Grudgingly self-professed “permabear” Albert Edwards of Societe Generale is at it again. In his February 6th report, Edwards says that the global deflation malaise infecting Japan, Europe and elsewhere will soon be coming to the U.S. Moreover, when it becomes clear that the the global economy is stuck in no-growth mode, he says that “the global equity markets will be ripped to smithereens in the next economic downturn which will, once again, show that the central banks have inflated another massive unstable financial bubble.”
Albert Edwards “Ice Age” thesis
Edwards has been advancing his “Ice Age” thesis for some time now, and the argument has two key strands. First, that government bonds would “re-rate in absolute terms and relative to equities.” The second strand of the arrument is that equities will also de-rate in absolute terms.
He notes that we are now three-quarters of the way in to his Ice Age. “The Ice Age thesis called for the Japanisation of the western markets and as far as the eurozone is concerned, most commentators would now accept we are there in terms of the economic, inflation and bond market outcomes. It will soon be obvious that the US only lags a few small steps behind.”
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Negative bond yields in the eurozone
The Societe Generale report highlights that the biggest surprise lately has has been the collapse in eurozone debt yield, especially German bond yields. Edwards looks back at a chart he made back in Sept 2006 where he argued that German 10 year bond yields, then at 4%, would be below zero by summer 2012. He notes: “That forecast proved premature and we have a little way to go yet – although we are already negative on the 10y in Switzerland.”
Deflation coming to U.S. soon
Albert Edwards says the other shoe is still to drop, and it might happen soon when investors start to notice the U.S. deflation threat is just as real as that in the eurozone.
He says take a look at core CPI inflation rather than the oil-inspired negative headline rates for overall CPI. Taking things one step further, he says investors have been “reassured that U.S. core CPI inflation is running well above that in the eurozone (1.6% vs 0.6%)”, but that U.S. inflation really a mirage.
Edwards goes on to note that 32% of total U.S. CPI and 41% of core CPI is made up of the “shelter component”, where prices have been moving up for the past year to now run at 2.9% yoy (see chart)”. He argues this shelter component has been preventing U.S core CPI from falling off sharply like it has in Europe.