Will There Be New Lows in 2010?

Societe Generale's Albert Edwards is generally considered an uber bear, although there were times in the past year he has tactically increased exposure to equities to take advantage of oversold conditions. Now is not one of those times. In fact, Edwards chimes in with many similar thoughts we've posted on the fundamentals... but sticks his neck out calling for new lows in 2010.

While the belief from this blog writer is this will all end badly, knowing when and how will be the ultimate question. Without the massive intervention by central banks and governments, we'd have a different landscape; and without knowing to what lengths these people will continue to go to, it's much more difficult to predict the intermediate road ahead. But unless the basic laws of economics are repressed permanently, the ultimate destination seems no different.

As with "intellectual bears" today, the NASDAQ bears of 1999 and real estate bears of 2006 were ultimately correct; but in the interim a lot of money was made by those who ignored warnings on the upside before it all came crashing down. And specific to NASDAQ, most bears who attempted to step in front of the freight train had little equity left to actually profit from their (eventual) accurate prognostications. Irony at it's best. At this point many who are non believers have finally jumped on board, with everyone assuming they can jump right back out, through the same narrow door when "some day" arrives. If only it were that easy....

Via Reuters:

• Albert Edwards, an analyst at French bank Societe Generale who correctly predicted the Asian financial crisis, sees global equity markets at a new low and chances of another global recession in 2010.
• Edwards, a prominent equities bear and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy responses will safeguard the West against a repeat of Japan's 'lost decade' of the 1990's.
• "People should question the happy clappy nonsense from sellside analysts," London-based Edwards, a global strategist with SocGen's Corporate & Investment Banking group, told a media briefing. "We are not saying that people should not participate in the rallies -- that will get you fired as a fund manager -- but they should not become too convinced of the recovery," he said. (hand raised)
• Edwards expected China to go into a recession at some point as cyclicality catches up with the economy, and called people's excessive faith in growth stories a "sick joke".
• He said while inflation was a concern, deflation was a bigger worry in the near term, at a time when western and Japanese governments were effectively insolvent. (print, print, print until your daddy takes the T bond away?)
• "If we get an economic downturn next year, when you have got core inflation at half a percent, I think there will be a real deflation panic, a bit like in Japan."
• Edwards picked grains like corn, wheat and soybeans as a more secular bet on China's growth story over other commodities and their related stocks as these have lagged the broad rally in the markets. (interestingly these agriculture commodities have lagged big time... my belief is because one can stockpile many commodities such as oil or copper with the cheap money being handed out - whereas foods spoil)
• Edwards is more worried about Japan in the near term as he expects the world's second-largest economy to run into difficulty funding itself next year as demand for Japanese government bonds wane and bond yields rise further. The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.
• "Equity valuations have been totally ridiculous for the last ten years but I'm less bearish than I was two years ago because we have had one round of correction," said Edwards, who thinks the S&P 500 .SPX should have dropped to 500 points last year to hit the bottom of the valuation cycle.

Some more recent Edwards below:

1) ZeroHedge provided further Albert Edwards thought process 2 weeks ago here.

2) Investment Postcards blog has a blurb from September here.

Edwards concludes that the global crunch is not receding, but intensifying, stating that the unwinding of the “grotesque debt excesses” of the last decade has only just begun. “As Japan experienced before, it is deleveraging that is the problem and retrenchment takes many years, rendering the economy extremely vulnerable to rapid relapses back into recession when any reverse or pause in extreme stimulus occurs.”

3) Edwards is one the prominent bears quoted often in this piece from The Economist in early October [email readers will need to come to the site] [hit fullscreen option for easy readingThe Economist 1 Oct 09 - The End is Nigh (Again)
One imagines all Albert Edwards' warning pieces must come with an appropriate soundtrack....


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Comments

[Ricard:]

Great article.

I like your perspective on agri-commodities. Lot of truth in that spoilage theory.

Grantham also thinks we'll have a correction next year amid good news about the economy, although he is nowhere near saying something like 'testing new lows'. I think Edwards is being a bit excessive here.

Maybe we'll have a 'stealth correction' involving inflation and monetary debasement. That seems like the likeliest outcome, IMHO.

Nov 10 05:00 PM

[damienhaas:]

I thought the good news is price in, The stock price at this level and the analysts forecast a 8 to 10 percent growth in 2010. Is it realistic?

I think the anomaly of high unemployment and debts level vs the high expectation of growth will make 2010 a very interesting year.

Nov 10 05:52 PM

[OstrichHater:]

Edwards is a very bright man, but I do think that he is missing an important dynamic when he talks about "unwinding of the 'grotesque debt excesses' of the last decade."

Specifically, one must remember that the majority of debt that is held by corporations (think bonds and pensions) and households (think mortgages) is generally at a fixed rate. However, inflation is not fixed. If the fed can artificially create inflation (remember helecopter Ben is chair of the FOMC), then asset values will be artificially raised and the deleveraging problem slowly fades away over time. This dynamic becomes even more effective if the government stated CPI is lower than the actual inflation rate, as we have seen in the last decade. This makes the private and government pensions which are tied to the CPI essentially get smaller and smaller with time.

I am certain that this is what the Fed intends to accomplish-- i.e. inflate our way out of the de-leveraging process. The only question is how sucessful will they be in their efforts.

Nov 11 06:56 AM

[Munts:]

You might be on to something there @ostrich and with secular commodity bull winds at fed backs, they may not have too hard a time pulling this off.

We end up with pensions that buy stuff all and a weak dollar that massively impacts consumption. Folk might even have to save (sharp intake of breath).

Anything that stops americans buying all this stuff (then clunking it a year later) is good for the planet and humanity.


On Nov 11 06:56 AM OstrichHater wrote:

> Edwards is a very bright man, but I do think that he is missing an
> important dynamic when he talks about "unwinding of the 'grotesque
> debt excesses' of the last decade."
>
> Specifically, one must remember that the majority of debt that is
> held by corporations (think bonds and pensions) and households (think
> mortgages) is generally at a fixed rate. However, inflation is not
> fixed. If the fed can artificially create inflation (remember helecopter
> Ben is chair of the FOMC), then asset values will be artificially
> raised and the deleveraging problem slowly fades away over time.
> This dynamic becomes even more effective if the government stated
> CPI is lower than the actual inflation rate, as we have seen in the
> last decade. This makes the private and government pensions which
> are tied to the CPI essentially get smaller and smaller with time.
>
>
> I am certain that this is what the Fed intends to accomplish-- i.e.
> inflate our way out of the de-leveraging process. The only question
> is how sucessful will they be in their efforts.

Nov 11 08:22 AM

[John Galt:]

I love how somebody is called an uber bear. As if this guy is just a big mean old pessimist.

If in 1999 you had been a bear, and stayed a bear for 10 freaking years, despire all the ups and downs of the market, you'd be right. Trader Mark points out how a a lot of stocks go up and down, but if you had just bought bonds in 1999, and held them for 10 years, you'd still be better off than the vast majority of investors.

Nov 12 09:14 AM