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Albert Edwards' On The Next Shoe To Drop: The Realization That Core Inflation In The US And Europe Are The Same

Tyler Durden's picture




 

When it comes to macroeconomic forecasts, one could not have been more spot on than SocGen's Albert Edwards, whose call of nearly two decades for a global deflationary "Ice Age", much to the chagrin of the "recoveristas", has proven absolutely accurate, now that one after another global region is succumbing to deflation. His other call for a collapse in global bond market yields has certainly been validated as well as we showed last week when we demonstrated that $3.6 trillion, or nearly a fifth of the global government bond market, is trading with negative yields.

Yet one place where Edwards's call for a bear market has so far failed to materialize is the one which over in he past 6 years has transformed from its traditional role of discounting the future and become the central planners' preferred policy vehicle of choice to preserve and boost investor and general public confidence: stocks.

It is therefore not surprising is Edwards' stern warning that the relentless stock market masquerade, manifesting itself in a virtually flat diagonal line from the March 2009 bottom, on the back of now every single developed central bank injecting direct liquidity into the market, is ending.

The bulk of our Ice Age thesis has now played out. One part though that hasn?'t is in the equity market, where I constantly see ridicule heaped upon our view that we are still locked in a secular valuation bear market that began in 2000 - with equities likely to fall below 2009 lows. I remain confident that the global equity markets will be ripped to smithereens in the next economic downturn which will, once again, show that the central banks have inflated another massive unstable financial bubble. But even without the coming ultimate equity denouement, any investor who, like us, has underweighted global equities since we made our (somewhat premature) call at the end of 1996 has outperformed - and at far lower volatility.

 

While Edwards wouldn't touch stocks, he still believes there is more room for upside in the 10Y government bond, although not on a longer-term basis, where the eventual even more aggressive QE that is coming will finally break the bond market, leading to runaway (hyper)inflation (remember: not one currency in history has failed due to hyperdeflation).

We remain overweight 10y+ government bonds because we believe there is one final shoe to drop - and a very large one at that! (Note that on a 5-10y view I believe government bonds will be a disastrous investment and that further rounds of much more aggressive QE will ultimately result in much higher inflation ? starting with Japan). But on a 1-2 year view I think there is ample room for global yields to fall further - led by the US.

And while Edwards' bearish stance on equities is hardly unexpected, one thing the SocGen strategist revealed which most certainly was not widespread public knowledge is that if one uses the inflation-measurement methodology of Europe, then not only is core CPI in the US below that of "deflationary" Europe, but is in fact negative

The US deflationary predicament, which is hiding between the lines, is why Edwards maintains his "view that the market is far too convinced that the US is in the spring of its economic recovery, whereas I believe we could well be in the autumn. What matters though is not my view, but the overconfidence of investors together with the very rich equity valuations." The catalyst would be investor realization "that, despite the US having recently been the single engine of global growth, the US deflation threat is every bit as immediate as that in the eurozone."

Edwards' explains:

The US CPI shelter component is made up of rent (7% of total CPI) and owner-occupier equivalent rent (OER, a massive 24% of the CPI). Now, when we exclude food  and energy from the CPI we often hear people complain that we shouldn't as food and energy are real expenditures that cannot be avoided. In contrast, the OER is a totally made-up number which no homeowner actually pays! OER is meant to measure the implied rent they incur by living in their home rather than renting it out - economists debate its inclusion in the CPI. Typically OER mirrors actual rents which tend to lag house price inflation, which rose strongly in 2013 but is now slowing sharply. Hence OER inflation will probably slow too this year, revealing the underlying deflation threat. But whatever the whys and wherefores, the bottom line is simple - OER is not part of the eurozone CPI and to compare like-with-like we should exclude it. If we do, the yoy rate of core US CPI inflation is the same as in the eurozone.

 

 

But, perhaps more significantly, the 6m change in core US CPI inflation (using the eurozone definition) is actually already negative, unlike the eurozone series. Who then do you think has the bigger deflation problem ? the US or the eurozone?

 

Which sadly means that not only all those "whopping" job gains of the past 3 months will be promptly "seasonally-adjusted" away during the next major revision opportunity, but that all the talk of a rate hike at a time when the US has a worse deflation problem than the Eurozone, will quickly an quietly disappear.

 

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Sun, 02/08/2015 - 21:23 | 5760318 spinone
spinone's picture

Everyone is persuing the same misguided policy, so everyone will get the same poor result.

We need failure and liquidation, not extend and pretend.

Sun, 02/08/2015 - 23:22 | 5760424 philipat
philipat's picture

"Despite the US having a much stronger economy"

.......According to US government published data.

There, fixed it for ya.

Sun, 02/08/2015 - 23:38 | 5760676 Silver Short Seller
Silver Short Seller's picture

That's right deflation. All that hyperinflation never came and ZH is wrong. You permabears will never learn.

Mon, 02/09/2015 - 04:59 | 5761022 BrosephStiglitz
BrosephStiglitz's picture

Upon reading your excellent analysis, I sold my positions into the market, increased my holdings of Greenbacks and I'm margined out in the debt markets right now.

Thank you anonymous shit-talking stranger for showing me the error of my ways.  Some say that '15 is the Chinese year of the Phoenix. Inflection point/vertical ascent imminent. (/sarc)

PS: Any losses I make on PMs (and I only entered the market in '14), I will consider in a similar manner to an insurance premium. If you price in EUR or JPY, the markets aren't looking so bearish.  If the USD should tumble along with existing currencies, a similar rise will be seen.

