Just like Bill Gross' monthly note earlier, Albert Edwards' latest piece is an exercise in stream of consciousness in two parts. In the first one, Edwards focuses on his, and our, favorite topic - bashing the "hubris" of central bankers, which he believes may be one of the indicators for "forthcoming economic collapse." This is how he puts it:
Commentators are always on the lookout for quirky indicators that suggest trouble might lie ahead. For a country, one good indicator of a forthcoming economic collapse has always been the Skyscraper Indicator. For an individual, appearing on the front cover of Time Magazine is seen as the kiss of death for one’s career. Being called ‘maestro’ didn’t do much for Alan Greenspan’s career! Alternatively analysts keep an eye on the size and glossiness of company annual reports as a sign of hubris. Also check out what baubles companies put in their entrance atriums (at my previous shop the management thought it a good idea to have a Formula 1 racing car in the hallway). Now we have central bankers patting themselves on the back for having done a jolly good job. That surely is the most worrying, hubristic signal of all.
How?s this for Grade 1 central bank hubris; Peter Praet, the ECB?s chief economist said in a recent interview that, ?Since the crisis we have had serious concerns about deflationary risks on several occasions in the euro area, but now we can say they have disappeared.?
At this point the ice-age deflationist goes ballistic, slamming the Praets of the word, showing that while inflation measured by 5y5y swaps may have rebounded, it is once again sliding...
... and after similarly accusing Yellen of having no clue about what is going on, says it is "this sort of comment that has led Marc Faber to want to short central bankers ?the only way being to buy gold. The increasing volume of central bank hubris may even explain the recent breakout of gold to the upside!"
Hardly surprising, just vintage Edwards.
Where his note did get interesting is his admission that his recent worldview - recall that in recent months, Edwards has likewise expected a major breakout in inflation, only to be followed by an even more acute deflationary episode, one which sends US TSYs to negative rates - may be at risk, for one key reason: there is no wage inflation, to wit:
To be honest I am a little surprised that US nominal wages are not showing more of an acceleration given surging headline inflation has crushed real wage growth over the last year. Falling US real wages are already resulting in slower consumption growth, but workers have not yet pushed up nominal wage inflation to compensate for the squeeze in spending power. One might debate how tight the US labour market actually is given the low participation rate, and whether it is sufficiently tight to prompt a surge in nominal wage inflation.
Answer: it isn't, especially not for those 83% of the labor force, the production and non-supervisory workers whose wage growth has not budged in the past 4 years. But anyway, back to Edwards, who then says that in Japan though, there is no such ambiguity with the job offers/applicants ratio already exceeding the peak of the late 1980s bubble economy ? and yet wage inflation has remained reasonably moderate (see charts below). "Maybe the laws of economics have indeed been abolished ? but I doubt it."
The unsuccessful search for wage growth continues:
One might have thought the surge in the oil price from its trough some 12-18 months ago might have had more impact on wage inflation, but so far that does not seem to be the case. Yet in the US, for example, the CPI energy component has swung from -15% to +15% in the space of a year and driven headline CPI inflation sharply higher (see charts below). With the oil price stuck in the 50-55 $/bbl range, the yoy surge in the oil price will now subside back towards zero. And although US headline inflation will now likely drift back down towards the core CPI rate, this is at 2¼%, a still substantially higher rate of inflation than that seen in recent years, and it will erode spending power noticeably.
Maybe the reasion why there is no wage growth is a very simple one: for all the euphoria, when looking at the future both the market and employers see no sustained rising prices.
Here is Edwards on market implied inflation expectations...
It is not just eurozone inflation expectations that seem to be in retreat. The same thing is happening in the US too (see chart below). I am always surprised how dominated 10y inflation expectations are by short-term movements in the oil price and headline inflation, but it was noticeable just how rapidly inflation expectations ran up in the wake of Trump?s election ? way in advance of what might have been expected by the bounce in the oil price (see chart below).
... and then simple surveys: "Despite the euphoria in the markets about the ?reflation trade?, survey inflation expectations have continued to drift downwards. The Conference Board measures 1y and 5y forward inflation expectations of households and these have continued to decline despite soaring headline inflation."
His conclusion: no matter what happens to wages, it will be central bankers who are ultimately taken to task: "Again I find this most surprising, but it might help explain why wage inflation is so sticky despite the real wage squeeze. But one thing is certain: for central banks to call victory over deflation may prove very premature indeed. Nemesis awaits." Here's to hoping.