Over the last decade, I’ve found my opinions coinciding more and more with those of SocGen strategist and “uber-bear” Albert Edwards. Last week he hit the headlines again with a claim that a “gut-wrenching slump” in profits amounts to an almost-certain predictor of recession. While the historic evidence for this is compelling, I’m not so sure this time couldn’t be slightly different — at least in terms of causes and effects.
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This is the second time recently I’ve found myself taking a slightly different stance to Albert. In January he forecast the S&P 500 would drop 75 percent (to around 550 points), triggered by a recession starting this year, which would also be catastrophic for corporate debt-holders with defaults spiking to record levels.
I absolutely echo the concerns about corporate debt, especially high-yield. Plus I don’t doubt we’ll see a recession that, accompanied by with such extreme levels of indebtedness, will invariably take the form of debt-deflation (more commonly known as a depression).
However, where I do differ from Albert is on the timing of this. The recession will be largely dependent on the incalculable derivative factors of the markets’ response to the Fed’s response to the markets’ response to the Fed’s response to the markets’ response etc…
In other words, both what will trigger the next depression and when it will happen is really anyone’s guess.
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Mark Twain famously said history doesn’t repeat but it does rhyme. These charts don’t in any way guarantee a repeat of the Great Depression but they do highlight the risk of what such a repeat would look like for equity markets:
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You might say that this difference is splitting hairs – what’s the difference between a fall of 75 percent or 87.5 percent?
Veterans of the 1930s would probably tell you it’s an initial 75 percent drop followed by a further 50 percent….
Full article: Fasten your seatbelts: History’s about to repeat itself (CNBC)
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