"I have been wrong," Albert Edwards, the uber-gloomy Socit Gnrale analyst, apologised last month. "I've been too bullish."
"Equity bears are now an endangered species," says Edwards, "just as they were in 2007". Edwards has long warned that America is set for a 'Japanese-style' lost decade but with stock markets now ticking up, he feels like "the last bear standing".
Thanks to "the sweet scent of optimism acting like a most potent aphrodisiac" most investors "reject the comparison with Japan". Especially since "bountiful Ben Bernanke" launched QE2. Yet Edwards is sticking to his guns. If anything, he worries that he "might have been too bullish".
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Japan's lost decade, which turned into two lost decades, followed the collapse of an unsustainable bubble in asset prices in 1991. This caused a crisis in the banking sector, which the Government tried to solve by bailing out insolvent institutions it felt were too big to fail. Sound familiar?
Edwards had thought that favourable demographics might help the US escape the worse effects of its own banking crisis. But he is "no longer as optimistic as I was". The problem is that while America's total number of workers is rising, it is doing so more slowly than the number of retirees. The US actually has fewer workers as a proportion of the population than Japan a situation that won't change until 2030.
How will this affect asset prices? Well, "as the former baby-boomers start to retire, this burgeoning cohort will tend to liquidate assets (sell shares etc)" which will force down the price. America's increasing workforce will probably push up the GDP, but "asset price inflation may be more closely related to the proportion of workers in the general population" which is going down.
"This means that Bernanke for all his efforts may not be able to prevent the secular valuation bear market fully playing out until rock bottom valuations are reached."
