Albert Edwards Explains Why The Latest Collapse In US Economic Data Is A Step On The Road To S&P 400

I don’t have any opinion as to whether or not he’ll be right, but his prescience about things in 2008 at least makes Albert Edwards worth paying attention to.

The Ice Age theme is now well known. In a world of very low inflation and near deflation, equities de-rate both absolutely and relative to government bonds, which also re-rate in absolute terms. After the obscene extremes of equity valuations seen during the 2000 bubble, we have entered a long valuation bear market which should end in extreme levels of cheapness consistent with an S&P around 400. The unavoidable deep recession associated with this level (not forgetting the inevitable China bust) will drag an already 'expensive' bond market to even higher extremes. One of the key themes of our longer-term analysis is that at the end of one of these lengthy 15-year phases for the financial markets (shown below), investors believe that the current investment phase will continue indefinitely. That was not the case in 2009 and is not the case now. There is still far too much hope to call a bottom.

…

Investors should note how the 2001 and 2008 recessions brought about savage Ice Age de-ratings of US valuations followed by only a partial 50% recovery of the previous valuation losses during the cyclical upswing. If we are about to set out another leg in the Ice Age de-rating, the next icy 'steppe' in valuations could take us closer to 7x - i.e. what we would typically expect to see at the end of a secular valuation bear market. By then investors would have lost all hope as we sink into deep recession and bond yields plunge below 2%. That will be the buying signal for equities and time to offload our remaining holdings of government bonds back to the Central Banks.