Some pretty interesting thoughts here from Societe Generale on the economic “ice age”. This is what their analysts refer to as the period after a bubble bursting has occurred. They’ve used the same Japan analogy that I am fond of. Pretty pessimistic thoughts (more so than mine), but I think they’ve got the macro situation understood better than most:

“In the aftermath of last week’s stunningly weak economic data the market is now beginning to acknowledge that, without a further round of QE a relapse back into economic stagnation or recession surely beckons.

In the post-bubble world, economic downturns = the most dangerous phase in the cycle.  Both equity PE’s and government bond yields will make surprising new lows for a consensus totally convinced of extreme cheapness of equities and expensiveness of government bonds.

So, this week we revisit some of our old favourite “Ice Age charts” to see how far advanced we are in out post-bubble long march.  The one below shows the US de-rating in exactly the same way Japan did a decade earlier.

The ice age theme = in a world of very low inflation, equities de-rate both absolutely and relative to government bonds.  After equity valuations extremes seen during the 2000 bubble, we have entered a long valuation bear market which should end in extreme levels of cheapness consistent with an S&P around 400 and the unavoidable deep recession will drag an already “expensive” bond market to even higher levels.”

Sorry to ruin your pre-weekend with that delightfully bearish note.  If it makes you feel any better, I think S&P 400 is extreme to say the least, but then again, I foresaw the housing crash and didn’t think equities would decline to 666 so I’ve been wrong before….

Source: Societe Generale


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • JCR

    Cullen – thanks for your blog. It is truly an island of rationality in a sea of economic misinformation. I think SG is completely correct. I see us mirroring Japan for similar reasons, real estate bust, misguided government spending etc. As for the equity markets rallies, they will occur only when monetary or fiscal stimulus is applied much like Japan markets have responded in the context of a 20 year secular bear market. Americans still do not grasp the seismic consequences of whats occurring around them. 95% of Americans living standards are going to be adjusted downward no matter what the government does.

  • Cullen Roche

    I very much agree with the Japan thesis, but I don’t see the logic behind a market collapse. Could we be in for prolonged stagnation? Yes, and I’ve been predicting that for a long time now. But market collapse and collapse of corporate America? I just don’t see it. But you never know…if the situation in China, emerging markets and commodities got really ugly I’d have to change my tune pretty fast.

  • El Viejo

    My brother was managing a nice high rise apartment complex and finishing up his degree in economics. A bank CEO had a 2nd apartment there and they used to talk. My brother said in the Winter/Spring of 2008 that the S&P was headed to 600 and the CEO was offended and said, “You’re crazy.” turned on his heels and stormed off. It’s funny sometimes how you can be blinded by the trees. Americans will make it. We adapt. My mother studied for her real estate license back in the 70’s and finally got it just as interest rates went to 17%. She adapted and survived. We will too.

  • JCR

    I don’t think equities will crash tomorrow but will be a slow grinding process. Which will eventually catch up with declining economic fundamentals.

    1) Collapse of demand because of reduced standard of living.

    2) Non-productive financialization of our best and brightest.

    3) Poor stewardship from Washington

    Not pessimistic just a realist. Eventually things will turn around.

  • quark

    The discussion in the early phase after the 1990 Japanese market top and the beginning of the paralysis of the Japanese economy was the refusal of the Japanese to write off their debt. At the time (early 90’s) comparison were being made by economists and the financial media that the meaningful difference between Japans economic performance and the US’s economic performance post debt crisis can be found in Americans ability to quickly recognize debt rot and American industries and people’s determination to quickly write-off the bad debt which resulted in quick recoveries. This attitude existed despite the still smoldering remains of the S&L debacle.

    The US has lost its economic fortitude. We’ve already performed a postmortem on why our economy finds itself in the grip of deflation. Various forms of analysis is applied as to what the best path to take in order to extract ourselves from this vacuum. It is hard to find anyone that puts their face on Bloomberg, Fox Business, CNBC or countless blogs who state that the only real remedy is for bond holders to take a partial haircut or complete loss. This of course would mean that entities that derive their income from the streams of cash flow from debt also take a hit…the stock market would take a hit.

