SocGen’s Albert Edwards is dreaming of Stephanie Kelton.
In a Thursday note that’s even more colorful than usual, Edwards admits there are perils to reading work-related material just prior to dozing off.
It would be impossible for me to do the opening paragraph of Albert’s latest justice by paraphrasing it, so I’ll just let him set the stage for you. To wit:
The reading of work-related articles last thing at night, propped up in bed, is finally getting to me. I actually dreamed about MMT last night after reading a Lunch with the FT interview with one of MMT’s highest profile advocates, Stephanie Kelton. Then as a final nightcap I read an article for and against MMT with Kelton as proponent and Edward Chancellor opposing. Later, I dreamed that helicopter money was being delivered by Kelton around the US, not by helicopter, but in a long goods train. It was quite sinister though as the train looked a lot like the armoured train Strelnikov used in my favourite film, Dr Zhivago.
The latter FT piece Edwards references is the same article I cited earlier this week while discussing the coming deluge of Treasury issuance. Anyone who missed the discussion is strongly encouraged to read more in “As US Gears Up To Borrow $3 Trillion In 3 Months, Here’s The Truth On Government Spending.”
Readers know which side of this fence I personally fall on, but regulars are also aware of my affinity for Edwards, which I imagine will remain unshakable irrespective of how divergent our views happen to be on any given subject.
And yet, in this case, I doubt if our assessment of the near- to medium-term outlook is all that different. Albert has, of course, been vindicated over the longer-run in his “Ice Age” thesis, and I expect he’s correct in his view that we’re in for a brush with outright deflation stateside before Progressive policies, higher spending and the wholesale abandonment of austerity in developed economies eventually ushers in the return of inflation, albeit of the subdued variety.
After regaling readers with the tale of Kelton’s money train (which doesn’t have a happy ending in Albert’s nightmares), Edwards moves on to detail what he describes as “ludicrous current equity valuations”.
He flags a “ubiquitous” chart of an ever-rising forward multiple, which math dictates will continue its ascent as long as profit expectations continue to collapse as the fallout from the virus containment measures becomes more clear. Below, he plots the 12-month forward multiple with analysts’ expectations for long-term EPS growth.
Those of you familiar with Albert’s work likely know where this is headed. It harkens back to a January note (and many notes previous) which asked if analysts are set to throw in the towel on reverse engineering their Buy ratings.
Clearly, if long-term EPS estimates collapse, it means the PEG ratio is going to explode. And explode it has.
With long-term estimates now below 10% (a trend Edwards says is “likely to accelerate during the current profits slump”), the PEG ratio “has risen above 2x for the first time ever”.
What you see in the left pane above “is even more shocking than a 20x PE!”, Albert marvels.
He then proceeds to deliver a truly amusing passage which one can only describe as “vintage Edwards”. Again, trying to paraphrase this risks diluting the potency, so I’ll just administer it directly into readers’ veins at full strength. Here’s Albert:
Compare the current situation with the late 1990s tech bubble. Then too the S&P forward PE rose above 20x, but at least back then the cycle was still intact, and as technology stocks increasingly dominated the index, the market’s LT eps was also surging higher in tandem with the rising PE. At least back then the market had a LT eps leg to stand on albeit a wooden leg, riddled with woodworm. By contrast, this time around, despite technology stocks once again dominating the index, the 20x PE is based on nothing more than an ideological dream.
He’s still got it, that’s for sure.
As far as bedtime reading goes, the Kelton money train dream has forced Edwards to rethink his routine. “I’m not sure what to make of all this except that at bedtime I’m going back to reading my favourite author, Marian Keyes with my cocoa instead”, he says.