Tags: stocks | crash | ice age | Albert Edwards

Strategist Albert Edwards: The Coming Economic Ice Age

Wednesday, 13 Nov 2013 12:45 PM

By Michael Kling

Societe Generale strategist Albert Edwards has long argued that global deflationary pressures will prompt stocks to crash.

His "ice age" hypothesis is becoming more reasonable, according to The Wall Street Journal.

"Mr. Edwards first came up with his Ice Age thesis back in late 1996, as he saw Japan-style market dynamics, first boom and then bust and deflation, infecting other developed markets," writes Alen Mattich for The Wall Street Journal. "Maybe he’s right."

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U.S. inflation is at 1.2 percent, well below the Federal Reserve's target. Eurozone inflation has been falling and was at 0.7 percent in October, prompting the European Central Bank to lower a key interest rate. Switzerland and Sweden are approaching outright deflation, and Japan has yet to reach its inflation target despite the Bank of Japan's stimulus.

"Deflation matters," warns Mattich. "It creates a nasty dynamic in countries suffering with high levels of debt. Falling prices increase the real value of outstanding loans, making it harder for people to pay them off. It further hampers domestic demand by encouraging people to delay purchases: it’ll be cheaper tomorrow."

Deflation puts downward pressure on assets. In Japan, which suffered a decade of deflation, equity and property values have fallen.

Bond yields in the U.S. have remained low because markets are pricing in continued low inflation, rather than a return to normal economic growth.

"Equity investors might choose to ignore the implications, but deflation could be around the corner," he warns.

Economists are starting to realize that aging populations may be a major deflation-causing factor. If they are, Japan will struggle to meet its inflation goal, and European countries like Germany and Italy face deflation danger.

In fact, the entire world will face a long-term deflation threat as the number of children in developing countries stabilizes, Mattich predicts.

Edwards is a well-known perennial bear.

He recently warned about disaster in the eurozone due to high unemployment and falling inflation.

“This is playing out in a very similar way to Japan in the early 1990s,” said Edwards, according to The Telegraph. “All it needs now is an unexpected recession and Europe will slide into outright deflation. The risk is a trade shock from Asia. That is when the markets will start to panic."

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