In the most recent installment of looming trial and tribulation from Societe Generale’s Albert Edwards, the Prince of Doom and Gloom argues that the Bank of Japan is likely to boost its QE program again soon, leading to a collapse in the yen and a rout in emerging market currencies. Edwards also suggests that continuing anemic U.S. inflation means the economy remains stuck in neutral.
Even though the sky is not falling yet, according to Albert Edwards’ October 7th Global Strategy Weekly, there are good reasons to expect it might fall tomorrow or the next day: “The first was more soggy Japanese economic data which suggests that the BoJ may soon hit the QE button even harder. That would trigger a renewed slide in the yen and another round of Asian currency turmoil – plus ça change! But, secondly and perhaps more important is increasing evidence of a loss of confidence that the Fed is actually in control. Ignore for a moment the stock market’s celebration of weaker than expected payrolls. Instead investors should focus on the rapid decline in US inflation expectations since the Fed meeting – even now converging to dire eurozone levels!”
Albert Edwards says Japan-style deflation is on the horizon for U.S. and Europe
Edwards argues that Japan is at a crucial crossroads. Given nearly all of the recent economic data on the Japanese economy have been disturbingly weak, most analysts are now expect the BoJ to notably boost its QE program (QQE as it is known in Japan, having thrown in qualitative with their quantitative easing).
According to Albert Edwards, “all this money printing will ultimately end in tears.” That said, Edwards also remains positive on the Nikkei stock index. He points out that Japan’s massive QQE (several times that of the Fed and ECB) means that Japan should easily win the upcoming currency race to the bottom. Furthermore, when the yen starts dropping, you will almost certainly see emerging currency weakness crank back up, causing U.S. and European inflation to remain mired around 1% or less.
U.S economy looking more and more like Japan in 1990s
In his discussion of the U.S. economy, Edwards points to the continuing decline in US break-even inflation expectations. The measure for five year expectations, over five years time, has now moved well below the January low, and the spread compared to the Eurozone is now just 20bp versus 60bp last October. The SG analyst argues that “investors are signalling to us that they don’t believe the Fed is in control anymore. The Fed by contrast is brushing aside the market’s deflation concerns. It all feels very much like Japan circa 1995 in the wake of the yen’s then surge.”