Albert Edwards, the investment strategist at Societe Generale who is famously bearish on stocks, said global equity markets “will be blown to smithereens” in the next recession as another asset bubble created by central banks collapses.
He said U.S. economic growth is sputtering and that inflation data are misleadingly optimistic compared with the way Europe measures changes in the price of goods and services.
“The market is far too convinced that the U.S. is in the spring of its economic recovery, whereas I believe we could well be in the autumn,” Edwards said in a February 5 report obtained
by MoneyNews. “Our Ice Age theme has now almost fully played out in the bond market.”
His Ice Age thesis, first described in 1996, argued that stocks will collapse and bond values will climb because of global deflation, or a decline in the price of goods and services, as seen in Japan after its economic bubble burst in the early 1990s. Deflation is problematic when it indicates a slowing economy and makes paying off debt more difficult.
He said U.S. deflation is being disguised in the way the country measures changes in rent prices. The euro zone method of calculating inflation excludes shelter costs. Applying European measurements to the U.S. shows that prices have fallen about 0.3 percent from six months earlier, according to Societe Generale.
The core consumer price index, which doesn’t include changes in energy and food prices, rose 1.6 percent in December from a year earlier, according to the U.S. Bureau of Labor Statistics. Because of the collapse in oil prices, CPI including food and energy advanced only 0.7 percent.
Edwards predicts that the bond bull market will march forward as investors seek yields in a deflationary environment. That will push the U.S. 10-year Treasury yield to less than 1 percent from about 1.8 percent currently, while stocks will collapse to less than the 2009 lows, he said.
“Our perma-bull bond call is now reaching its zenith, but we still expect one final shoe to drop,” Edwards said. “The scales will soon lift from the market’s eyes.”
Nouriel Roubini, an economics professor at New York University, said deflationary pressures will persist because of an overabundance of goods, such as commodities.
"Simply put, we live in a world in which there is too much supply and too little demand," he said in an article for Project Syndicate. "The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing."
Central bank efforts to spur economic growth by easing interest rates are useless without temporary government stimulus, he said.
"The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation," Roubini said. "This, however, is a zero-sum game that merely exports deflation and recession to other economies."
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