- Albert Edwards, the global strategist at Societe Generale, says he is convinced that the Ice Age theory he has promoted since the 1990s will soon hit the US.
- His theory stipulates that a wave of deflation would pummel long-term bond yields towards zero and send stocks tumbling in tandem.
- In a recent note to clients, Edwards explained why he doesn’t foresee a jump in inflation any time soon, and the impact that the next recession would have on stocks and bonds.
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It takes a certain brand of persistence to maintain the same prediction for two decades and counting.
In his latest missive, Edwards says he’s "more confident than ever" that the next phase of his long-touted Ice Age theory will soon befall the US. His thesis, formulated in the 1990s, stipulates that deflation will grip US and European markets, sending long-term bond yields towards zero and triggering the collapse of stock prices. This scenario would be similar to what happened in Japan after the country’s credit bubble burst in the late 1980s.
For proof that his thesis is already taking hold, Edwards points to the negative 10-year-bond rates that were recently seen in some European countries including Germany. He’s now warning that US investors should brace for the same, as well as a corresponding slump in stocks.
"Most commentators now accept the Japanification of mainland Europe has occurred, but they just cannot conceive that the same thing might happen with the US," Edwards said in a note on Tuesday.
He continued: "My biggest conviction call is that US 10y bond yields will converge with Japanese and German yields in the next recession at around minus 1% (and US 30y year yields will fall to zero or below) and that markets will panic as outright deflation takes an icy grip."
Edwards is not known to be shy about taking wildly contrarian views. Even as he calls for sharply lower US Treasury yields, Wall Street heavyweights including JPMorgan CEO Jamie Dimon and DoubleLine Capital CEO Jeffrey Gundlach are vocal about the opposite: a sudden jump in interest rates.
For Edwards, one of the ingredients that would trigger such a spike — inflation — is simply nowhere to be found, and the Federal Reserve is not worried about its imminent return. Moreover, wage growth appears to have ended the breakneck increases it recorded last year, and oil prices are having a muted effect on headline inflation.
With the climate for the so-called Ice Age in place, Edwards sees US stocks soon following the Japanese 10-year yield lower, based on their historical relationship.
"One of my favorite charts shows Japan leading the US in terms of the equity de-rating relative to 10y bonds," Edwards said. "I believe the pop in equities vs bonds (in the circle below) is temporary."
In his view, the slump in stocks will resemble the dotcom bust of the early 2000s. Growth companies with lofty valuations will be "exposed" as deeply tied to the whims of the global economy when the next recession hits, he said.
"Those who believe that in the next recession more QE (or indeed MMT/helicopter money, etc.) can keep US equity valuations from collapsing relative to bonds are living in a state of deluded optimism in my opinion," Edwards said.
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