Albert Edwards: Expect a deflationary bust

Ever since the late 1990s, Albert Edwards has been warning that the West is heading for a repeat of the Japanese experience, with debt and deflation causing an “Ice Age” in equity markets and economies. It’s starting to look as though he may have a point.

Stocks have gone sideways since the late 1990s, and have got much cheaper. They will get much cheaper still, says Edwards in a Société Générale note, as investors have yet to twig that “we are only one short recession away” from deflation.

Most developed countries’ inflation rates are below 1.5% and the trend almost everywhere is down, notes Edwards. The US rebound is “already noticeably longer than average [and showing]… classic signs of old age, such as rapidly slowing productivity growth and stagnant corporate profits”.

It won’t be too long before the markets lose confidence in the economic recovery and “will no longer be able to ignore the lurking deflationary threat”. Rapid market moves would ensue.”

How will all this end? First, in a “deflationary bust”. But in the longer term, expect much, much higher inflation, as panicked central banks print yet more money in a vain attempt to escape the downturn.