Albert Edwards: How Bad Will the Meltdown Be?

Albert Edwards’ “ice age,” during which U.S. bonds outperformed stocks, is ending. But before a new regime sets in, U.S. capital markets are heading for a final meltdown that will leave equity investors much poorer.

Edwards is the global strategist for Société Générale and is based in London. He publishes a weekly strategy report, upon which this article is based.

Edwards is known for his “ice age” thesis, which posited that, beginning in 1996, the correlation between bond and stock yields would break down, and 10-year bonds would outperform stocks. His template was Japan and its lost decade of growth, which began in 1990. That forecast has been largely accurate, although it was disrupted temporarily by quantitative easing (QE).

When I last heard Edwards speak, in January of 2019, he foresaw the all-but-certain, unfolding recession (of course, he did not foresee that it would be brought on by a pandemic). Moreover, he predicted that the recession would be quite deep and accompanied by a deep trough in earnings.

In his recent writings, he has noted that in every recession since 1970, real S&P 500 earnings-per-share (EPS) have declined by a progressively greater percentage from their prior peaks.

The unfolding recession is the “final stage” of deflation, according to Edwards. The turmoil is so bad that it will force authorities to transition to a “new regime.” Those authorities will go from QE and monetary easing to monetization that will drive the “great melt” of fiscal deficits.

The OECD is forecasting a 25% economic retraction, he noted, and the virus has given the monetary authorities the “cover” to facilitate that monetization.

Monetization is not a precisely defined term, and Edwards clarified what he meant in an email exchange. Unlike the financial crisis, when much of fiscal stimulus, like the TARP program, wound up in banks’ balance sheets, this time the money is headed for consumer circulation.