Back in February, after surviving an earthquake and narrowly dodging a tsunami in Jamaica, SocGen’s Albert Edwards returned safely to work, and promptly predicted that “The Ice Age” (his long-standing thesis describing western markets’ date with deflation) was near its end.
We are, he said, on the verge of transitioning to “The Great Melt”, which will be catalyzed by the adoption of helicopter money across the developed world.
Before we get there, though, Edwards said there may be one final phase of “The Ice Age”, which he called “The Great Meltdown“.
Read more: Albert Edwards: The Ice Age Is Nearing The End (Because Helicopter Money Is Coming)
“Notwithstanding short-term market gyrations, I am now more convinced than ever before that the coming deflationary bust will take the US 30-year yield below zero”, he said, adding that “helicopter money will be the chosen way out of this deflationary quagmire, especially as it becomes increasingly clear that there is now no way left to reverse every government’s exploding fiscal liabilities”.
Over the next five weeks, US 30-year yields proceeded to tumble more than 100bps as Wuhan’s problem became the world’s problem and financial markets were plunged into chaos.
The subsequent policy response was unprecedented in a number of ways, not least of which was that the pandemic brought us closer than ever to overt monetary financing. Indeed, central banks have made no secret of the fact that they are enabling fiscal policy with expanded asset purchase programs.
In effect, the pandemic collapse brought forward the final stage of “The Ice Age”. One might argue “The Great Meltdown” played out over a matter of just three months. Sure enough, it was accompanied by a stock market crash, deflation in the US and what might as well be the adoption of Modern Monetary Theory.
Edwards takes all of this up again in his latest weekly. The first thing you should note is that he has little doubt about the state of the policy panic and what’s coming next in that regard. To wit:
This economic bust is so serious and so deflationary that policymakers felt they had no choice but to cross the policy Rubicon. In The Great Melt there will never be any serious attempt to reverse policy stimulus. Indeed we will see more and more stimulus until the deflationary ice melts.
As you can imagine, Albert noticed that core CPI in the US fell a third month for the first time ever in May.
“Previously even a single sighting of a 0.1% MoM decline in core CPI was as rare as hen’s teeth”, he writes. “US core CPI has now slumped into deflation and the markets will find this a most difficult crevasse to bridge”.
On a YoY basis, core declined to just 1.2% last month, the slowest pace in nearly a decade, and just half of where we were in February.
Edwards notes that “excluding imputed Owner Equivalent Rent (OER is not included in the eurozone measure) this comparable measure is rising only 0.4% YoY and falling sharply on a 6-month basis”.
(SocGen)
This will be familiar to those who follow Edwards’s work. “High OER inflation (which tends to mirror actual rent inflation) has held up core CPI” for years, he reminds you.
He also takes note of the disparity between consumer expectations for inflation in the US (which are rising) and “delivered” inflation, which is plunging. As noted here on Wednesday, this is attributable in part to the fact that, during the lockdown, Americans weren’t engaging in economic activity in the areas where prices have plunged. They were, however, shopping for groceries (food at home prices have surged) and reading dire-sounding headlines about meat shortages tied to shutdowns at processing facilities.
In any case, Albert goes on to say that “the slump in inflation feeds into the core” of “The Ice Age” thesis and has implications for stocks as well.
“Nominal GDP growth will slow further and drag down analyst forecasts of long-term EPS growth, which are already weighed down by the ongoing profits collapse”, he says, before warning that falling core CPI stateside is ushering in the Japanification of US nominal growth on top of an economy that is weighed down by debt.
(SocGen)
If the projection in the left pane is correct, it will not bode well for long-term earnings, and that, in turn, could prompt a reality check for what Albert continues to decry as “nose-bleed expensive” PEG ratios (right pane).
None of that means he doesn’t still believe the “The Great Melt” is coming. Rather, he simply thinks “The Great Meltdown” has a while longer to run.
“Massive monetary stimulus is combining with frenzied fiscal pump-priming in an attempt to paper over the current slump”, he says. “But before markets can properly embrace ‘The Great Melt’, they first need to comprehend the new normal: deflation has arrived”.
Albert has framed it very well, and the recent deflationary numbers speak for themselves. I’ve yet to hear a single credible theory on exactly how the consumer is supposed to pull the economy — or the markets — out of that trap. All of these companies have to sell their products to someone, and yet that most basic point somehow never seems to be taken very seriously.
(knock, knock) Who’s there? It’s the Fed, here to buy your “products”.
I admit to not studying the various arguments on inflation very closely. As far as I recall, they are something like:
+ US govt doing MMT in deed if not in word (yet)
– Money not getting lent or spent so velocity low
+ Deglobalization so product costs rise
– Weak consumer so product prices fall
+ Small companies fail, share concentrated in large companies so pricing power
Am I missing a major argument?
In the near term, weak demand seems like it trumps everything else, which I guess is Albert’s point.
:trumps”? Is that a pun?
Nice summary!
So, what does one invest in when the meltdown occurs? Interest rates go negative, no fixed income safety—corporate profits decline, no stocks?
