beckons.

The respectful Albert Edwards, the global strategist at Societe Generale, has been an ueber-bear for years. The key message today:

One of the most worrying things about the last few years has been the seemingly neverending ability of investors to kid themselves. Over the years I have conducted a soul destroying battle for investors to acknowledge the dark side. But ultimately investors are like moths, fluttering towards the light. This is natural. If we give up hope, what is left? Capitulation and revulsion will present major opportunities in the next year. Embrace investors’ despair.

Over many years I have always been bemused at investors’ ability to reassure themselves that disaster was not around the corner. Niggling doubts and worries are soothed away by the siren voices of policy makers and other happy-clappy market cheer leaders.

Was it Sir Alan Greenspan who justified the S&P forward PE at 24x in 1999 because equity analysts’ high long-term earnings expectations correctly reflected the New Paradigm? Was it Sir Alan who reassured us that there was no US national housing bubble? Was it Ben Bernanke who reassured us that high debt loads were perfectly sensible in “The Great Moderation”? And was it also Ben Bernanke who claimed that the gaping US current account deficit and low bond yields were due to surplus savings in Asia? Investors lapped this self-serving nonsense up because they wanted to believe.

One of the most touching acts of market faith I see at the moment is that the Chinese authorities are in control of events and will be able to turn their economy around from the Q4 contraction. Commodities and Chinese equity prices lurched up in anticipation of more easing measures being announced. As ever, the bulls’ argument is dangerously plausible and appealing. Meanwhile, in a world of competitive devaluation the Chinese Yuan has overtaken the Yen as the region’s strongest currency (see chart below). And the FT reports that output of Chinese steel mills has gone off a cliff after a buoyant December– link. All I can do is bring my long experience of dealing with these situations. My considered riposte to the bullish consensus is “rhubarb, poppycock, bilge, balderdash and piffle!”

Click on chart to enlarge, courtesy of Societe Generale.

Consider as a probability!