    Most of the financial analysts who invest other peoples money in order to collect a paycheck assure Americans that the stock market just needs the correct monetary and fiscal measures and it will inevitably go higher. Employment will recover albeit slowly, we just need more tax cuts and more unbalanced sacrifice between the social classes and all the debt will be paid down which will unshackle our country allowing for economic prosperity to trickle down once more.

    Of course this is all nonsense. The citizens of this nation simply are not made up of the same moral, ethical fiber nor the fortitude of those who lived through the great depression and that was but 2 generations ago from where I stand. My grandmother was in her 20’s during the depression and that generations fortitude was made through LIVING through sacrifice and degrees of austerity that would make the average citizen in this countries knees buckle. Much fanfare is made of the fiber of our countries citizens and our ability to pick ourselves up and dust ourselves off to fight another day…yet financial malfeasance is in nearly every industry of our economy, we are afraid to address nearly every important issue of our time because it may require too much sacrifice from this group of citizens or this industry.

    FORTITUDE and the WILL of a nation to endure hardship and bounce back with a stronger spirit and industriousness (is that a word) are the products of its people and the condition of our country speaks volumes to the absence of these two virtues.

  • Sojourner

    JCR – I agree 110%. Cullen does an outstanding job with this site

  • ES

    What I don’t understand is why everybody thinks QE2 is such a great thing. Did it really improve the economy? Let’s assume it did (at elast it looks like it imprvoed the stock market). So why not do Qe to infity if it is so good for stock market? What stops us (I ignore the politicians because they’ll be beggining for the next QE should stock market go down more than 20%)? Usually if something is too good to be true then it is. So, what is the dard side of QE whatis the payback if we continue you it for years to come?
    We’ve had interest rates at 0% for 3 years now, and will probably continue as is for another year or two. This is also unprecedented. In my mind this casuses misallocation of resources but the outcome will not be visible for years and years. And even then it won’t be catastrophic. Is QE like this as well? The paybck will be 20 years from now in the form of slower growth?

  • Cullen Roche

    Right. What I said back last year:

    The only thing scarier than QE not working is if it does work

  • Different Chris


    Would either of you agree that the potential for markets to avoid the slide this SG seems to be predicting is the currently unlikely announcement of QE3?

  • Different Chris

    Great post,

    Never underestime humans’ and more specifically Americans’ (among others’) resiliency to adapt and bounce back.

  • JCR

    See Cullen’s remarks below on QE2’s effectiveness

  • Different Chris

    I understand QE’s affect on the economy was thankfully nil, however, was question was more in regard to say, commodities markets.


  • Cullen Roche

    QE alters psychology which clearly influences trading, but ultimately, I think investors are learning to focus less on QE and more on the real economy. If QE3 were announced tomorrow we’d likely see a continued rise in commodity prices, continued margin crunch and weak economic data which would ultimately hurt stocks. QE didn’t do anything except cause a margin squeeze in the economy. Ultimately, stocks will yield to actual growth data and not just talking heads at the Fed who implement policy that does nothing real.

  • Different Chris


    Thanks! Your insights are always valued, and thanks for TPC, its an amazing resource.


  • El Viejo

    Japan has worse demographics than the U.S.(shrinking population with younger generation uninterested in marriage) We have an advantage there. Their culture of savers is also different (but changing) and that is hurting us now, but we may return to business as usual (tempered a bit) in a year or so.

    We may actually take some corrective actions down the road.

    Was it Winston Churchill that said, “Americans can always be counted on to do the right thing after they have exhausted all other possibilities.”

  • jeffc

    Two Questions:
    1. Why does the bond market not force long term yields upward and the US (or Japan who is 10 years ahead of US in terms of debt worries and public debt is greater than the US as a % of GDP) into austerity?

    2. If toxic debts held in the bank was written off what would realistically happen?
    I think we would see a number of banks and financial companies shut down and bondholders take a loss. And what would happen to yields, liquidity, home prices/inventory and stock market? I’m trying to get a sense if american’s have an appetite for this or if they might actually prefer the Japanese experience that our leaders are giving us?

