SocGen's Edwards says S&P 500 headed towards 550 points

The US Federal Reserve was unable to help the US economy with its programme of printing money, but it certainly did inflate global asset prices into the stratosphere, and that is now about to come back to haunt it, Societe Generale strategist Albert Edwards believes.

In what Edwards termed as his Ice Age thesis, the valuation-bear market in US equities did not play itself out fully in 2009, but now it would, sending the S&P 500 below the lows hit back then, at 666 points.

Valuation-bear markets - which take the Shiller or cyclically adjusted price-to-earnings multiple to seven - play out over many economic cycles, he explained.

If he was right, the S&P 500 would fall to 550 points - for a 75% decline from its recent peak at 2,100 - he told clients in a research report published on 13 January.

To ward off that risk the Fed will use every weapon at its disposal, including a "deeply negative" Fed funds rate of -5% on top of more QE, he said.

"Now I realise most people think I am talking utter garbage but I’m used to that. And maybe I am! But the truth will come out in the next recession which may be pretty close now."

All of the above dynamics are reflected in the recent devaluation of the Chinese currency, the renminbi (often referred to as the yuan), Edwards wrote in his weekly strategy report.

"It means global deflation and recession. The coming carnage is an indirect result of the failure of the Fed’s QE. It may not have done much to boost US growth, but it certainly inflated global asset prices into the stratosphere."

The boost to economic growth in emerging markets, the commodity bubble and the US shale 'boom' which resulted were all part and parcel of unsuccessful US QE but very effective emerging market QE, as EM economies surged on the back of easy financing, the strategist said.

"The illusion of prosperity is shattered as boom now turns to bust."

"But unlike 2007, this time around the US and Europe sit on the precipice of outright deflation. Indeed, it is all around us. But don’t expect the central bankers to comprehend the hole they now find themselves in."