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12 Reasons Why Negative Rates Will Devastate The World

12 Reasons Why Negative Rates Will Devastate The World

It has been a thesis over 20 years in the making, but with every passing day, SocGen’s Albert Edwards – who first coined the term “Ice Age” to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity – is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.

Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan’s great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a “Japanification” of every major bond market…

… Edwards said that what bond markets are telling us is “that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high.”

Needless to say that’s not good, not least of all because we now live in a world in which the bond universe with negative yields continued to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion…

… rising  significantly above the previous mid-2016 record high of around $12.2tr. The expansion of the universe of negatively yielding bonds as a percentage of total is shown below: as of the last week, this proportion increased further to around 30.0%, above the mid-2016 record high of 25.8%.

 …click on the above link to read the rest of the article…

Albert Edwards: “At This Point You Realize Something Has Gone Very Wrong”

Albert Edwards: “At This Point You Realize Something Has Gone Very Wrong”

In his latest note published last week, SocGen’s Albert Edwards – never at a loss subjects that inspire his outrage – rages on the topic of Brexit, and specifically the often repeated assertion (discussed here as well), that post-Brexit referendum UK has lost 2% of its GDP output, or about £800m a week.

We won’t dwell on that for a simple reason: as UBS’ chief economist Paul Donovan put is best last week, “A few things have happened in the EU-UK divorce. Does anyone care? No, they do not.” 

Another reason why Brexit is largely meaningless despite resulting in countless, pound-moving newswire headlines each hour: the final outcome is clear – with Theresa May a remainer, and with both sides seeking to perpetuate the status quo by delaying and delaying and delaying some more until it appears that it’s the public’s desire to reverse the outcome of the 2016 referendum, it is just a matter of time before the entire idea of Brexit is scuttled.

Instead we will focus on an anecdote that Edwards brings up in relation to his now 30-year-old son, Newcome, who was 10 back in 1999, and was reportedly stealing Albert’s Financial Times “to look at Nasdaq share prices:”

It was at that point that I realised the tech bubble was really getting out of hand (I have reproduced part of this weekly explaining what happened, at the end of this note).

As Edwards further explains, “discovering my 10 year old son looking at Nasdaq share prices alerted me to the extent of the madness that had gripped the markets by end 1999. Similarly there are moments in this job when something you hadn’’t been following particularly closely is highlighted to you and you stagger back in shock. At that point you realise that something has gone very wrong.” 

 …click on the above link to read the rest of the article…

Albert Edwards: “Equity Investors Are Facing The Four Horsemen Of The Apocalypse”

Even SocGen’s Albert Edwards was surprised at how quickly his latest predication was validated.

Recall that 3 weeks ago with the 10Y yield at 3.10%, with Edwards looking at the surge higher in 10Y Yields the SocGen strategist pointed out that the break in the 10y above 2.8% was not the key level that could mark the end of the secular bull market, but rather it was the 3.05% zone as shown in the chart below.

Commenting on this breakout, he said that rates might surge further and addressed whether this would mean the end his “Ice Age” thesis. As he noted, if investors “get the wrong side of a new multi-year bear market in government bonds, all investment  portfolios will be shredded to ribbons as bonds are the cornerstone of most equity valuation models”.

Fast forward to today when in his latest note he writes “let me be totally honest: I was most surprised that the US 10y yield managed to smash through its multi-decade downtrend last week, mainly due to the fact that the CFTC data showed that speculators had already built unprecedented large short positions. It seemed that every man, woman and child was already bearish and so who was left to sell? Well clearly someone was! One thing that helped tip bond prices over the edge and take yields up to 3¼% was the fundamental support from stronger than expected economic data (see chart below). ”

Another factor for the latest breakout in yields which pushed the 10Y interest rate to fresh 7 years highs was the previously discussed economic exuberance by Fed Chair Powell who managed to convince markets that they were still too sanguine on their expectations on interest rates, “and the futures strip ratcheted up another notch towards the Fed dots.”

…click on the above link to read the rest of the article…

Albert Edwards: Why The Next Recession “Might Only Be Six Months Away”

SocGen’s Albert Edwards is out with a new note today – one which he says he wasn’t going to write – but felt compelled to do so anyway due to the ongoing rout in the US bond market, which has prompted the following question that Edwards tries to answer: Is the Ice Age over?… of as he elaborates:

“As the bond rout continues, the biggest call investors have to make is whether the break of the multi-decade downtrend marks the end of the secular bull market. This is the big one. Get on the wrong side of a new multi-year bear market in government bonds and all investment portfolios will be shredded to ribbons, as bonds are the cornerstone of most equity valuation models.”

