This page has been archived and commenting is disabled.
Albert Edwards: "Prepare For Sub-1% Treasury Yields And Another Financial Crisis"
Make no mistake, warns SocGen's Albert Edwards, this is the start of something big, something ugly. For while the west has been heaving a sigh of relief over the past few months that deflation pressures have abated somewhat – especially at the core level – we have been emphasising that deflation has only been intensifying in Asia and that like any puss-filled boil, this deflationary pressure would soon need to be lanced...
We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.
* * *
Aside from the relentlessly weak economic and inflation data out of China in recent months (notwithstanding the surge in pork prices), the one thing that has changed dramatically over the last 18 months is China’s huge swing into a Balance of Payments deficit. This has exerted chronic downward pressure on the renminbi, forcing the Peoples Bank of China (PBoC) to start selling its vast foreign exchange reserves to prop up the beleaguered currency (FX reserves have slid $300bn over the last four quarters). Now, though it was only a little over two months ago the IMF declared the renminbi to be no longer undervalued, many of us felt the situation had gone far beyond that stage and that indeed, the currency was substantially overvalued, especially with the rest of Asia devaluing alongside the Japanese yen. The most shocking illustration of China’s loss of competitiveness in recent years is the 50% surge in its Real Effective Exchange Rate (REER) against the US (see chart below).
In some ways the question is not whether the renminbi is competitive or uncompetitive. The problem is that the renminbi is unambiguously less competitive than it was. This comes at a time when the Chinese economy is struggling and the stock market bubble is bursting. We have always said renminbi devaluation would not be a preferred policy lever, but it was one that would be yanked vigorously if needed – viz FX intervention to stop the renminbi falling is effectively a monetary tightening, the last thing China needs at present! Many had felt it would continue to keep the renminbi stable while the IMF was still deliberating whether to admit the renminbi into the IMF’s basket of reserve currencies (SDR). But the IMF’s announcement last week to defer a decision until the autumn of 2016 may well have been sufficient reason for the PBoC to stand aside from FX intervention and bow to the inevitable.
The key thing here is that Tuesday’s devaluation is not just a one-off – you will see persistent weakness from hereon in. For although the PBoC said the move was a one-time adjustment to reflect changes in the way it calculates the daily fix, it also said that the price would be set “in conjunction with demand and supply conditions in the foreign exchange market and exchange rate movements of the major currencies”. To all but the most PollyAnna’ish of observers that means this is the start of a major renminbi devaluation because of the massive downward market pressure the currency is under via the BoP deficit.
This move will transform perceptions about the resilience of the US economy. The recent strength of the trade-weighted US dollar has already contributed to deflation being imported into the US (see right-hand chart above), at a time when core consumer price inflation is already too low. Up until now Japanese yen devaluation has been the main driver of falling US import prices (see top right-hand chart above). Another way to view this is to look at the level of US import prices from various countries/regions since the start of this recovery (see chart below). Despite much talk of Japanese exporters maintaining dollar prices to expand margins and profits, dollar import prices have definitely slumped and China is about to catch up with Japan! For although the renminbi Is not actually included in the trade-weighted DXY calculation, the Fed estimate China’s importance to be 21% of their own broad tradeweighted dollar index - a steep rise from only 15% a decade ago. Japan by contrast currently accounts for 7% of the index, but it has been yen devaluation that has helped heap pressure on China to devalue. Watch that dark blue line below closely.
Many observers, such as myself, believe the US dollar has now entered a secular bull market irrespective whether the Fed raises interest rates in September or not. But in any case, with an ongoing renminbi (read EM …) currency devaluation now underway, the US will import even more of the world’s unwanted deflation. We see this as the end-game in this cycle. With US profits already falling (sharply in the case of whole economy profits), the cycle is already very vulnerable indeed, as it is the business investment component of GDP that causes recessions.
While investors have already talked about the eurozone looking similar to Japan, a deflationary recession also beckons for the US. Core inflation on the Fed’s preferred measure (core PCE) is hovering around the 1% level and a new round of in the currency war will see a move in core inflation below zero to accompany the headline rate.
Prepare for sub-1% 10y Treasury yields and another financial crisis as policy impotence is soon revealed to all.
Source: SocGen
»
- 52111 reads
- Printer-friendly version
- Send to friend
- advertisements -
Only the corrupt Fed can bring it down that low. SUB -1% is unheard of. This will wreck the economy, especially the lives of those who are living off the interest on their savings; it will wipe them out. END THE CORRUPT FED NOW!!!
https://biblicisminstitute.wordpress.com/2014/08/24/the-corrupt-federal-...
Who needs a bunch of old food gummers FRNs? We can get all the crisp new ones we want from The Fed.
( Suckers. Never even saw it coming.)
