...what Albert Edwards, one of the most famous “perma-bears” and the current chief investment strategist for Societe Generale SA in London, dubs an “Ice Age.”
...His call has always been that the Ice Age would end with American yields joining bund yields in negative territory, stock markets back to their 2009 lows, and the economic situation so desperate that governments have no choice but to change tack so dramatically that they create inflation. At that point, stocks would become a far better bet than bonds and the world would embark on a new direction.
He remains convinced that the scale of the downturn now is due to the build-up of debt that preceded it. The coronavirus turns out to have been the trigger for a debt reckoning that would have happened at some point:
leverage was built up on the premise that nothing bad happens. And something very bad has now happened. Hence many of us believe that central bank actions over the last decade have made the current already bad situation much worse than it otherwise would have been.
This is how he summarizes what he had expected to bring the end of the Ice Age (in the era pre-coronavirus):
I expected the anger of the populace and the populism it would engender would bring a transition in economic policy away from the increasingly discredited Quantitative Easing (QE), which I believe actually did very little good (in reviving the economy), but much bad (in that it exacerbated wealth and intergenerational inequality - helping to drive the rise in populism). Instead of more QE, I wrote that some variant of Helicopter Money such as the increasingly fashionable Modern Monetary Theory (MMT) would be adopted in some shape or form. It would in effect be the monetisation (of rapidly increasing public sector deficits) in all but name. It would not be announced with great fanfare. It would just be done.
...the case for helicopter money has suddenly become almost the undisputed orthodoxy. And that lines up with the Edwards belief that the regime would be “such a major event that it can only be implemented during a crisis.”
...the sheer deflationary impact of the recession he sees ahead should still bring Treasuries down to the negative level of bund yields. The last week has seen a stunning reversal in the bond market, with real yields positive again after moving well into negative territory:...Edwards points out that something very similar happened at the outset of the post-Lehman phase of the last crisis, with everything sold off, including even bonds, in the initial liquidation phase. Subsequently, yields went far lower:
...His base case, which he shares with financial historian Russell Napier, is that U.S. stocks will need to revisit their lows of 2009, or fall even lower. But in terms of time it isn’t far away. From now on, when central banks intervene in the bond market, he says, it “is not about yield suppression or yield curve control. It is about financing fiscal expenditure and tax cuts.”
Once bond yields go back down again, that will be a signal that the moment is approaching. The same is true of a reversal for gold, which has fallen so far in this crisis. It did so at the outset of the last two big market breaks, so a reversal could be useful signal:
...the coronavirus has introduced the possibility of economic damage on a scale that even he didn’t predict.
On the prospect of helicopter money, he says: “Of course it will ultimately work to trigger a recovery, but we collectively have no idea how deep this economic and financial market meltdown will be — especially if you adhere to my own view about the inherent extreme vulnerability of the system even before the coronavirus hit.”
With so much uncertainty, he is prepared for the possibility of calling a turn even if Treasury yields never sink into negative territory, or if stocks don’t drop below their 2009 lows.
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