When last we checked in on everyone’s favorite bear, SocGen’s Albert Edwards, he was taking aim at the mighty Rikshog and dragging FT’s Katie “Because Lines” Martin along for the ride.
You should maybe check that post out as it’s not only a hilarious trip down Riksbank memory lane (and as many of you know, that trip always includes a stop in Paul Krugman fantasy land), but is also particularly relevant given that Sweden just removed their easing bias in lockstep with perceived ECB hawkishness. For those inclined, here’s the post:
Well, Albert is back and needless to say, he’s got a thing or five to say about lackluster incoming inflation data in the US and how that fits with his infamous and enduring “Ice Age” thesis (a thesis which, you’re reminded, will never – ever – be proven wrong as long as Albert is alive to defend it and here’s hoping Albert lives forever).
Below, you can find the bullet point summary of his latest note (which you should read in full if you can get your hands on it), but for those interested in what we think is probably the most notable takeaway, have a look at the following chart which shows that in an era where everyone is obsessed with the extent to which central banks have or haven’t been successful at rescuing the world from the deflationary doldrums, the number of OECD counties undershooting a typical core CPI target of 2% are at an all-time high.
As Edwards notes, “this is quite amazing given where we are in the global economic cycle.”
Equities have risen to new all-time highs as weak US inflation data have reduced expectations of further Fed rate hikes. This has driven both bond yields and the dollar lower and in turn EM and commodity prices higher. But the trend might easily reverse as the second half of this year progresses. This might dampen the impact of recent compelling evidence that core CPI and wage inflation seem destined to remain curiously weak throughout the remainder of this cycle. But a far bigger question is how the recent equity highs sit with our Ice Age thesis – is it dead or just sleeping?
US core CPI and wage inflation have surprised on the downside for four successive months. Usually only two data points are sufficient for most of us to be able to draw a trend, but four data points surely provide clear evidence of the decisive re-emergence of a deflationary trend. At the very least this recent data is grounds for a dismissal of the argument that ‘end of cycle’ inflationary pressures might make a brief appearance, before the long-term deflationary secular trend reasserts itself in the next downturn.
If inflationary pressures are indeed ebbing in the US economy, this begs the question that if the third-longest cycle in US history cannot produce a cyclical uplift in wages and prices, what on earth will happen in the next recession! Investors might give some thought to the fact that we are now just one recession away from Japanese-style outright deflation!