Albert Edwards admits that his “über bear” reputation is well deserved, at least with respect to equities, an asset class he has dismissed for the last 10 years. His bearishness has not abated, and for the coming year, he fears that “deflation will overwhelm the west.”

Markets, he said, will riot.

Edwards is the chief global strategist for Société Générale and he spoke at that firm’s annual global strategy conference in London on January 13. Andrew Lathrope, the firm’s head of global quantitative strategy, and Dr. Marc Faber, the publisher of the Gloom Boom & Doom Report, also spoke.

Global markets face three risks, according to Edwards: bearishness in the U.S. government bond market, a flawed confidence that the U.S. is in a self-sustaining recovery and undue faith in the relationship between quantitative easing (QE) and the equity markets.

Deflation is the main threat, though, according to Edwards. “This is the year the markets really panic about deflation. You haven’t had that panic yet.”

Edwards said that U.S. equities are “stuck in a secular-valuation bear market” and have been inflated by QE. Though he did not predict a recession, he said stocks would react very negatively if one were to happen.

“The market embraces a recession by going to a new lower low on valuations,” he said.

He offset that pessimism with a bullish view on the U.S. bond market. He said the 10-year yield could go below 1% and “converge on what is happening in Japan.”

“Markets move on extreme surprises,” Edwards said, “and when expectations are so firmly held and they are shown not to be the case, you get these extreme moves.”

Let’s look at some of the candidates for surprises that Edwards identified and the path he expects major economies to follow.

Albert Edwards’ three big risks

The net short position on the U.S. 10-year bonds is at a very high level, Edwards said, similar to the level at the beginning of 2014.

Edwards predicted an “extreme move down in yields” even if those bearish views are “justified fundamentally” – meaning if the U.S. economy were to significantly weaken.

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