Albert Edwards interview:
His predictions of a market cliff edge aren’t popular, but the Socgen strategist stands by his Ice Age thesis, reports Tom Rees
The most bearish strategist in the world insists he is an optimist. Société Générale’s Albert Edwards has told investors to sell stocks every year since 1996. He believes the next market crash will wipe 80pc off the value of equities and that Mark Carney and the Federal Reserve’s policies will deepen the next financial crisis.
But he maintains that the doom and gloom goes against his natural inclination to be “happy” and “relaxed”. Edwards shows no immediate signs of being a crackpot in a tinfoil hat. Amid the streams of sharp-suited City workers, the notorious Socgen strategist is in khaki trousers, his wife’s pink glasses, a floral shirt and clutching an ancient Nokia brick phone.
We find a restaurant tucked away in the winding streets linking Liverpool Street on the edges of the Square Mile and tatty-bricked Shoreditch, an unlikely refuge for the potty-mouthed strategist who is battening down the hatches for the next market storm.
The City is run by optimists. Perma-bear Edwards admits that his predictions of the impending cliff edge in the equities market are “not very popular”. “If I’m right, we’re all going to have to retrain as basket weavers by the time we finish.”
He is being modest. Even after two decades of warning clients on the buoyant stock market, Edwards has carved out a revered role in the Square Mile. In June he topped the global strategy category in the 2018 Extel Survey of Analysts for a 15th consecutive year, a feat unmatched.
The defining idea of Edwards’s career is his infamous “Ice Age” thesis. Two decades on, the worst effects, he claims, are still brewing, but his grim warnings are starting to resonate. Edwards believes that Western markets will eventually follow Japan on the path of deflation and miserable growth it has been walking since the Nineties. With each economic cycle, inflation and growth will drop to a new lower level.
The West is sliding closer and closer to “outright deflation”, Edwards argues. “The US, for example, is at the end of the second longest economic cycle in history and core inflation is between 1.5pc and 2pc. If that’s the best you can get to after this massively long cycle, it begs the question what on earth will happen in the next recession.”
Inflation is “one decent recession away from dropping below zero in both the US and eurozone”, he argues.
When the Ice Age sweeps the West and financial markets freeze over, it could be even worse than in Japan, he warns. “When Japan was suffering this, the rest of the world was growing strongly.”
Like in Japan, government bond yields would sink towards zero while stock valuations collapse as equity and credit bubbles burst.
He proved correct on bonds but the stocks bull run has been stubbornly resilient – so far.
Despite Edwards’ somewhat outsider status in the Square Mile, his roots are deeply intertwined with it. He recalls taking the District Line as a child to the City of London school near Blackfriars where smoke was “belching out” of the Bankside Power Station, now the Tate Modern, across the Thames.
Born in Ravenscourt Park, west London, and raised near Kew Gardens, the strategist has never strayed too far from the nest. But Edwards has an “eclectic” background. He is of Armenian descent and a second-generation immigrant, his mother having been born in India and his father in Iran.
His career was kickstarted by one of the institutions that now regularly finds itself in his crosshairs: the Bank of England.
After a brief stint at the London Electricity Board – “the most useful job I ever did” – he moved to Threadneedle Street. Edwards spent three years in the Bank’s economics division “surrounded by very clever people, like David Miles, who was on the Monetary Policy Committee”.
A 20-year spell working on global strategy at Kleinwort followed, before 10 years as a “one-man band” at Socgen, the French banking giant.
But it’s the Bank of England where conversation repeatedly gravitates towards. His muesli is sodden after sitting neglected from an hour of Edwards ruthlessly picking apart Carney’s “ludicrous failed” attempts to stave off weak growth.
“The job of the central bank was when the party gets going you take
away the punch bowl to stop people doing stupid things. Both borrowers and lenders are getting so intoxicated with the current climate they are thinking that it will go on forever.”
Carney and former Fed chairmen Janet Yellen and Ben Bernanke have been “locking the door at the party and forcing people’s heads into the punch bowl”, he says.
Corporate debt, especially in the US and China, has ballooned from years of ultra-low borrowing rates. Moody’s has warned that a quarter of US companies saddled with debt could default within three years in a severe downturn.
“You see the IMF writing this stuff, you just think I’m not as mad as I fear.”
Quantitative easing (QE) – when central banks try to stimulate the economy by buying bonds to lower interest rates and push investors into riskier assets, such as stocks – has been credited with helping to turbocharge a sluggish recovery following the crisis.
Economists acknowledge that the emergency stimulus has inflated stock prices but Edwards believes that QE has “created a massive asset bubble” on the brink of popping.
A normal recession typically knocks 50pc off the stock market’s value. But Edwards warns that QE will amplify a crash. After enticing investors into stocks through several rounds of QE, the next recession will slash “75pc to 80pc off equities”, he predicts.
“That makes the recession much, much deeper, the whole thing starts to implode,” he predicts. “People thinking policymakers will sprinkle their magic powder on financial assets and we will remain up at these levels indefinitely is ludicrous.”
Edwards admits his role in the City is to try to “rip apart the consensus view”. If you are relying on your four-bed property in the suburbs for your retirement, Edwards has an equally grim prognosis of the UK’S housing market.
One of the most “damaging” widely held views out there is that a lack of supply caused the UK housing crisis, Edwards believes.
He says that it is not meagre supply keeping prices beyond the reach of younger generations but the “free money” of QE. Prices were also inflated by Help to Buy, implemented under “that moron” George Osborne.
“There’s a lot of stock there that could be just be dumped on to the market. Nothing engenders selling more than falling prices.”
Edwards’s ideas often seem mad before they come true. His dismissal of the explosive growth enjoyed by the “tiger economies” before the Asian financial crisis was an astute call. But rather than reminisce on past glories, he’s already looking towards the next crisis.
“Think of your most mad policy to dig us out of the next hole,” he asks. “In the next downturn there will be helicopter money, there will be monetisation, there will be negative interest rates, there will be devaluation, there will be anything you can think of to dig ourselves out.”
For now, he will have to wait to be vindicated. “I’ve been very lucky to create a franchise where I don’t have to be right in six months’ time,” he says.
Edwards adds that he prefers to be known as an uber-bear rather than a perma-bear. The latter implies that stocks will never whet his appetite but “valuation is key”. One day, he insists, he will turn positive.
‘I’ve been very lucky to create a franchise where I don’t have to be right in six months’ time’
Albert Edwards believes Western markets will eventually follow Japan on the path of deflation and miserable growth it has been walking since the Nineties