The SocGen strategist Albert Edwards is saying he still sees the S&P 500 going to 400 (it’s currently at 1325 as of 5/26/11) and bond yields going to new lows. His 400 S&P forecast with sub 2% US bond yields — is the equity markets enjoying yet another Fed induced mega-rally and many are looking for explanations for the continued low level of global bond yields with many expecting new lows in bond yields.

Recent weaker-than-expected economic data around the world concur with our analysis that the current downturn in the change in analyst optimism is suggestive of weaker economic data just around the corner. For many, much of this weakness is explained by temporary component supply problems in Japan slowing production (especially autos) around the world and to an extent there is surely some merit in this argument.

But this analysis reminds me too much of commentators who blamed the collapse in the global economy towards the end of 2008 on the bankruptcy of Lehman’s in mid September of that year. To be sure this made a very bad situation much worse. But make no mistake; the US economy was already in deep recession by the time Lehman’s went bankrupt.

Many think I am mad. But I am not the only commentator expecting a “Deflationary Bust” – the sort of bust that will take the S&P down to 400 from the current 1325. I recently watched John Authers of the FT Lex and Long View columns interview Russell Napier, formally of CSLA and a leading stock market historian. Russell’s views are as interesting as ever and well worth 11 minutes of watching time. His views are similar to mine, although he articulates his thoughts far more clearly than I.

Where I diverge slightly from Russell is that the world he describes sounds pretty recessionary to me. Clearly the “S&P Falling to 400” destroys household balance sheets and consumption anew and EM liquidity tightening could causes hard landings. In China, for example, a recent calculation showed FX intervention accounted for around one half of the country’s runaway money supply which has helped propel the boom). My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury Yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.

He links to John Authers’ recent interview with market historian Russell Napier, who also sees the S&P 500 going to 400. In a nutshell, Napier thinks inflation-fighting emerging markets are going to have hard landings that reverberate around the world.

This may seem extreme, but there’s a case to be made that such a downdraft is always possible in the aftermath of bursting “Credit Bubbles“, when economic recoveries are slow and fragile and tensions are high.

Tags: Albert Edwards, Balance Sheets, Bankruptcy, Bond Yields, Credit Bubbles, Deep Recession, Deflationary Bust, Economic Data, Economic Recoveries, Emerging Markets, Fed, Fundamentals, Hard Landing, Lehman Brothers, Liquidity, Market Historian, Mega Rally, Printing Presses, Recession, Russell Napier, S&P 500, S&P Falling to 400, SocGen Strategist, Tea-Party, The Great Reset, Treasuries, US Bond Yields, US Economy, US Treasury Debt, US Treasury Yields

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