It takes a lot to surprise economist Albert Edwards, the bearish co-head of global strategy at Société Générale, aka SocGen, France’s third-largest bank.
However, the man who made a name for himself warning about a market crash seems surprised at the way the stock market is just ignoring the economic shock of covid-19.
Edwards predicts that within the next couple of months, the U.S. is “going into outright deflation with core CPI (consumer price index) inflation year-on-year going negative,” he said in an interview with Swiss publication Finanz und Wirtschaft.
After the short-lived stock market plunge in March, Edwards said “it was quite amazing to see how the S&P broke through important levels. Up until 3,000 points it looked like the usual recovery rally we see after this kind of setback. But now I am really becoming surprised. And believe me, it does need a lot to surprise me doing my job for 37 years. I admit that I often get it wrong, but I struggle to fit this into my view.”
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Edwards‘ view that the U.S. will see negative interest rates and a deflationary bust soon is not shared by the stock market.
He’s is not alone. Many believe that deflation is imminent despite the trillions of dollars continuing to pour into the U.S. economy, target-date fund manager Ronald Surz wrote for Seeking Alpha. Surz wrote that he thinks “serious inflation lies in our future, but we will probably see a little deflation first.”
“Both headline and core (consumer price index) inflation will go negative,” Edwards said. “I know the discussion that both supply and demand side got a hit but the recent data shows that the core CPI will fall below zero. In March CPI fell 0.4, it was only the fifth month of decline for the first time since the 1980s. That’s huge. My calculation is that we see another couple of months like that and then we see deflation.”
If there is deflation, expect a currency war, Edwards predicts. “A currency war will be part of fighting a deflationary bust, especially in the U.S. Nobody wants to have a strong currency. Switzerland has been one of the leaders in this war but now others will join, acting much more aggressively.”
In the event of a deflationary bust, policy makers may be forced to print even more money. “Short-term, this is an environment where bond yields go even more negative and is it also is favorable for gold and gold mining stocks,” Edwards said.
All but two causes — austerity and decrease in the money supply — are currently in play, so deflation is a real possibility, wrote Surz, who hosts the Baby Boomer Investing Show. “But we see several of these causes diminishing through time, giving way to inflationary forces,” he wrote.
Edwards predicts that the Fed will introduce negative interest rates within the next six months. “Ahead of the U.S. presidential election, we will see aggressive actions,” he said. “In the next months it will be clear that the economy is slipping into deflation. As soon as this is acknowledged, the strong dollar will no longer be acceptable. Currently the dollar is 35 percent overvalued versus the Euro and 55 percent over the yen. This is tolerable while the U.S. has a much stronger economy and inflation than anybody else. It is absolutely intolerable now as the U.S. slips into deflation.”
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Negative interest rates will be counterproductive because of the impact on banks and investments, but the No. 1 priority is to avoid deflation, Edwards said — “not to protect the banking sector and the money market mutual funds.”
He predicts that Trump will become more aggressive in his reaction to weakness in the U.S. economy, and a trade war with Europe is likely.
Read the full Edwards interview here.