  • Cullen Roche

    Bonds yields are a function of Fed policy.

    If the banks were all allowed to be exposed as bankrupt we’d likely have a real catastrophe on our hands….

  • JWG

    We already have a catastrophe on our hands. The question is how do you plan for, and deal with, the aftermath? Denial, phony asset marks and welfare for Wall Street aren’t working. We survived inflation, unemployment and treasury rates all in double digits in the late 1970s and early 1980s, and then the crash of the S&Ls in the late 1980s, because adults ultimately accepted reality and dealt with it. We are currently governed by the naive and the corrupt.

  • Octavio Richetta

    How about the Japanese? Do they have any less cojones than us?:-) I knew there was a reason their economy/equity market is in the dumps.

  • Octavio Richetta

    I wonder what CW is saying these days…

  • jeffc

    Ok I see my problem, I’m assuming treasuries have default risk premium.
    The treasury yield (~3%) = FFR + inflation + time premium + default premium
    – The FFR is approximately zero.
    – The time premium maybe less zero (given yield can be lower than inflation).
    – For a MMTer (and the market), the risk premium is effectively zero for US debt.
    – For a non-MMTer, the risk premium may “spike” if investors dump US bonds
    In fact, the only way the default premium would spike is if congress chose to default by not raising the debt ceiling.

    I’m concerned that a number of people have their savings invested in various securities (some with toxic exposure) and are ignorant to the risk. There is poor disclosure and mainstream media coverage of the “catastrophic” state of the banking sector. Something is very wrong here and this will not end well.

  • GordonGekko

    I am of the opinion that buying Japan and selling U.S (or the west in general) on an equal weighting could be the trade of the decade. I say this because Japan has a massive head start on the required debt deleveraging. I get the impression that Japan has bottomed by the way the Nikkei has shrugged off the recent disasters in Japan. Any thoughts?

  • Bottom Feeder


    I suspect you may be correct.

  • catsick

    A lot of the similarity between Japan and the US can indeed be explained by demographics, the Japanese bulge is 10 years ahead of the us, the propensity for people to spend is at its maximum in the mid to late forties but then sharply reduces heading into retirement, the japanese boom was exactly the same boomers hoovering up real estate as their earning power hit peak and their family situation required the most spending, they then and only then went into turbo saving mode ahead of retirement, and only now has the spending propensity reversed with the boomers drawing down on pensions so becoming net spenders again from about now. This is very unhealthy for the US, the demand for McMansions is basically gone and the country will become a net saver for some time to come, the government will be forced to pick up the slack. Japan is the canary in the mineshaft, Japan is only now going to start to recover as although the population will still fall the spending/saving dynamic will be much better going forwards, Japanese stocks are also insanely cheap now …

  • catsick

    As an example look at a company like mitsui , a 400 year old company that looks more like an emerging market portfolio of gas and mining interests as well as a host of other cash generating businesses spread across the world , They trade on a multiple of 3 times what they will earn this year before tax … They pay a lot of tax ( unlike global us companies who don’t feel the need to) so 5.5 times post tax earnings but generate massive cash flow from global business they reiterated the earthquake mess will have zero effect on them , in another 400 years they stand a better chance of being around than a groupon or linked in ….

  • JH

    A couple of points to consider…
    First China’s present economy and its growth are being supported by speculation in real estate much like the economy of the US prior to 2006.
    When China’s real estate bubble deflates as it is beginning to do, the economy in its present state will not be sustainable. The fact that the Chinese have never seen a recession before could cause quite a panic.

    The second point to consider is timing.
    Just suppose for a minute that the European crises snowballs by first a default in Greece, followed by 2 or 3 other PIGS; while at the same time China is experiencing their first capitalist recession. Now imagine some type of calamity in the derivatives market at roughly the same time.
    This scenario would make 2008 seem like a party, and the scary part is, it is a very possible chain of events.
    We will not even bring the chance of a Middle East crisis to the scenario because it just gets too ugly to think about.