Albert Edwards: Yen Collapse Will Lead To "New Round Of Currency Turmoil", Deflation In US And EurozoneSubmitted by Tyler Durden on 06/02/2015 10:55 -0400
One look at FX trading this morning and all one can see is surging volatility and, for lack of a better word, turmoil. Which is precisely what Albert Edwards said would happen in his latest note overnight (released just as the USDJPY briefly breached 125) in which he observes that the Yen has now fully broken its 30-year support and predicts that "a new round of currency turmoil" is beginning.
"With US GDP growth ‘officially’ back where it belongs, in the Arctic zone close to freezing on the surface but much worse in real life, for reasons both Albert Edwards and Ambrose Evans-Pritchard (not exactly a pair of Siamese twins) remarked this week; that is, excluding the 'biggest inventory build in history, the economy contracted sharply', it’s time for everyone to at long last change the angle from which they view the world, if not the color of their glasses."
"The Q1 US GDP data was a major disappointment to the market as business investment declined due to the intensifying US profits recession. Only the biggest inventory build in history stopped the economy subsiding into a recessionary quagmire. The US economy is struggling and the Fed will ultimately re-engage the QE spigot. Talk is growing that China will soon be doing the same as local authorities struggle to issue debt. But this week we want to focus on Japan, having just made my fist visit to that fine nation for over a decade! Japan, the third largest economy in the world, is also in trouble (see chart below) and will soon be increasing its off-the-scale QE programme to an out-of-this-world QE programme." - Albert Edwards
"The downside risk would be to have broad-based outflows if the macro story deteriorates further or the stock exchange collapses, which would create a confidence crisis,” one analyst tells Bloomberg, as capital continues to flow out of China. The country faces accelerating capital outflows, a looming economic downturn, and an epic stock market bubble, and ironically, efforts to combat the latter two problems are very likely to exacerbate the former.
UK debt has continued to rise throughout the recovery and has soared to an eye-watering £1.48 trillion. In recent days, a slew of foreign exchange analysts have warned that the pound is vulnerable to falling in value. The incumbent government have not reined in public and trade deficits and have been accused of juicing the property market and the economy to postpone a crisis until after the election.
A five sigma event signifies extreme conditions, or an extremely rare occurrence. To bring this discussion from sports and weather to the financial world, we can relate a 5 sigma event to the stock market. Since 1975 the largest annual S&P 500 gain and loss were 34% and -38% respectively. A 5 sigma move would equate to an annual gain or loss of 91%. With a grasp of the rarity of a 5 sigma occurrence, let us now consider the yield spread, or difference, in bond yields between Germany and The United States. As shown in graph #1 below German ten year bunds yield 0.19% (19 one-hundredths of one percent) and the U.S. ten year note yields 1.92%, resulting in a 1.73% yield spread. This is the widest that spread has been in 30 years.
"Some highly respected market commentators, most recently Ray Dalio from Bridgewater, have raised the possibility that Fed rate hikes risk a 1937-like slump. It is indeed a dilemma but likely already too late to avert another crisis.... In that respect it is probably too late already. We believe that the die is now cast, the cake is baked and coming out of the oven, and the financially fattened goose is well and truly cooked!"
Gold's up 11% against the euro this year, in addition to 12% last year. It has risen versus many major currencies and suffered only modest declines in a few currencies this year. Most central banks are involved in competitive currency devaluations.
"Although the market seems obsessed with the euro/dollar parity, SG's Technical Analysis guru Stephanie Aymes stresses that it is the $1.05/1.04 level that is more important, being the lower limit of the EUR/USD?s massive upward channel (see chart below). Stephanie argues that the move since last summer has been relentless and is very similar to the one seen in the late 1990s. She suspects that a break below $1.05/1.04 will confirm that the ongoing move is not a correction of the upmove since 2000, but a much larger down move. In such scenario, the EUR/USD will achieve parity, but this may well be just a temporary support before the downleg extends towards $0.98/0.96 - and even perhaps towards the lows of $0.84/0.82 reached in 2000."
"Mario Draghi and the ECB’s manipulation of asset prices makes Greenspan’s Fed look like a rank amateur. More shocking though than the plunge in the euro, and more shocking even that 25% of sovereign eurozone bonds now trade in negative territory, is what has happened to eurozone equity valuations. For, as we approach the sixth anniversary of the US cyclical bull market, the PE expansion of eurozone equities is simply off the scale!" - Albert Edwards
The entire formerly rich world is addicted to debt, and it is not capable of shaking that addiction. Not until the whole facade that was built to hide this addiction must and will come crashing down along with the corpus itself. Central banks are a huge part of keeping the disease going, instead of helping the patient quit and regain health, which arguably should be their function. In other words, central banks are not doctors, they’re crack dealers and faith healers. Why anyone would ever agree to that role for some of the world’s economically most powerful entities is a question that surely deserves and demands an answer.
With all eyes squarely on the ECB as Mario Draghi prepares to flood the EMU fixed income market with €1.1 trillion in new liquidity starting Monday, Soc Gen’s Albert Edwards reminds us that “another type of QE” is drying up thanks largely to the relative strength of the US dollar. "The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is — a clear tightening of global liquidity. Investors ignore this at their peril."
"Give Everyone A Check For $10 Million, It Will Create Inflation": Albert Edwards First TV Interview In 20 YearsSubmitted by Tyler Durden on 03/07/2015 20:20 -0400
In his first TV interview in 20 years, SocGen's Albert Edwards unleashes his brutal honesty on Raoul Pal in this excellent RealVisionTV discussion. From "what Japan is doing is absolutely off the scale," warnings about money-printing to the awkward reality that "policy makers cannot eliminate the business cycle," warnings instead that "they will make the eventual downturn far worse than it otherwise would be..." Edwards' discussion ranges from the UK and US "choosing lunatic policies" to describing Alan Greenspan as "a prospective economic war criminal," the SocGen strategist concludes, rather ominously, if policy-makers keep handing out free money, it will create massive problems, "there is a trigger point where you can create inflation. I don't know where that is. The central banks don't know where that is."
The stock market is totally mispricing what's coming.
With the "Great Greek Tragedy" now behind the markets, for the time being, all eyes have turned towards the Nasdaq's triumphant march back to 5000. (The graphics department at CNBC have been working overtime on banners and bugs for when it happens....watch for them.) For now, it is all about the hopes of a cyclical upturn in the Eurozone economy supported by the ECB's QE program starting next month. Market participants have been bidding up stocks globally in anticipation that the ECB's program will pick up where the Fed left off, and the flood of liquidity will find its way back into asset prices