Gold! Gold! Gold!
Actually, that may be slender. I don’t know where Albert Edwards stands on Gold. But I note that, in 2008/2009, he expected the S&P to go to 666 (a number that got to have been chosen for effect).
Needless to say, we didn’t go there.
It’s a looong time to wait for being right about Equities. Obviously, the one thing we should all have done is follow his advice 30 years ago and load up on T-bonds.
Interesting read and comments, as always. March 6, 2009 low on the .SPX was 666.79.
Ah, Thanks for correcting me. Hadn’t realised it went that low…
Real estate? Visa or Mastercard (since credit card interest rates will always be high)? Payday loan companies (with even higher interest rates to fleece the poor)?
Visa and MasterCard are processors, so their revenues are on transactions not interest on carried balances…
I’ve been following Edwards writing for 10-12 years. I’m still not entirely sure about what his Ice Age theory is/was.
The general idea of Japanification is fine. I don’t have a problem with ‘becoming Japan’.
But let’s be frank – we’re not experiencing deflation b/c of anything he foresaw. It’s a consequence of a pandemic. You might have said we were bound to have one one day (there were enough warnings, SARS, MERS, Ebola etc.) but it’s definitely nothing to do with fiscal/monetary policies.
As to the idea that MMT would mechanically lead to inflation… Well, only if the fiscal/monetary authorities screw up and don’t keep a close eye on money velocity etc.
Money is an illusion. It’s the sum total of our ability to mobilize (and distribute!) our real resources – land, people, machinery, assets, technology etc.
Right now, for political reasons, the people who would consume don’t have enough money to do so and those whose needs are so satisfied they can’t consume anymore keep on accumulating most of the cash/wealth.
MMT/deficit monetization seems to me to be a way to bypass the political reforms/the debate around redistribution – as long as the wealthy keeps their wealth frozen in assets (whose value might be rising but doesn’t generate more consumption), the government can engage in monetizing the debt it incurs to sustain the middle and lower class consumption capabilities.
The pandemic was a mere catalyst we were already trending in that direction.
I don’t think we actually expected a demand shock per se in 2020 or 2021.
Were we bound to get deflation in the next standard recession? Sure, possibly. But low level deflation isn’t anything to be afraid if it is provoked by 1- technology or 2- a passing, shallow demand shock. It’s just the reverse image of low level inflation.
The supporting arc to our whole economic system is mass consumption. When the masses are tapped out and can’t consume, things get dicey. It’s not exactly a surprise. And the solution is pretty obvious but politically unpopular b/c you can always spin pre-distribution or redistribution as “unfair”
I have to agree with A Pi. If you can’t get inflation up where you want it then you are trending towards deflation. The concentration of so much wealth in so few hands kills the accelerating consumption of the masses that is needed for inflation. The great economic engine of American capitalism has been slowly grinding to a halt. There is so much economic energy in infrastructure spending that a vibrant economy would have addressed it long ago.
So I believe we’re saying the same thing?
i agree, and with respect to this point by Fred in particulr: Right now, for political reasons, the people who would consume don’t have enough money to do so and those whose needs are so satisfied they can’t consume anymore keep on accumulating most of the cash/wealth.
Thanks!
To be fair, Albert has laid out The Ice Age thesis in hundreds of notes over the years, and in exhaustive detail. Here is one quick summary from late last summer when bond yields were busy plunging: https://heisenbergreport.com/2019/09/05/albert-edwards-reprises-famous-ice-age-thesis-after-cold-summer-for-critics/
There are a lot of things you can say about Edwards, but one of them certainly is not that he hasn’t fleshed out this thesis. It defines his entire career, to a certain extent.
Hi, dear host and thanks for replying with a link.
I think i had read it at the time and read it again and I still don’t understand his projections for PE at 7x and rising equity yield.
He says that’s what had/has happened in Japan and QE is responsible for the difference. One, maybe but being wrong is kind of important here as it suggests your underlying theory is faulty.
Two, attributing the difference between Japan and US equities to QE seem slightly bizarre since 2a- isn’t Japan doing lots of QE too? And, 2b, aren’t we expecting QE to be part of why bond yields have been crushed?
As I said, I’ve read Edwards, I certainly wish I had been in a position to follow his advice in ’96 (I was in my last year at uni. so…) and I understand he’s been right on bond yield getting slammed down, below zero in many cases.
But I think he’s wrong as to why (as I can’t seem to determine his ‘why’). Mine is simple – wealth extraction by a tiny minority that freezes consumption, compounded by a monetary authority forced to act in place of the fiscal authorities for a good 30 years and the unintended consequences of that (as you yourself have demonstrated, financial engineering by companies and attendant rising inequality).
Basically, for me, everything is due to rising inequality. The circuitry can be complex but the root cause isn’t. If Edwards has something (demographics, aging, technological shocks, lack of technological shocks, whatever), I haven’t identified it yet.
I am also not at all clear what this means or what to do to get ahead of this if indeed it is to occur similar to what is proposed.