Albert Edwards, the uber-bearish strategist at Societe Generale, is warning clients that the
ongoing devastation in the emerging marketsis a sign of bad things to come.
“At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $US10,000,” wrote Edwards in a note subtitled: EM Rout Is Merely The Final Tweet Of The Canary In The Coal Mine.*
From his note:
The emerging markets ‘story’ has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flip- flopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses…
Edwards’s note included a chart showing how the S&P 500 in 2013 was on the same trajectory as it was in 1987 right before it crashed.
“I remember the 1987 crash well,” he wrote. “I was working at Bank America Investment Management as an economist/strategist at the time. Of course, the immediate trigger for the equity crash was the fear of US recession caused by the fear that the US would have to hike rates sharply to defend the dollar.”
That sounds eerily similar to the sentiment of today.
“As to this year, ‘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 wrote.
As you can see from the chart below, the S&P has decoupled from copper. Edwards obviously believes that will correct as stocks crash.
*We often refer to South Korean exports as the global economic canary in the coalmine. Edwards associates it more broadly to the Emerging Markets as a whole.