Albert Edwards, global strategist, Societe Generale
One of the main justifications for the bull market in shares since 2009 has been the idea that “There Is No Alternative” (Tina), due to the fact that government and corporate bond yields have been kept so low by central banks over the years, notes Albert Edwards of Societe Generale. This notion that high equity valuations can be justified by low bond yields – in essence, that dividend yields on stocks should typically be lower than yields on bonds – took hold in the 1980s and 1990s, during which period it was indeed a “very stable and useful” valuation measure.
However, says Edwards, there’s a big problem with “Tina” theory today – “in a deflationary environment, equities should be cheap relative to bonds, which is exactly what happened in Japan. It is also the backdrop that presided in the US right up until the early 1950s – up until that point, dividend yields had always been higher than bond yields”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This is a key pillar of Edwards’ “Ice Age” theory – the idea that bond yields will continue to fall and turn negative across the globe, even in the US. What could be the trigger? “The huge build-up of US corporate debt is the Achilles heel of the US economy,” says Edwards. This mountain of overvalued debt leaves the economy very vulnerable to any disruption. “Companies that are already likely [to be] struggling with the profit-crushing effects of the coronavirus will see a cascade of defaults and bankruptcies and the economy will be plunged into a deep deflationary recession.”
