Societe Generale Strategist Albert Edwards see a massive market crash on the horizon. According to Edwards, the S&P 500 will tumble to 450 and investors will bid up haven assets like gold. He believes this will cause gold to climb seven-fold and a new phase of aggressive QE will lead to inflation that is unlikely to be containable.
August 30, 2013, 9:01 AM
This just in: Societe Generale Strategist Albert Edwards sees a massive market crash on the horizon.
The S&P 500 index SPX -0.34% will tumble to 450. Investors will bid up haven assets like gold GCZ3 -0.69% , which will climb seven-fold, and the 10-year Treasury note 10_YEAR -0.36% , whose yield will fall below 1%, he writes in his latest note to clients.
Ok, so maybe it’s a given that SocGen’s biggest permabear is still, well, a bear. He made the same call back in April, and he’s had the S&P target of 450 as far back as 2010.
But he knows how his predictions sound when his calls have yet to play out, so he’s got some quoted words of wisdom to back up the fact he’s not, in his words, a “crackpot.” Here goes:
“My former colleague Dylan Grice pointed out the perils of calling things too early. In his latest letter to investors he quotes a Rabbi Shlomo Riskin who pointed out ‘When you’re one step ahead of the crowd you’re a genius. When you’re two steps ahead, you’re a crackpot’. And so our call at the end of last year that the EMs were heading for a balance of payments crisis and would see a currency debacle similar to 1997 was met with total indifference. We still find the same disregard to our call for a renminbi devaluation.”
This time around, the emerging-markets tumult, which he calls “the final tweet of the canary in the coal mine,” is raising his red flag. Here’s the ugly economic future he predicts on the horizon:
“I see the current EM FX turbulence leading to a renewed global recession, with waves of deflation flowing to the west from Asia as China is ultimately forced to devalue in the face of an unrelenting loss of competitiveness, most especially against its EM rivals. The structural US equity valuation bear market will then embrace the third major leg in its long and volatile Ice Age journey… Ultimately I expect a new phase of aggressive QE will lead to inflation that is unlikely to be containable. Policymakers have no idea how much QE is too much, other than by looking in the rear-view mirror. But, until this unfolds, I remain resigned to being Rabbi Riskin’s proverbial crackpot.”
One sign of trouble is the price of copper, which Edwards views as an economic indicator. “‘Dr Copper’ has been telling us for some time that all is not well with global growth, and long before the markets’ ears picked up the loud sucking sound of the air draining out of emerging markets,” he writes.
He also added that the market right now looks a lot like it did on the eve of the 1987 crash, but noted that we should take such comparisons with a grain of salt.
Edwards might be an outlier, but he’s not alone in thinking that the emerging markets weakness — which threatens to become a globally reinforcing cycle — could usher in more pain. Yale economist Stephen Roach thinks emerging-markets woes could cause stock markets to enter a severe correction mode. “Large current account deficits make emerging markets vulnerable,” he told CNBC on Thursday.
And Abigail Doolittle, technical strategist at The Seaport Group, has also been calling for a correction for some time. In a Wednesday report, she mentioned the same Treasury yield target as Edwards:
“Our conviction is as strong as ever that the 10-year yield will drop below 1.00% and that this precipitous decline will be signaled once again by a “Death Cross” as the 10-year yield’s 50 [day moving average] likely slices through its 200 [day moving average].”
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