Deflationary quicksand… We will all end up Japanese… Collapsing houses of cards…
Yes, it’s another missive from SocGen’s perma-bear Albert Edwards, who on Thursday developed some recent riffs on deflation a tad further:
…although our deflationary arguments are gaining some traction in the bond market, investors have yet to fully acknowledge we are now walking on the deflationary quicksand that will inevitably suck us towards total fiscal and financial ruin – you ain’t seen nothing yet. With core inflation rates now sub-1% in the eurozone and the US, we are only one recession away from Japanese-style deflation.
Albert thinks recession will return by the end of the year, but that’s not the main issue. The real problem is that private-sector de-leveraging has barely begun, Edwards says, especially if you strip out the efforts made by financials — see chart (click to enlarge):
Although one wonders what Edwards, economist at a eurozone bank, thinks of Willem Buiter’s argument that the kings of leverage are… uh… eurozone banks.
Edwards argues that we already face a ‘stinking fiscal mess’ because of all this de-leveraging. This will end up on central banks’ desks, leaving them to print money:
Recent fiscal tightening will hasten the speed of our descent into this quagmire. The market reaction to the acknowledgement of that fact is likely to be unprecedented in its savagery. The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant. The super-inflationary end result will become obvious to all.
But wait! There is a challenger to all this obviousness.
Step forward Ian Harwood, Evolution Securities’ chief economist, who has set out a bullish case based on exactly the same data Edwards has been using in support of his deflationista views.
For example, Edwards has pointed to the slump in the ECRI weekly leading index. But according to Harwood (emphasis in original):
This, of course, is all grist for the bears. The ECRI weekly index, however, is primarily driven by financial market components. Other US composite leading indicators such as those of the Conference Board and OECD have a much wider range of components, with real economy inputs dominating. For this reason, I reckon that these leading indicators are more reliable. And, interestingly, these broader-based indicators continue to look robust. For example, the most recent Conference Board Leading Index, that for May, rose by 0.4% mom, and the previously-reported -0.1% April decline was revised away.
While on recent US housing sales data, the two economists are like chalk and cheese.
Here’s Edwards’ view:
The latest dreadful housing sales data in the US indicate just how dependent this sector has been on steroids as well for any sort of recovery. Withdraw the stimulus and down comes the house of cards. But even before the latest appalling data it has been clear from the slide in the weekly data on new mortgages for home purchases that there has been no underlying recovery in the critical housing sector.
And Harwood’s:
Another source of grist for the bears is the recent US home sales data… Housing, however, was never going to be a source of US growth. Rather, the US housing sector is a deflated asset price/ economic bubble, and a lengthy period of consolidation – to judge by the experience of similar phenomena elsewhere – is in prospect. Crucially, however, other elements of US aggregate demand – whether exports, business investment or consumption – look set to keep improving.
Never mind grist for the bears (or bulls), this is grist for the social constructivists.
Related links:
Japan, Deflation and Mortgage convexity – Macro Man
Sunny side up – FT Alphaville
XXL liquidity and a side of inflation, says MOST – FT Alphaville
The loss of central bank credibility, the coming inflation – by MOST – FT Alphaville