“The biggest bubble in recent history is heading for the mother of all hard landings,” says Albert Edwards
The chart and paragraphs below come from friend, scrumming partner and uber-bear (equities, not bonds), Albert Edwards, global strategist from Société Générale Cross Asset Research.
“We are in a profits recession, both at the developed and emerging level. My Quant colleague, Andrew Lapthorne, pointed out to me that forward earnings growth for both MSCI developed and emerging are now falling. For we are at that point in the cycle where the easy productivity gains are over. In the US, for example, we can see unit labour costs running well ahead of output price inflation, leading to a downturn in the margin cycle. The equity markets seem able to ignore this inconvenient truth for the moment while they think the US economy might be reviving and China’s policy makers are successfully engineering a soft landing. But any evidence to the contrary at a time when profits are already under downward pressure will likely be met by an unforgiving response.”
Edwards concludes by saying that with global stock market profits in a recession, it “explains why US bond yields might dive much lower”. He therefore remains overweight long government bonds and remarked: “Government bonds will become even more expensive on a 6-12 month view with an evaporation of confidence in the sustainability of the US recovery and/or a China hard landing (the former could occur with or without the latter).”
Source: Albert Edwards, Société Générale Cross Asset Research, May 3, 2012.
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