Albert Edwards: winter is coming to the markets

US markets are heading for a collapse that could put the long-term future of the global financial system in danger, says Societe Generale’s Albert Edwards.

Wrap up warm - a financial storm is coming

© 2012 Bloomberg Finance LP

The cover story in this week's MoneyWeek magazine focuses on whether the US bull market and economic expansion can continue. One person who has a strong opinion on this is Albert Edwards, head of global strategy at Societe Generale.

Many strategists like to play it safe, limiting themselves to safe predictions and minor portfolio tweaks, but Edwards is well known for his bold, contrarian calls. We recently talked to him about his outlook for the US economy and why he thinks that "we are in the late autumn of the economic cycle".

Advertisement - Article continues below

"Nearly every Federal Reserve rate-hiking cycle has ended in recessions" says Edwards, and this time is unlikely to be any different: "When the good times are rolling, people tend to ignore risk, creating problems when the cycle turns".

The build-up of credit is a dangerous levels

So it is not surprising that "excess levels of credit have been allowed to build up" in the US economy by some measures, US firms are more indebted now that they were in 2008. The International Monetary Fund released a report in April 2017 suggesting that 20% of American firms were at risk of default and bankruptcy if interest rates were to increase significantly.

Of course, "using credit to elongate the business cycle inevitably makes the downturn worse", so "when the collapse comes, it will be much deeper".

Advertisement - Article continues below

Any recession "could be as bad as the one that took place in 2008" says Edwards, and could include "a huge amount of unemployment" as well as a collapse in US house prices, which have recovered and are making new highs. We shouldn't expect a quick recovery, either: after all, "when the Japanese bubble burst in 1990 it took many business cycles to fix".

Advertisement - Article continues below

Another thing that should worry investors are the high valuation levels, especially in the US, "which are currently detached from reality". This means that equities could end up suffering from a double blow of both falling earnings and lower price/earnings ratios, which could fall into single digits. From discussions with his colleague Andrew Lapathorne, Edwards thinks that the stockmarket could crash by as much as 70%, rather than the 50%-60% fall that happened during the Great Financial Crisis.

A crash will spread far beyond US markets

Of course, it won't just be the US that is affected since "entities around the entire world are likely to suffer". A stockmarket crash could put the long-term future of the global financial system in danger.

Because of the rapid post-2009 recovery, policymakers and central bankers "largely got away with it", and escaped blame for their actions in the run up to the crisis. But now, with populist politicians either in power or on the verge of office, this is unlikely to happen again, so we should expect to see central bankers bear the brunt of any criticism this time it is even possible that we could see the end of independent central banking.

Advertisement - Article continues below

Certainly, low interest rates and high levels of money printing mean that the major central banks "have already lost a lot of their credibility".

How to position your portfolio

If such a meltdown does take place, then the immediate beneficiaries are likely to be traditional safe havens such as gold, cash and government bonds. Indeed, bonds in particular could benefit from both their safe-haven status and also from any "race to the bottom" in terms of money printing.

If you don't want to abandon shares, then Edwards recommends Japan as one of the few developed countries where companies have taken advantage of cheap money to get their house in order and reduce their level of the corporate debt. Japan's investment in robotics has resulted in higher productivity, despite its unfavourable demographics.

It also might be worth taking a look at emerging markets. While they will inevitably get caught up in any global downturn, many of them have much lower levels of corporate debt. Thanks to recent price declines, they also "start from a much lower level". Taking these factors into account it is possible that there could even be a few potential bargains, especially if prices fall further.

However, one country that you should definitely avoid is China. This is because it is suffering from "a massive credit bubble", that is arguably far worse than the one in the United States.




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

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular


These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020