Albert Edwards Revisits The S&P 400, Still Sees Deflation To Hyperinflation

Zero Hedge

« Many think I am mad. But I am not the only commentator expecting a deflationary bust – the sort of bust that will take the S&P down to 400 from the current 1300. I recently watched John Authers of the FT Lex and Long View columns interview Russell Napier, formally of CSLA and a leading stockmarket historian. Russell’s views are as interesting as ever and well worth 11 minutes of watching time. His views are similar to mine, although he articulates his thoughts far more clearly than I – Long View: Historian sees S&P fall to 400 – 16 May. »

 » Where I diverge slightly from Russell is that the world he describes sounds pretty recessionary to me. Clearly the S&P falling to 400 destroys household balance sheets and consumption anew. And EM liquidity tightening could causes hard landings. In China, for example, a recent calculation showed FX intervention accounted for around one half of the country’s runaway money supply which has helped propel the boom). My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins. « 

« But despite the cyclical slowdown in the US reducing inflation expectations, China’s inflation problems should not be ignored. To the extent that the Fed’s QE1&2 is driving Chinese CPI inflation upwards (and the CPI measure severely understates wider Chinese inflation with the GDP deflator running closer to 10% yoy), it is coming back into the US via higher US import prices of Chinese goods which is in turn impacting core inflation. »

Albert’s conclusions:

« We expect a global deflationary bust to reverse the clear inflationary pressures building from monetary debauchment around the world – more so EM than developed. If as last year we see a severe economic slowdown unfolding around the turn in the year, this could rekindle geopolitical tensions as the US is currently suffering a record seasonally adjusted (Datastream measure) trade deficit with China, disguised for the moment by favourable seasonal effects (see charts below). But from June onwards record reported deficits will increase trade tension sharply, especially if as last year we get US growth spluttering badly as QE draws to a close. »


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