Mon, 02/09/2015 - 03:35 | 5761037 Hobbleknee
Hobbleknee's picture

Core CPI does not include food, energy or housing.  Food alone is up 19%, but who needs food?  The gov says everything is awesome, so it must be true.

Mon, 02/09/2015 - 06:47 | 5761160 supercelld
supercelld's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Sun, 02/08/2015 - 21:25 | 5760326 lordbyroniv
lordbyroniv's picture

long mom and dad's basement !1

Sun, 02/08/2015 - 22:44 | 5760565 Boston
Boston's picture

long the US 10yr T-note

Sun, 02/08/2015 - 21:26 | 5760330 Squid Viscous
Squid Viscous's picture

Ge to work, Mr. Yellen - Purple NIRPles for everyone

Sun, 02/08/2015 - 21:27 | 5760333 gatorengineer
gatorengineer's picture

Deflation in what?  Measured by what?  Food and utilities hockey sticking.  While Home prices cratering again. Gasoline going up again...  no I think what you have is biflation.

Sun, 02/08/2015 - 23:49 | 5760699 BeanusCountus
BeanusCountus's picture

You are right. Its not happening now. Deflation will never happen until losses are recognized, and realized. We are not close to that. Yet.

Sun, 02/08/2015 - 21:28 | 5760338 wendigo
wendigo's picture

But what does it mean ?!

Sun, 02/08/2015 - 21:29 | 5760344 surf0766
surf0766's picture

why bother comparing manipulated cpi numbers

Sun, 02/08/2015 - 21:31 | 5760353 Yen Cross
Yen Cross's picture

  Please... Someone?  Inflation is really cold, and I need some cheap gloves. (deflation adjusted)

Sun, 02/08/2015 - 21:38 | 5760379 Monetas
Monetas's picture

Cheap gloves :  Harbor Freight, powder free nitrile gloves, pack of 100, MED LG and X-LG, 33% off, $7.99 !

Sun, 02/08/2015 - 22:01 | 5760445 Creepy A. Cracker
Creepy A. Cracker's picture

Don't forget your 20% off coupon on top of that.

Sun, 02/08/2015 - 22:17 | 5760486 Monetas
Monetas's picture

Thanks Crack ! It's says coupon can't be used with other discount .... but I will use that 20% on something else .... like 10" pneumatic tires .... BTFD !

Sun, 02/08/2015 - 22:29 | 5760523 Creepy A. Cracker
Creepy A. Cracker's picture

My local HF normally lets me use it with the sale items as well.  You never know...

Sun, 02/08/2015 - 21:38 | 5760380 kowalli
kowalli's picture

it doesn't matter - banks in liquid trap already. they are between hammer - deflation and anvil - inflation.

system  dead

Sun, 02/08/2015 - 21:42 | 5760394 Yen Cross
Yen Cross's picture

  System DEAD, cheap gloves; Got it .

Sun, 02/08/2015 - 21:53 | 5760427 kowalli
kowalli's picture

good pupil

Sun, 02/08/2015 - 21:37 | 5760374 zeropain
zeropain's picture

they can seasonaly adjust that.

Sun, 02/08/2015 - 21:39 | 5760384 q99x2
q99x2's picture

Hey I'm on the side of deflation that has to deal with the size of my Reese's peanut butter cups and the amount of crackers in my Keebler's box. Would somebody please call the police. The world is no longer what it appears to be. I better head back home before it is too late. Somebody do something.

Sun, 02/08/2015 - 22:03 | 5760449 Monetas
Monetas's picture

That's Michele Obama's portion re-adjustment !

Sun, 02/08/2015 - 21:40 | 5760388 Yen Cross
Yen Cross's picture

I read the full context of the article. Are you Fecking kidding me? You're using "Pari Passu" in the context of the Cypriot bailout?

Sun, 02/08/2015 - 23:52 | 5760706 holdbuysell
holdbuysell's picture

So to summarize: banks and equities should blow up due to over valued digital assets while food and energy prices go sky high.

Sounds about right.

Mon, 02/09/2015 - 00:36 | 5760795 enloe creek
enloe creek's picture

I have maybe some good news for all you used car buyers.... The dealers are swamped with used cars because everyone has traded in or just bought new as the credit has flowed relentlessly etc.. Now they are skipping the wholesale  auctions. Car lots are selling 8-12 yr old cars on ebY with little reserve  there are good deals but this means the auto market is saturated for now and if a downturn happens look out below.

Mon, 02/09/2015 - 03:21 | 5761025 Quaderratic Probing
Quaderratic Probing's picture

http://www.dollartimes.com/inflation/inflation.php?amount=1&year=1930

Bonds crashed in 1928 stocks in 1929 

Check inflation in 1930 dollars in 1938

Total inflation -16% 

Blowing up markets does not create inflation.

Mon, 02/09/2015 - 06:23 | 5761146 El Hosel
El Hosel's picture

Quince Edwards might have something Moar to say about all of this.

Mon, 02/09/2015 - 08:04 | 5761213 Cloud9.5
Cloud9.5's picture

We can all see the long term trends but for the moment traffic on I 275 is unbelievable.  I have not seen it this thick since the glory days of 06.  In a rigged market you can starve in the midst of plenty or have a surplus in a world of scarcity.  When you are in a free fall it feels like you are flying.  I know the ground is coming up fast but I cannot see it for the purple haze.

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