To Edwards this is a familiar question because as he explains, it is “exactly the same bold heading box I wrote in my Global Strategy Weekly of 13 June 2007.” As he recalls, “the rout in the bond market back then was even more savage than it has been in recent weeks, with the 10y yield rising from 4¾% in mid-May 2007 to the 5¼% peak on 12 June, just one day before I wrote the words above, pondering the possible end of the secular bull market for Government bonds.”

Furthermore, just like now, yields were also set to break out above the secular downtrend and respected bond investors such as Bill Gross were, just like now, calling for the end of the secular bull market. Referring to a chart from SocGen’s head of technical analysis, Edwards points out that the break in the 10y above 2.8% was not the key level that could mark the end of the secular bull market, but rather it was the 3.05% zone as shown in the chart below. Indicatively, earlier today the 10Y hit 3.09% after reaching as high as 3.11% yesterday.

…click on the above link to read the rest of the article…

Albert Edwards: Why We Are Destined To Repeat The Mistakes Of The Past

With everyone and their grandmother opining on the 10 year anniversary of the start of the global financial crisis, it was inevitable that the strategist who predicted the great crash (and according to some has been doing the same for the past decade) – SocGen’s Albert Edwards – would share his thoughts on what he has dubbed the “10th anniversary of chaos.”

In it, the SocGen skeptic slams the trio of Bernanke, Geithner and Paulson who have been not only penning op-eds in recent days, but making the media rounds in a valiant attempt to redirect the spotlight from the culprits behind the crisis, writing that “they just never recognized beforehand that the economy was a massive credit bubble, just like it is now” and points to central bank arrogance as the “main reason why we should still be scared.”

Of course, just like 10 years ago, as long as the market keeps going up, nobody is actually “scared” and instead everyone is enjoying the ride (just as the legion of crypto fans who are no longer HODLing). The “fear” only comes when the selling begins, and by then it’s always too late to do anything about the final outcome as yet another bubble bursts.

Below we excerpt some of the observations from Edwards’ “A thought on the 10th anniversary of chaos”

Central Bank arrogance is one of the main reasons why we should still be scared. As a former official at the NY Fed, Peter Fisher, recently noted, “The Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side-effects, no perverse consequences, only diminishing returns.”

…click on the above link to read the rest of the article…

Albert Edwards: “Trump Will Soon Turn His Protectionist Fire On Germany. That Will Be Messy”

We were wondering how long before one of our favorite “perma-skeptics”, Socgen’s Albert Edwards, would chime in on the global trade war that broke out in the past few weeks, especially since trade protectionism, tariffs and subsidies are the opposite side of the same “strategic” coin of currency devaluation which we have observed for the past decade, and both of which have one purpose: to make one nation’s goods and service (and stocks) cheaper to the outside world (curiously, in recent years, it has emerged that “soft” protectionism i.e. currency devaluation, is far more acceptable to the establishment than direct or targeted trade intervention via tariffs and trade protectionism).

We got the answer today when in a note, what else, warning what comes next, Edwards writes that whereas “a trade war and competitive currency devaluation was always going to be the end game in our Ice Age thesis as a global deflationary bust destroyed wealth, profits and jobs” and it now looks that this endgame “might be arriving  sooner than we had anticipated.”

The reason: central banks. The catalyst: Donald Trump.

As Edwards explains, while the world is all too quick to point the finger at Trump for daring to expose that the trading emperor is naked, the real culprit behind massive trade imbalances is elsewhere, usually inside a central bank building:

Increasing trade tensions are an inevitable consequence of the side-effects of QE pursued by central banks – especially the ECB. In the near term, there are a couple of trade issues rankling the US Administration far more than steel and aluminium that could easily trigger a full-scale trade war. More immediate is the impending result of a US probe into China’s alleged theft of intellectual property. And boiling away in the background are Germany’s, and now too the eurozone’s, outsized trade surpluses.”

Edwards begins his analysis by pointing out something trivial: politicians lie.

In this context, Edwards claims that President Trump “is a most unusual politician. Like him or loath him, he seems to be doing something politicians seldom ever do: namely, attempting to fulfill his election promises. This is most unusual!”

…click on the above link to read the rest of the article…

Albert Edwards on Trump’s Legacy:15% Deficits then a Deflationary Bust

Albert Edwards at Society General does not have kind words for Trump’s stimulus package.

