According to Albert Edwards, the king of gloom and doom, the U.S. Fed has already waited way too long to pull the trigger on a rate hike. He argues that to delay the Fed rate hike cycle any longer is the height of folly, as it will just exacerbate the current financial excesses and worsen the nearly inevitable looming global recession.
In his September 10th report for Societe Generale's Cross Asset Research, Edwards says: "...even those like me who see a deflationary bust awaiting think the Fed should hike next week – because the longer you leave it, the bigger the financial market excesses become, and the bigger the risk of financial dislocation and global recession ensuing. Have we learned nothing from the 2008 Great Recession? Just get on with it!"
Quantitative tightening sapping EM economic growth
Much has been said over the last few years on the topic of quantitative easing (extraordinary methods of providing liquidity to an economy) as both the U.S. and the EU have undertaken QE programs to support/stimulate economic growth. Edwards points out how the expanding FX reserves seen in emerging markets until recently are really just another form of QE, and argues the ongoing decline in EM currency reserves is in effect a monetary tightening that will negatively impact global growth.
Following Charles Gave of Gavekal, Edwards notes that this drawdown in EM currency reserves is in effect "quantitative tightening" (QT), and that if EMs continue to defend their currency and spend their FX reserves, already weak EM economic growth is going to drop to recessionary levels.
Edwards explains his perspective: "My own view is that the main impact of QT will be to slow foundering economies still further via a monetary tightening if EM authorities do chose to continue to defend their exchange rates"
Edwards says China likely to continue yuan devaluation given Fed rate hike
Despite the statement from Chinese Premier Li at Davos recently that the country is not in the process of devaluing the yuan, Edwards argues further devaluation of the Chinese currency is pretty much inevitable as the economy loses steam due to QT and the looming Fed rate hike.
He notes: "Many commentators seem to still believe that Chinese policymakers will “do the right thing” and not engage in competitive devaluation. Personally I believe China will have no choice given they have (prematurely...?) opened the capital account in their bid to be included by the IMF in the SDR basket so that the renminbi will be used more as an international reserve currency."