ARRRGGGG - Fuck these backward thinking bankers
I have been "importing deflation" from Europe in the form of much cheaper heavy construction equipment
without this "deflation" my sales numbers would be zero instead of very low to US clients in the current economy
"importing deflation" is not a bad thing for core US consumers
This is the whole problem with tracking consumer and capital goods pricing as a metric for economic and monetary growth labled "inflation"
without gold to balance international current account imbalances the whole thing becomes a circle jerk
So, what will the pensioners do...who rely on an expected fantacy 7+% ROR....when, their 10Y's actually send them a 1% bill on the due date. lol. woops.
"Sub-1%" as in "less than 1%". Not "-1%".
Interest
What's that?
"especially the lives of those who are living off the interest on their savings; it will wipe them out. END THE CORRUPT FED NOW!!!"
Like they give a shit.
$850 gold, here we come.
WTF is "core PCE"??
All we little serfs can see is RISING PRICES.
I've been amazed again and again that the can could be kicked so far, but I'll say it anyway: Sub-one percent on the 10 year would spell Game Over for retirees, insurance companies, public & private pensions, annuities, money market funds---pretty much the whole enchilada.
They just need to panic-buy into the S&P500 at a CAPE10 of 30.
If that's true, ObamaCare will have to become a sole government entity. It's a TAX anyhow.
Finally, someone who gets it (mostly). We will continue our slide to lower rates, but what Albert seems to forget is that we have trillions in unfunded liabilities along with a dwindling tax base thanks to globalization and various other reasons. The fed can't and won't raise rates in a meaningful manner. In short, we are all Japanese now. Long treasuries until 1% on the ten year.
the trend since volker. 10 years 1 percent interest. say what? what does that say about the value of money. bubles a coming. follow the herd...
It's at 0% to maintain the CURRENT bubbles. They can't even raise it 0.25%. Are you friggin kidding me. The shit is so bad they can't have a 0.25% rate. Think about it. We're immersed in bubble froth and they're scared shitless to let the air out even 0.25%. Financial catastrophe dead ahead, sir.
Puerto Rico = Greece + 10yr Trsy goes under 1% ( and everything below goes NIRP ).
=
The US will become the EU of North America?
No, wait, wait, ahh; -now I get it! Dow 38,679!!!
eeeCONomicial SecuriFISTFUCKulization.
sub 1%, ha lol, get ready for housing costs to skyrocket.
real estate 101, people buy a payment, get a house...
another bubble inflating
blow bitchez blow.
ha
Fuck the pensioners and retirees.
I have been poor for my whole life.
Welcome to MY reality.,....bitchez.
bitter over your own poor decisions, eh?
Yes
But I have a valid defense fuck faces
I WAS LIED TOO !!!!!!!!!!!!!!11111111111111111111111111111111111111
Amazing that you are happy to announce this to the world. In "your whole life" was there nothing you could do about your poverty. Are you so deficient in talent, tenacity and resourcefulness that despite your best efforts you have remained poor. If that is the case, yours is a sorry situation indeed.
The Fed has endless deep pockets,but I am sure even they want to limit the money they are pissing away in the futile effort to prop markets in front of the rate hike.
All of the buying in the last few days, and the buying as GS, tells me that the rake hike for sure is of the table, and dovish talk will be emating from the Fed this week.
Edwards’ message: Prepare, we’re going to hit you again.
Oh, what I’d give for that day when I can tell the Big Banks: Prepare, we are going to hit you big time and you probably won’t survive.
The nerve of these thieves, amid the stealing, to issue additional warnings about more stealing to come.
Our forefathers built this country; It was a war to survive. Every meal we eat, and every pair of blue jeans that’s worn, every bit of it was fought for by our countrymen, often alone, often without help, and they survived and they built this country.
And I for one refuse to hand it over to a band of international criminal bankers without a fight. Americans have too much at stake to hand it over to the Albert Edwardses and the Jamie Dimons.
"...refuse to hand it over to a band of international criminal bankers without a fight."
Excellent.
What's the plan?
My long term prediction is the under 1% for the US10Y. The question at that point is this- what happens then? An important part of the financial system will drown with interest rates that low. What a fuckup.
"under 1% for the US10Y. The question at that point is this- what happens then? "
A long hot season of Jewish Lightning.
..& huge motherfucking .GOV bailouts for Geico, Prudential, State Farm, etc..
I would love to see the fed rate at 3% and the 10yr under 1%. (Entirely possible.) If it happens, get ready to see private lending and crowd funding explode.
WE DO NOT REQUIRE THE DAMNED FED CARTEL JACKALS TO DO JACK TO LEND AMONGST OURSELVES.
FUCK THE CARTEL.
