Central banks have done it again, says Societe Generale's Albert Edwards. Led by the Federal Reserve, they "have created the conditions for another debacle every bit as large as the 2008 Global Financial Crisis".
Just as they kept interest rates far too low for too long in the mid-2000s, causing the credit bubble and inevitable bust, today's "negligently loose" monetary policy, this time with zero interest rates and money printing, has had scant impact on growth, even as it has "inflated global asset prices into the stratosphere". Now the bubbles are bursting but unlike in 2007, "this time America and Europe sit on the precipice of outright deflation".
China's weak economy, along with the capital pouring out of the country, are putting strong downward pressure on the yuan. The resulting devaluation will "transmit a massive deflationary shock to the West" via lower import prices. Some bulls say that while US manufacturing may be ailing, services are holding up fine. But history shows that, when a recession looms, "it is almost always the manufacturing sector that takes the less volatile services sector by the hand and leads it into a recessionary underworld".
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The renewed plunge into global recession implies a collapse in US-led global markets. Since the late 1990s, Edwards has been worried that the US and Europe were following Japan into deflation and stagnation: his "Ice Age" thesis. In stockmarket terms, this implies a gradual fall in valuations to historic lows.
In this context, reckons Edwards, the post-2000 bear market has unfinished business, because the S&P 500's cyclically adjusted price/earnings ratio never fell below seven, a typical level for the bottom of long-term bear markets. It only fell to 13 in March 2009. A fall from today's 26 to seven implies an S&P 500 at 550. Think that's impossible? Most people thought the same about the 2008 crisis.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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