Societe Generale’s Albert Edwards, who has made his name as a perma-bear predicting financial doom for well over a decade, had a chance to air some of his grievances yesterday at the bank’s annual January conference in London, reports Katie Martin for The Wall Street Journal. Even though most analysts disagree with his gloomy stance, his opinion carries enough weight that he was able to fill the room in Paris and packed in close to 500 journalists for a press conference in London (an astounding number for someone unknown to the general public).
“People listen to me a little bit less when equities are going up,” said Edwards “One way to deal with that is to bang the table more aggressively and become even more bearish. The other is to tell more jokes.”
QE didn’t support commodities forever
But his fears of the long-term damage from qualitative easing are serious. He argues in a new research report that, just as people assumed QE would always be supportive of commodities prices, they think it will always be supportive of equities: if the first proves to be false, how can the market be so convinced of the second?
“The market has firmly got it into its head that QE will always be good news for equities. So if the economy swoons (maybe due to excessive monetary tightening either via tapering or a strong dollar), equities will look through any short-term disappointment as more QE will save the day. Investors see bad economic news as good news for equities,” Edwards wrote in preparation for his talk.
Edwards is far from the only analyst worried about how the Fed can get us out of the QE Trap, or what damage might be done to the economy in the meantime.
Next recession could trigger deflation
Edwards also thinks that we are close to falling into a deflationary trap, “sitting on the edge of a cliff,” as he puts it. “Markets remain stoic about the risks of outright deflation in the US and eurozone for one very simple reason – they simply do not believe a recession that would trigger outright deflation is on the horizon.”
While inflation may have leveled out in the US over the last year, it is still falling in the Eurozone, and a huge portion of developed economies have inflation rates under 2%. The consensus, that these problems will recede as the economy recovers, may turn out to be true, but in the meantime you can expect Edwards to keep banging on the table.