KICKSTARTER & PRIVATE LENDING FTMFW.
***BARTER YOUR PRODUCTIVITY AND CREATIVITY AND LEND AMONGST YOURSELVES PEOPLE !***
A secular bull market in the USD? He must have got hold of some blue Meth.
Mixed with crack and paint thinner. Heh.
Re "We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and eurozone at just 1%."
Horse puckey. The fool who wrote that didn't have his car fixed, or get dental work, or something repaired or painted on his house, or go to the doctor, or pay any bill...
Deflation? Yah. Right.
Next!!
Jim Quinn exposed the BLS' "Lies, Damned Lies and Statistics" in late July with this given: "You know your true level of inflation. You know it’s not 0.1%. You know it’s somewhere between 4% and 10%. You know your government is lying to you. You know the captured corporate media perpetuates the lies. You know those in control of the government must lie to keep their Ponzi scheme going. You know they are just following the Edward Bernays playbook. They want you to believe it’s for your own good. Do you think it’s for your own good?"
Says Quinn:
"Even though it came in at an annualized rate of 3.6%, they and their mouthpieces in the corporate mainstream media dutifully downplayed the uptrend. They can’t let the plebs know the truth. That might upend their economic recovery storyline and put a crimp into their artificial free money, zero interest rate, stock market rally. If they were to admit inflation is rising, the Fed would be forced to raise rates. That is unacceptable in our rigged .01% economy. There are banker bonuses, CEO stock options, corporate stock buyback earnings per share goals and captured politician elections at stake.
"The corporate MSM immediately shifted the focus to the annual CPI figure of 0.1%. That’s right. Your government keepers expect you to believe the prices you pay to live your everyday life have been essentially flat in the last year. Anyone who lives in the real world, not the BLS Bizarro world of models, seasonal adjustments, hedonic adjustments, and substitution adjustments, knows this is a lie. The original concept of CPI was to measure the true cost of maintaining a constant standard of living. It should reflect your true inflation of out of pocket costs to live a daily existence in this country.
"Instead, it has become a manipulated statistic using academic theories as a cover to systematically under-report the true level of inflation. The purpose has been to cut annual cost of living adjustments to Social Security and other government benefits, while over-estimating the true level of GDP. Artificially low inflation figures allow the mega-corporations who control the country to keep wage increases to workers low. Under-reporting the true level of inflation also allows the Federal Reserve to keep their discount rate far lower than it would be in an honest free market. The Wall Street banks, who own and control the Federal Reserve, are free to charge 18% on credit card balances while paying .25% to savers. The manipulation of the CPI benefits the vested interests, impoverishes the masses, and slowly but surely contributes to the destruction of our economic system."
Continues Quinn, "There is so much wrong with the BLS data, I don’t know where to start." But start he does and the proof of the inflation is in the price levels he cites in his article.
http://www.marketoracle.co.uk/Article51515.html
YUP. we just got a quote on a new roof.... $20,600... ashpalt shingles. nothing special here. your standard colonial.
I think I'll do it myself. F-ing back breaking work, up on a roof. But screw it. I don't have 20 grand. And I ain't taking out a loan. Deflation my ass.
Shingles are one of many things that skyrocketed in price when oil went to 150- "due to high raw costs", but never came back down
this article is bunk. the deflation boogey man. oooooohhhhh - spooky bullshit. implication: we have to print too!
prices falling have always been a silver lining to a recession. ESPECIALLY TO THE MIDDLE CLASS FOR FUCK SAKES! When you import inflation by bootfucking your currency you destroy purchasing power and you dislocate capital because rising prices does not equal rising demand! - plain and simple. Volume matters in estimating demand, or changes in demand - not price. Inflation constrains current consumption for the future. people spend less not more. Importing deflation through strong currency allows the stewarding currency to purchase productive assets much cheaper provides more flexibility in production and sales - you can move on price of the output where as in an inflationary environment your output price is bound by high input costs. you HAVE to charge more to compensate for the loss of networth replenishing inputs, so you have no room to move on price - or very little. much easier to manage from the bottom line than it is strictly from the top line.
Finally - I don't know of one country that has debased its currency and has prospered long enough to talk about it - not one country - EVER.
The great depression was deflationary. The biggest boggey man the FED has after contagion, is deflation. Absolutely everything done at the FED is to keep deflation at bay. It has been slowly crawling up our ass for some time now. What makes you think it won't just take up residence? The FED has not been able to raise rates even a single basis point.
if prices are delfationary - tell me how that is not a good thing. markets clearing. creating inflation to prop up value when value isn't there only prolongs the inevitable. its also a fucking waste of cash considering amortization on depreciating assets. eventually shit goes to zero. so do you want those assets productive now - or never?
Yep. NIRP.