Albert Edwards: I was wrong, I was too optimistic!
'Shocking slump' into outright deflation
Fed should begin to tighten interest rates
Société Générale's bearish analyst Albert Edwards has said the mounting evidence which suggests inflation has already slid into deflation will result in the US 10-year treasury yields converging with Japan and Germany at around -1%, and the next recession will be deeper than even he previously thought.
Permabear Edwards (pictured) said if one looks at core Consumer Price Index (CPI) inflation then it highlights a "shocking slump" into outright deflation over the past six months.
Despite this, however, the analyst said the Federal Reserve should still begin to normalise interest rates in order to accommodate for the next inevitable recession.
He said: " If I were a Fed Governor I would be pretty shocked/concerned/bemused at inflation developments this year."
However confident the Fed is of a self-sustaining-recovery, there is growing evidence of a slide into outright deflation.
"Deflation did not need another US recession to emerge. It is already here. The longer the current credit excesses are allowed to continue, the deeper the next recession and deflationary bust will ultimately be."
The permabear went on to say the current tight US labour market would normally produce an upturn in wage and CPI inflation instead of the deflationary pressures which have been occurring.
Edwards said he originally believed this uptick in wage and CPI inflation would cause the Fed to raise rates which would end in a surprise recession.
However, he said: "This is exactly what I expected to occur at the start of this year and I thought it would be that recession that would tip the US into outright deflation but I was wrong. I was too optimistic!
"Although wages have accelerated due to the tight labour market, the last six months has seen consistent downside surprises."
Furthermore, Edwards' said his prediction of a mid-1990s Japan-style crash occurring in the West will come to pass, despite the "best efforts" of policymakers.
"In the mid-1990s I witnessed first-hand the hubris of Western commentators who claimed that Japan's post-bubble slide into deflation was a one-off example," he said.
"My former colleague and Japan guru, Peter Tasker, and I came to the conclusion that hubris of Western commentators would turn to nemesis.
"Japan's post-bubble experience of sluggish economic growth was due to debt retrenchment followed seamlessly by deteriorating demographics.
"We felt both factors would also combine to push the West into a similar deflationary bust, despite the best efforts of policymakers."
Despite this, however, the analyst said the Federal Reserve should still begin to normalise interest rates in order to accommodate for the next inevitable recession.
He said: " If I were a Fed Governor I would be pretty shocked/concerned/bemused at inflation developments this year."
However confident the Fed is of a self-sustaining-recovery, there is growing evidence of a slide into outright deflation.
"Deflation did not need another US recession to emerge. It is already here. The longer the current credit excesses are allowed to continue, the deeper the next recession and deflationary bust will ultimately be."
The permabear went on to say the current tight US labour market would normally produce an upturn in wage and CPI inflation instead of the deflationary pressures which have been occurring.
Edwards said he originally believed this uptick in wage and CPI inflation would cause the Fed to raise rates which would end in a surprise recession.
However, he said: "This is exactly what I expected to occur at the start of this year and I thought it would be that recession that would tip the US into outright deflation but I was wrong. I was too optimistic!
"Although wages have accelerated due to the tight labour market, the last six months has seen consistent downside surprises."
The permabear said he still expects his Ice Age thesis, which has predicts US and European 10-year bond yields will converge with Japan, to occur with the "downward crash in US yields likely to be particularly shocking".
"In the mid-1990s I witnessed first-hand the hubris of Western commentators who claimed that Japan's post-bubble slide into deflation was a one-off example," he said.
"My former colleague and Japan guru, Peter Tasker, and I came to the conclusion that hubris of Western commentators would turn to nemesis.
"Japan's post-bubble experience of sluggish economic growth was due to debt retrenchment followed seamlessly by deteriorating demographics.
"We felt both factors would also combine to push the West into a similar deflationary bust, despite the best efforts of policymakers."
