Call it the end of an era — Albert Edwards, the acerbic strategist at Societe Generale, says what he dubbed the Ice Age is finally over.
For years, Edwards discussed how the rest of the world would feel the deflationary impulse the Japanese economy has experienced. And his thesis was showing evidence it was working, as bond yields, and the fed funds rate, registered both lower lows and lower highs.
Well, not any longer, as the Fed and other central banks ratchet interest rates higher with U.S. inflation at nearly 9%. Edwards noted approvingly the recent commentary from Bob Prince, the co-chief investment officer at hedge fund giant Bridgewater, who expects a multi-year secular tightening cycle. Edwards calls the new phase a “great melt.”
“In essence Bob Prince is saying that we are currently in only the first phase of a multi-year secular tightening cycle to address the after-effects from combining monetary and fiscal policy in a reckless fashion. In particular, Bob notes that investors have mistakenly discounted only one quick tightening cycle and so they are going to be mightily surprised,” says Edwards.
Edwards expects a recession, but he said it will only brief temporary relief to the long march upwards in rates. “As Bob Prince highlights the Fed will then toggle between rapid tightening and easing as they attempt to squeeze inflation out of the system,” he says.
He also discussed the recent phenomeon of labor hoarding, as companies become reluctant to dismiss the new employees they struggled to find in the first place. “We know what happens: consumption holds up better in the recession, but profits take the strain and collapse as labor becomes more of a fixed cost,” he said.
In developed economies, recessions come less from falling consumption but by huge swings in the business investment cycle, said Edwards.
The yield on the benchmark 10-year Treasury
reached as high as 3.48% in June, but has cooled to 2.89% on Wednesday.