Albert Edwards warns of return of the Ice Age

Society Generale uber-bear Albert Edwards holds a special place in markets. Anyone else making his dire predictions would long-ago have been flushed-away as a crack-pot. But it was Edwards who very successfully described the GFC in advance and coined some of its terminology, most pointedly the “Ice Age” thesis that Western economies were going to follow Japan into a long and destructive deflationary cycle. Well, he’s back:

Inflation expectations in the US have just followed the eurozone by plunging lower. Until very recently, the Fed and the ECB had been quite successful at keeping inflation expectations in their normal range – this despite their clear failure to control actual inflation itself, which has consistently undershot expectations. Investors are beginning to realise that contrary to their confident actions and assurances, the Fed and the ECB have failed to prevent a dreaded replay of Japan’s deflationary template a decade earlier in the West. The Ice Age is once again about to exert its frosty embrace on markets as investors wake up to a new and colder reality.

I’ve had a lot of requests of late to resend our Ice Age thesis. This is usually a good indication that we have again reached that point in the cycle where investors are willing to start valuing risk properly again. I will update readers with my full Ice Age thesis shortly…

There were two key parts to our Ice Age thesis. First, that the West would drift ever closer to outright deflation, following Japan’’s template a decade earlier. And second, financial markets would adjust in the same way as in Japan. Government bonds would re-rate in absolute and relative terms compared to equities, which would also de-rate in absolute terms. This would take many economic cycles to play out. Previous US equity valuation bear markets have taken 4-6 recessions to complete – we’ve only had two thus far.

Another associated element of the Ice Age we also saw in Japan is that with each cyclical upturn, equity investors have assumed with child-like innocence, that central banks have somehow ‘fixed’ the problem and we were back in a self-sustaining recovery. Those hopes would only be crushed as the next cyclical downturn took inflation, bond yields and equity valuations to new destructive lows. In the Ice Age, hope is the biggest enemy.

Investors must pay close attention to the (second most important) chart below. Investors are beginning to see how impotent the Fed and ECB’s efforts are to prevent deflation. And as the scales lift from their eyes, equity, credit and other risk assets trading at extraordinary high valuations will take their next giant Ice Age stride towards the final denouement.


In broad terms I agree, though it could well be thirty years in the making…

Houses and Holes
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    • migtronixMEMBER

      You’re an idiot, but its good to have Edwards back in the permabear plantation, now where’s Rosenberg?


      AUD is now a proxy for LNP economic management — do you really want to be left holding THAT bag?

    • These Solar Cycles are interesting. I note the view on population growth. Pickety when interviewed made mention of this and how the U.S was able to become a Superpower going from a population of around 30m to 300m now. There is little likelihood the U.S will head toward 500m in the years ahead. The effect this has as a constant source of demand growth and wealth accumulation at the top has been underestimated.

    • General Disarray

      I’m sure someone could dig up some astrological data that would also support this. 😉

      Better buy some crystals and adjust feng shui.

  1. It can be argued that the Japanese economic model is particularly unique (a collusive triumvirate between government, corporate titans, and the ubiquitous bureaucracy) compared to Western models and has only been replicated by Korea. The obvious difference between Japan and Western countries is cultural–the individual in Japan is mentally and psychologically disposed towards sacrifice for the greater good. Therefore, you do not seem civil disobedience towards the government at the same levels that you see in the West or even in other Asian countries. Secondly, Japanese corporations were never really designed to serve stockholders; they exist for the employee and keiretsu-type relationships. Arguably, they are the single biggest store of wealth in Japan. And finally, the Japanese superannuation model was never built on a model of buying equities (even though that has changed dramatically in recent times).
    If Edwards is correct and a slow melt is what will eventuate, it will have to be managed with a smokescreen that suggests that the status quo is all hunky dory and that people’s destinies have not been sold out from under them. Bitterness will seep through, but it will be much worse if people believe that they have been duped in any way,

    • migtronixMEMBER

      I think you’re pretty correct in the background there but for mine it just seems like Edwards and Bass are singing from the same hymn sheet now.

      JPY to the moon

      • JPY and select Japanese equities to the moon I guess. To their credit, their industrial and infrastructure achievements are in demand all across Asia. While we have all been talking about how great we are with our special relationship with China, Japanese corporates have been laying down roots wherever they can. OK, it might not be in the Chinese juggernaut, but their presence is well established across Asia. Even the Mitsuis of the world have our mining sector by the gonads.

    • That is true, in fact one could argue Japan is actually more socialist in nature than China. But that reflects their social structure – hence their saying The nail that sticks out gets hammered down. But to imply that there is no close collusion between the industrial elite in France, Germany and northern Italy and their respective Governments not being a feature of their economic models, is in fact incorrect.

      In France, top public servants regularly leave government to run often quasi-nationalist corporations for a number of years, before returning public service. In Germany governments of all persuasions take industry views and structure their economy decisions to champion national (industrial) heavy-weights (e.g. even left leaning Schroeder engaged harsh labour deregulation to regain international competitiveness). In Italy, companies are encouraged to keep separate books for their shareholders, pay as little corporate tax as possible (which in effect, is a state subsidy).

      In fact when the EU were complaining to Ireland about its low corporate tax rate, Eire made the point that effective tax rates (after subsidies, research grants, fixed pricing, accelerated depreciation. etc) for domestically domiciled French and German companies is between 10 and 11%, respectively. After which they then told the French and Germans to jump…

      The way that Europeans do business to us is in fact, very different.

      • Well if they hadn’t, they would be here now… although rumour is they want to float their RBS stake soon.

      • Yes, it is fair to say that these models exists everywhere. They are all unique in the manner in which they operate. And in many ways, they all operate under their own cultural paradigms.

      • The Irish has sworn and cursed before using the British royal vocabulary at ease only to be bombed
        out of their home turf criket ground, unfortunately history is not on the Irish side as when the tough
        gets going, they tend to leave their country behind. They should be thankful they had the opportunity
        to re-build for a while leading upto 2008, the country was in an awful state prior that.