Societe Generale's notoriously bearish strategist shot down the 'ludicrous' idea that stocks will boom in the coming recession

• Albert Edwards, the notoriously bearish Societe Generale strategist, is warning investors not to rely on equities as a definite way of avoiding losses during the impending recession, calling such suggestions "ludicrous."
• "Many equity bulls think it is inevitable that massive central bank liquidity will boost equity prices. This strikes me as ludicrous."
• Central banks have pumped unprecedented amounts of stimulus into markets in recent weeks, aimed at helping prop them up during the coronavirus crisis.
• Edwards expects bonds to do better than equities during this downturn.
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Albert Edwards, the notoriously bearish Societe Generale strategist, is warning investors not to rely on equities as a definite way of avoiding losses during the impending recession, calling such suggestions "ludicrous."

Edwards, chief strategist at the French bank, said in research note on Thursday: "Many equity bulls think it is inevitable that massive central bank liquidity will boost equity prices," referring to the unprecedented measures unleashed in recent weeks.

"This strikes me a ludicrous."

He said: "Equities are a cyclical risk asset just like commodities, and they are driven by fundamentals and liquidity, just like commodities. And both usually slump in deep recessions just like this one."

He added: "Over the past few years many clients have been sympathetic to my warnings of a deep deflationary recession and they also agreed this would prompt a monetary and fiscal tidal wave of easing the like of which has never been witnessed before. Quite a few though remained bullish on equities purely because of the likely magnitude of the policy response."

Instead Edwards expects investors to take the ultimate flight to safety with much money to flow into government bonds.

"The collapse in profits is highly likely to fatally undermine the argument that equities can look through the valley. I expect instead ample liquidity to flow into government bonds. But watch commodity prices closely: they should tell us when it is finally safe to rotate back into corporate risk assets. But that time is not now," he said.

Why quantitative easing won't help equities

The Fed has engaged in a number of policy measures aimed at boosting liquidity, and at minimizing the economic impact from the novelty coronavirus pandemic.

Edwards said: "Many equity bulls think it is inevitable that massive central bank liquidity will boost equity prices. This strikes me a ludicrous. As we saw with industrial commodity prices between 2012-2016, when the fundamentals turn against any risk asset, it struggles — despite ample QE at the time."

Central banks for the G-7 nations bought $1.4 trillion of assets in March, five times higher than what as spent during the financial crisis, to shore up the economies.

The Federal Reserve bought more than $1.1 trillion after announcing unlimited purchase plans for US treasuries and corporate debt.

Coronavirus has wiped out millions of jobs, and brought major economies to a standstill.

Jobless claims published on Thursday, showed 4.4 million Americans filed for unemployment benefits the first time last week.

Citi warned on Wednesday that stocks have more to fall during the coronavirus and before that Goldman Sachs' top strategist Peter Oppenheimer voiced similar concerns that equities have rallied too sharply.

Edwards added: "This deep recession, albeit triggered by the Covid-19 pandemic, has catalyzed exactly the policy response we expected — just more quickly.

"It is a major mistake though to believe that the liquidity central banks are hosing into the markets is somehow compelled to flow into any particular risk asset unlike direct central bank purchases."

"Liquidity will flow into whatever momentum trade emerges as the winner. "