Submitted by Tyler Durden.
While the bulk of tangential themes in Albert Edwards’ latest letter to clients “The Ice Age only ends when the market loses hope: there is still too much hope” is in line with what we have been discussing recently: myopic markets focused on momentum not fundamentals (“It’s amazing though how the market can get itself all bulled up and becomes convinced that we are the start of a self-sustaining recovery. And funnily enough there’s nothing more likely to get investors bullish than a rising market”), short-termism (“One thing you can say for the market is that it has an extremely short memory”), and that so far 2012 is a carbon copy of 2011 (“One thing you can say for the market is that it has an extremely short memory. Let us not forget that the performance of the equity market so far this year is almost exactly the same as we saw at the start of 2011 (in fact the performance has been similar for the last 5 months”), his prevailing topic is one of hope. Or rather the lack thereof, and how it has to be totally and utterly crushed before there is any hope of a true bull market. And just to make sure there is no confusion, unlike that other flip flopper, Edwards makes it all too clear that he is as bearish as ever. Which only makes sense: regardless of what the market does, which merely shows that inflation, read liquidity, is appearing in the most unexpected of places (read Edwards’ colleague Grice must read piece on why CPI is the worst indicator of asset price inflation when everyone goes CTRL+P), the reality is that had it not been for another $2 trillion liquidity injection in the past 4-6 months by global central banks, the floor would have fallen out of the market, and thus the global economy. In fact, how the hell can one be bullish when the only exponential chart out there is that of global central bank assets proving beyond a doubt that every risk indicator is fake???
Why every last bit of hope must be crushed:
One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when “buyers-on-dips” become “sellers-on-rallies”. It is when volume dries up to almost nothing. It is the loss of hope. In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.
The market is once again in a hope phase – hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone. These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors’ eyes. Only then can the bull market begin.
On why he is not a flip-flopper:
Arielle, one of our senior salespersons e-mailed me a couple of weeks ago with a question: “Hi, any change in your views? Just checking…as I have questions from Clients.” Reading between the lines I think the question was whether I am near throwing in the towel. Bloomberg reports that “Global Strategists Abandon Bearish Views After Missing Rally” – link. Rest assured, I am not one of them. What will make me more bullish? As I believe that we are still in the grip of a valuation bear market the answer is easy – cheaper valuations.
Edwards, like Janjuah, sees no point in trying to provide policy recommendations as there is nothing that can fix the system now – implicitly it is too late, as the Keynesian end-game has taken us too far. We had a chance with Lehman in 2008 to reset the system and to bring it to a sustainable footing; it is now too late with everyone dodecatuple all in on a faulty system.
It is easy to moan that policymakers are still making a mess of things and it would be fair to say that I certainly moan more than most. I find it far harder though, when I am asked what I would do if I was standing in policymakers shoes. Let me make an admission. I do not have the clarity of view that many have about the “right” policy prescription for the current macromess. There are just bad and less bad choices. The key thing for me was not to get into this mess in the first place and I was amongst the vocal for many years about the ruinous polices that were being pursued. For me it’s a bit like the old joke when you ask a local person the way to somewhere and the extremely unhelpful answer after much intakes of breath is “Well, I wouldn’t have started from here.”
Finally, while we have covered the topic to death, Edwards nails it on corporate profits.
A flattening of the profits cycle is exactly what you might expect as the easy, early cycle productivity gains come to an end. It is worth noting that the last time this occurred was just ahead of the start of the recession which the NBER date as having started in December 2007. Back then too, both markets and policymakers all felt the economy was still quite healthy. Indeed neither non-farm payrolls nor the headline ISM signaled the economy had already entered recession at the end of 2007 - indeed like now, payrolls actually accelerated in the second half of 2007, just as profits began to slip!
Pretty much covers it.
So to recap, Conan summarizes best what is best for a bull market: