Features

If these guys are right, the S&P 500 could fall below its 2008 low

The turmoil we've seen in the markets could be a taster of far worse things to come. So says investment guru Albert Edwards. Is he right? John Stepek investigates.

16-1-15-Trader-634

Earlier this week, I attended the annual SocGen bearfest.

Each year, SocGen's team of analysts, headed up by the (in)famously bearish Albert Edwards, present a rather gloomy prognosis for the global economy.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

You could tell that markets have had a rough start to the year. The venue in central London was mobbed. Attendance was at record levels.

And if the audience was hoping for any sort of reassurance well, they were bound to have gone home disappointed.

Advertisement
Advertisement - Article continues below

If this is correct, then the S&P 500 could be headed below 666

Edwards reckons that "the US equity market is in a valuation bear market that did not fully play itself out in March 2009, when the S&P touched the 666 level we will see new lows." He also reckons that the Federal Reserve's interest rate could fall as low as negative 5%.

The current shenanigans in China are just a sign that this is happening. China devalues, and exports deflation across the globe, alongside collapsing commodity prices. Countries become locked in a competitive devaluation spiral and we end up in a situation not far off the 1930s: "an outright deflationary bust accompanied by a trade war".

Meanwhile his colleague Andrew Lapthorne presented plenty of convincing evidence that US stocks are hugely overvalued where they are today. Not only that, but plenty of European stocks look expensive too, once you exclude the most distressed sectors.

But the star of this year's show the guest speaker was Russell Napier. Russell, one of MoneyWeek's favourite commentators and someone I suspect you'll be familiar with if you've been reading for long, talked about his biggest concern.

And it was a suitably scary one.

The coming boom in sovereign busts

Emerging markets are at risk of going bust as capital flees their shores. They've got too much dollar-denominated debt. Given the choice between servicing this or protecting the best interests of their populations by defaulting on it, there's no contest.

Advertisement
Advertisement - Article continues below

This in turn could cause a crisis, as that debt goes unpaid. Investors holding this emerging market debt (and there are a lot more of them these days) will panic, find they're unable to sell in an illiquid market, and will instead sell anything else that they can get their hands on. (Not unlike in 2008.)

Meanwhile, it could easily cause another banking crisis, specifically in the eurozone. Because European banks haven't fixed their balance sheets, and unlike US banks, they're still holding a lot of the worst rubbish around the planet.

There's a lot to agree with here. I agree that the strong US dollar is clearly a problem for many parts of the world. And I wouldn't be at all surprised to see an emerging market or several run into serious trouble this year.

When they do, it wouldn't be surprising to find out that most of that money is owed to the European banking sector. And when that happens, we'll see how well-organised the central bank response can be, and just how worried depositors will get when they realise that they can be bailed in' to bail out the banks.

But and here's the rub I also suspect that the Federal Reserve is keenly aware of all this. And I wonder how far it would let things slide before it sticks its oar in yet again. You might see an emerging market going bust. But how far back towards 666 would the S&P 500 have to slide before the Fed went into rate-cutting, money-printing, dollar-smashing overdrive?

As my colleague Cris said when we were discussing this: "What we should really be worried about is a situation that can't be resolved by a central bank somewhere saying here, have some money.'"

Advertisement
Advertisement - Article continues below

There are lots of those potential scenarios too. An obvious one is a resurgence in inflationary pressures. Spiking inflation could force central banks to raise interest rates regardless. And there are plenty of political situations that could cause problems that central banks couldn't paper over with more money.

Don't get me wrong. I'm not saying that any of this can't happen and we'll be keeping a close eye on all the indicators that it might be happening. I'm just saying that you shouldn't be sticking 100% of your money in cash and US Treasuries just yet.

In any case, Russell's suggestions for what to buy look pretty good to us he likes gold and Japanese equities among other things.

Enjoy our interview with Charlie earlier this week? Then watch this one now

interview with Charlie Morris

For now, you can watch the interview here online.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Visit/502393/the-us-economic-downturn-its-only-a-matter-of-time
Economy

The US economic downturn: it’s only a matter of time

With the US economy facing headwinds from trade wars to slowing global growth, talk of a recession is picking up.
22 Feb 2019

Most Popular

Visit/520478/central-banks-what-really-matters-for-markets-in-2020
Stock markets

Here’s what really matters for markets in 2020

The current geopolitical turmoil is making headlines. But it isn’t particularly significant for investors, says John Stepek. What matters more is how …
10 Jan 2020
Visit/520406/mindfulness-and-wellbeing-the-relentless-creepy-rise-of-the-enforced-happiness-industry
Investments

Mindfulness and wellbeing: the relentless, creepy rise of the enforced happiness industry

The evidence suggests we’ve never been richer or healthier, yet we are always being told how stressed and discontented we are. Jonathan Compton assess…
9 Jan 2020
Visit/520422/the-state-of-irans-feeble-economy
Economy

A look at the state of Iran’s feeble economy

The Islamic Republic is a big player in regional geopolitics, but its economy is weak, its people in revolt and its enemies growing bolder. Simon Wils…
11 Jan 2020
Visit/520113/uk-property-prices-are-in-the-doldrums
Property

UK property prices are in the doldrums

House prices barely rose in 2019. Good news, says Nicole Garcia Merida.
9 Jan 2020