S&P to hit 450 with U.S. worse than 'lost' Japan: strategist

WASHINGTON (MarketWatch) -- A noted bearish strategist said Thursday that the S&P 500 will tumble to 450 because conditions in the U.S. are "much, much worse" than during the lost decade in Japan.

As the market debates whether bond prices are in bubble territory, Societe Generale's London-based strategist Albert Edwards said bond markets are at least moving to discount deflation but that sell-side strategists still say the current situation in the U.S. is unlike Japan a decade ago, when the now-third-largest economy suffered through a prolonged no-growth period.

"There is still too much hope about. Until the mantra changes from 'Equities for the long term' to 'Bonds at any price,' we will not have completed our Ice Age journey," he said in predicting the S&P 500 /quotes/comstock/21z!i1:inx (SPX 1,048, -7.76, -0.74%) would tumble to 450 -- from 1,055 at the close on Wednesday.

Edwards noted that the total return of U.S. long bonds over the S&P is over 20 percentage points this year. (The chart at right shows yields, which move inversely to prices.)

"The structural bear market has not reached the end. We have long said that the de-bubbling process would end only when equities became very cheap and revulsion in equities as an asset class hangs in the air like a fog," he said.

He forecast that yields on 10-year Treasury bonds /quotes/comstock/20m!i:tnx (TNX 24.99, -0.39, -1.54%) would fall to the 1.5%-to-2% range and that German 10-year bonds would break below 1.5% while U.K. government-bond yields would fall below 2%. The U.S. 10-year was yielding 2.55% Thursday morning, the German 10-year bund 2.14% and the U.K. 10-year gilt 2.87%.

Edwards also noted that the Cleveland Fed's alternative measure of core CPI shows that core inflation is evaporating far faster than the original measure suggested.

"So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the nationwide manufacturing ISM slides below 50 into recession territory in coming months," he said. "Indeed the new-orders data for August, already reported in regional ISMs, suggest the equity market is going to get some sentiment-crushing data in the very near term."

Steve Goldstein is MarketWatch's Washington bureau chief.