Albert Edwards, whose opinion, of all macro economists, is among the most respected by Zero Hedge staff, has just thrown down the gauntlet. In his just released piece he mocks the Black Knight, compares the market to a Polish dude with a bullet stuck in his head, makes fun of koolaid drinking permabulls, and sets his estimate for the S&P... at 450.
Investors cannot move for the weight of broker research comparing the current conjuncture in the US with Japan a decade ago. While bond markets at least, move to discount deflation, most sell-side analysts still say the current situation is unlike Japan a decade ago. They are right. Things now in the US are much, much worse than Japan a decade ago.In case anyone needs a graphic summary of all that was just said, the chart below summarizes it best:
Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst.
This lack of awareness reminds me of reports this week that a 35 year old Polish man hadn?t noticed for five years that he had a bullet lodged in his head. Like the equity market in 2000, the Polish man had been partying too hard to notice that he had been shot. The BBC report the police as saying "He told us he remembered having a sore head, but that he wasn't really one for going to the doctor."
As the equity bloodbath of the last decade enters its final, even bloodier phase, investors continued optimism also reminds me of the Black Knight in Monty Python & the Holy Grail - link. Despite being grievously wounded by King Arthur, the Black Knight makes light of his injuries which he dismisses as a flesh wound. The vast bulk of the investment industry fails to appreciate that we are locked in a structural bear market and about to enter Act III.
This year has already seen a dramatic flip-flop in sentiment as the market has begun to acknowledge it is sinking into the deflationary quicksand. For this year outperformance in the US, for example, is over 20 percentage points (see chart below).Another pet peeve of the SocGen strategist, as demonstrated repeatedly by Zero Hedge when we show that bonds imply stocks should be at about 750-800, is why have stocks not followed bonds down into the deflationary abyss. His conclusion:
So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the nationwide manufacturing ISM slides below 50 into recession territory in coming months. Indeed the new orders data for August, already reported in regional ISM?s suggests the equity market is going to get some sentiment crushing data in the very near term. But never mind the last standing optimist will tell us ? it is only a flesh wound!Yet all logic aside, we know readers are just waiting for the punchline. So here it is:
The structural bear market has not reached the end. We have long said that the de-bubbling process would end only when equities became very cheap and revulsion in equities as an asset class hangs in the air like a fog. The problem remains more of excess valuation within the US rather than Europe, but that will not prevent the bear market hurting other cheaper markets as much. We will return to the valuation nadir last seen in 1982 with the S&P bottoming around 450 (see chart below).
