- Notorious permabear Albert Edwards gave his legendary annual Global Strategy Presentation in London this week.
- Edwards was marginally more optimistic than usual this year, but still had some severe warnings for market watchers.
- His main focus was the idea that there are echoes of the 1987 Black Monday market crash in the market situation at the moment.
- Business Insider was in attendance and shares some of the key slides from Edwards’ presentation.
LONDON – Every year, in the second week of January, several hundred investors, market watchers and a few journalists pile into a conference centre in the basement of the Marriott Hotel in London for a presentation from one of Europe’s largest banks, Societe Generale.
This is SocGen’s annual Global Strategy Presentation, hosted by the bank’s legendarily pessimistic strategist, Albert Edwards.
Each year, Edwards – alongside his long time colleague Andrew Lapthorne, and usually a special guest – spends roughly an hour tearing into the global financial system, highlighting imbalances and trends that he believes will eventually lead to the next market crash.
The event has become somewhat notorious in financial circles, and is so big that it is now colloquially known as “Woodstock for Bears.”
This Tuesday, Business Insider went along to see what SocGen’s strategists had to say for themselves, and amazingly found the permabears just a little less pessimistic than normal, with Edwards and Lapthorne both actually highlighting some positive trends in the markets.
“I feel I’m not going to be as bearish as I normally am,” Edwards said. “It’s getting a bit wearing, and no one really wants to hear it that much.”
However, the key theme as ever, was bearishness, with this year’s topic of choice being the echoes between the current financial market situation and that seen in the 1980s, just before the Black Monday Crash of 1987.
Edwards also flagged that the current market rally – which has seen stock markets across the world hit new records on a seemingly constant basis in the last couple of years – is so strong that even the biggest bears in the market are “being forced to participate in the madness.”
“Of course this is all going to go horribly, badly wrong, but what we continually ask is ‘What is the trigger?’ We’re going to try and discuss a couple of possible and potential triggers,” he told the audience.
Edwards’ presentation featured roughly 45 slides, each containing a chart to illustrate a key point or theme that he discussed during his 35 minutes at the lectern. We’ve pulled out the first handful of slides from the presentation which show Edwards’ overarching argument. Check them out below.
One of Edwards’ most famous hypotheses is the so-called “Ice Age Theory” which states that deflationary pressures will eventually trigger a stock market collapse and a bond market boom. With global stocks surging for several years, Edwards’ theory has been criticised, but he thinks it is alive and well.
US price earnings ratios have surged ahead of the eurozone and Japan, with divergence between them at record levels.
That divergence has been attributed by some to surging FANG (Facebook, Amazon, Netflix and Google) stocks in the US, but Edwards disagrees, pointing to this chart that shows “the difference in sector composition only accounts for a very small portion [of the divergence.]”
Even as central banks start to begin the process of policy normalisation, they’re continuing to print money at record levels. This, Edwards says, goes some way to explaining extreme valuations in the stock market.
Non-institutional investors are exposed to the stock market at “extreme” levels. “It is not just valuations that are frothy, it is investor sentiment,” Edwards said.
Financial advisors are also giving their clients bullish advice on buying stocks. That is something Edwards says has changed from last year, when valuations were bubbly, but sentiment was somewhat subdued. “We are back up to where we were before the 1987 crash,” on this metric, Edwards said.
Here’s where the historical parallels with 1987 get a bit scary. The market’s behaviour in that year is “a bit like what has happened in this last year,” Edwards said.
The pattern of manufacturing in the US and of oil prices also looks similar to 1987 right now. Manufacturing ISM is above 60 for only the third time since 1987, while oil prices are recovering after their plunge over the last three years. Both of these things happened prior to the ’87 crash.
“The economy looked very, very vibrant,” in 1987, Edwards said. “And yet, the market collapsed, and it had something to do with valuation.”
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