Investing and economics: Following the Japanese script

Posted: May 2, 2013 in economy
Tags: , ,

ALBERT Edwards has been plugging his ice age thesis since the late 1990s, that economies are doomed to slide into a deflationary squeeze and that equities are doomed to de-rate relative to bonds. Mind you, he does think we are nearing the end-game. In his latest note (he’s at Societe Generale now, having been at Dresdner Kleinwort in the past) he writes thatwith core inflation of only 1% we are only one short recession away from outright deflation. Hence we see US 10 year yields converging to Japanese-style sub-1% levels. This event will of course generate extreme central bank QE hyperactivity and despite our short-term cyclical bullishness (retaining a maximum overweight bond position) we remain of the view that on a 3-5 year time horizon bonds will prove to be a toxic investment and rapid inflation is the likely longer term outcome.Edwards highlights the recent decline in copper prices as a sign that the deflationary pace is quickening, and also points to a slowdown in the core inflation rate in the US. Mind you, he also argues that unit labour costs are rising faster than core prices and will squeeze profit margins; the latest data (see chart) suggest they’ve fallen back again. 

Nevertheless, equities look the odd one out at the moment, given falling bond yields and commodity prices. Edwards warns thatWith the backdrop of virtually unlimited QE, we still meet …

via Economic Crisis


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