S&P 500 Could Fall Below 666 In Valuation Bear Market: SocGen's Albert Edwards

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Albert Edwards, the outspoken and often negative global asset research analyst for Societe Generale, would pair well at a dinner party with George Miller and Byron Kennedy, creators of the “Mad Max,” franchise of films that revealed a post-apocalyptic world where all order had broken down. The highly entertaining and often insightful Edwards, in an “alternative view” research piece out Wednesday, points a familiar finger China as well as central bank central planning and says “the illusion of prosperity is shattered as boom now turns to bust,” as a 75% stock market decline is in sight.

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Soc Gen ISM decoupling Albert Edwards

Albert Edwards charges QE is priming the wrong pump and has not created lasting jobs

Edwards has been among several analysts who has harshly questioned central bank quantitative easing. He is joined in the respective ranks with Paul Singer and other voices who have criticized or said market manipulation for any prolonged period of time will result in a mean reversion. The longer the market manipulation occurs, the more harsh the mean reversion.

Without using the phrase “mean reversion,” Albert Edwards, in a report titled " China set to start another leg in the Ice Age, taking the S&P back below 666," points to market valuations that are at or near bubble highs and could fall. “The coming carnage is an indirect result of the failure of the Fed’s QE,” he wrote, a topic seldom addressed in polite company but obviously critically important to the near term future. “It may not have done much to boost US growth, but it certainly inflated global asset prices into the stratosphere.”

When he considers the real beneficiaries of quantitative easing, Albert Edwards doesn’t see the magic fairy dust working as much in the developed nations, building long-term, sustainable jobs, but rather sees emerging markets and by extension generally wealthy long-only commodity investors benefiting during the priming of the QE pump. QE had a nail driven in the heart in December of 2015 – but a process that had quietly been underway much longer, as reported in ValueWalk and now the free money is coming home to roost. Recovery from this headache is likely to take some time as well.

Soc Gen recovery long Albert Edwards

Emerging markets and commodity bubble has been created that will lead to a stock market bubble bursting

Albert Edwards, in less than a paragraph, explains mean reversion in commodity markets and points to a wasted effort relative to quantitative easing:

The one area though, where US QE did unambiguously boost growth was in emerging markets (EM) as surplus money poured into these supposedly superior investment opportunities, leading to massive EM foreign exchange intervention to hold their currencies down. This turned ineffective US QE into very effective EM QE in terms of boosting EM economic growth. A commodity bubble and the resultant US shale investment boom were all consequences of the Fed’s QE.

To be fair to the Fed, quantitative easing has likely had a real impact beyond just the stock market and inflating the assets of the top 1% of society. How much this benefited the middle class is in doubt, a point that might have led Rebecca Jarvis of ABC News to ask Janet Yellen in a televised press conference if there weren’t better, more direct methods of implementing stimulus? The logical question, with the implication that stimulus has overwhelmingly benefited wealthy big bank clients and those invested in high end assets, was not definitively answered. What Albert Edwards says in Wednesday’s report is that much of the benefit of quantitative easing been experienced offshore in the likes of Argentina, Brazil and Peru -- all of whom are now struggling in a deflationary environment:

I have always said that if inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now and it is not! The Fed?s pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad).

Soc Gen trade down the hole Albert Edwards

People saw 2008 crash and they see the current crash forming: will anyone be able to say they didn't see it coming?

Albert Edwards pulls no punches as he reverts back to the 2008 financial crisis and, not addressing fraud, ratings agencies or disclosure practices, he considers a historical date when outgoing Treasury Secretary Hank Paulson claimed to have given a warning:

One of the main problems has been the overconfidence with which the Fed pursues their objective. Yet in the run-up to the 2008 Global Financial Crisis they demonstrated their lack of understanding of the disastrous impact of excessively low Fed Funds. Even in retrospect they remain in denial - as evidenced by Bernanke's recent book. Why can't these incompetents understand that they are, once again, the midwife to yet another global unfolding economic crisis? But unlike 2007, this time around the US and Europe sit on the precipice of outright deflation. Indeed, it is all around us. But don’t expect the central bankers to comprehend the hole they now find themselves in.

Where will it all end? After prodigious analysis of various gloomy economic factors, the Chinese currency and pointing to a deflationary picture, Edwards doesn’t paint a pretty picture:

Where will this all end? I believe the Fed and its promiscuous fraternity of central banks have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis. I believe the events we now see unfolding will drive us back into global recession. I have long believed that 30y US bond yields would converge with Japan, just as Germany has now done. But a key part of my Ice Age thesis is that the US equity market remains in a valuation bear market that did not fully play itself out in March 2009, when the S&P touched the 666 level, and we will see new lows.

Albert Edwards points to the 666 level on the stock market. The end of the world is here, he says, as he looks towards what might be the worst correction in market history.

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