In his latest Email, Albert Edwards at Society General fires a shot at Trump’s tax cut.

Edwards says the “fiscal expansion is probably the most foolhardy escapade in modern economic policy, and the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the collapse of US financial markets as the Fed hikes rates even more quickly.”

I doubt this is the most foolhardy expansion in history, but it is reckless and ill-timed.

Here are a few clips from Edwards.

After some eighteen months of surprising to the downside, US wage and price inflation are rising briskly, putting intense downward pressure on financial markets. Yet another Fed-inspired financial Ponzi scheme now looks set to collapse into the deflationary dust. But the post-mortem will identify President Trump’s ludicrously timed fiscal stimulus as a key trigger for the collapse. A 15% deficit will be his legacy.

Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history. To say it is ill-timed and ill-judged would be a massive understatement.

The outcome of this front-end loaded stimulus package is patently obvious. It will rapidly accelerate the end of the economic cycle.

Tim Lee of pi Economics opined recently on why the VIX will struggle to regain the very low levels of a couple of weeks back. “We are much further into the cycle of what might be thought of as an underlying tightening of monetary conditions. The Fed is contracting its balance sheet and raising interest rates. On top of that … US imbalances are worsening with the personal savings rate set to fall to a new low while US government finances deteriorate further. Nominal and real bond yields are rising.”

…click on the above link to read the rest of the article…

According To Albert Edwards, This Country Will Trigger The “Great Unwind”

For years, SocGen’s permabear Albert Edwards was best known for preaching the gospel of terminal deflation, having introduced the “Ice Age” concept some three decades ago to describe a world trending toward monetary paralysis and the failure of conventional economic policies as central banks fail to stimulate “just the right amount” of inflation to kickstart growth, instead losing the war to deflation as attempts to boost wage growth fail time and again.

Which is surprising, because in his latest letter to clients from last week, the prominent SocGen strategist proposes that not deflation, but rather a unexpected episode of monetary tightening will be the catalyst that will trigger the next “Great Unwind”, bringing the record-setting global stock market to a screeching halt.

What is even more interesting is the country that according to Edwards, will launch this great monetary shock: Japan, also known as ground zero for every failed reflation experiment conducted in the past 30 years.

This time may be different and, far now, most investors fail to see it, according to Edwards.

As he explains, “with so much investor attention focused on the improving US economic outlook and the Trump corporate tax cuts, and with the eurozone having seen a rapid improvement in growth prospects over the past year, the other big developed economy/market has been somewhat overlooked”, that of Japan.

“Japan’s economic situation has been improving too although likely in a more durable fashion. Indeed the front-page chart shows a consistent improvement in consumer expectations that the great deflation in Japan has finally ended – despite headline inflation remaining close to zero. A change in the deflationary mindset may yet be at hand, and that in itself would stimulate the economy by reducing the incentive to delay purchases.”

…click on the above link to read the rest of the article…

“The Nightmare Scenario” Revisited: Albert Edwards Lays Out The Next “Black Monday”

“The Nightmare Scenario” Revisited: Albert Edwards Lays Out The Next “Black Monday”

Is it the onset of a recession or the fear of a recession that causes a crash? That is what SocGen’s bear (or, as he calls himself this time, wolf) Albert Edwards contemplated on the 30th anniversary of Black Monday, before reaching the conclusion that it’s the latter. Having taken several weeks off from publishing his ill-named global strategy “weekly” report to meet with clients, Edwards finds that most clients “seem to harbour similar fears as I, namely that the QE-driven bubble will burst at some stage and lay low the global economy, just as it did in 2007.” Yet where clients differ, is on the timing of said burst:

“despite my bearish (or is it wolfish) howling, virtually no clients think the denouement will come any time soon and that the equity bull market should have at least 12-18 months left to run. Most can see nothing on the immediate horizon that might burst this bubble.”

So, doing his public service to boost the overall sense of dread, and perhaps fear, Albert takes it upon himself to reprise recent discussions with clients, and in his latest letter explains “what might catch them out in the near term.” To do this, Edwards focuses first and foremost on the catalysts behind the abovementioned 1987 “Black Monday” crash.

A retrospective macro-narrative was inevitably wrapped around the ?Black Monday? 19 October 1987 equity market crash. My 30-year recollection is pretty good: 1987 saw a buoyant equity market rising briskly through most of the year as the oil price recovered from the previous year?s collapse (from $30 to $8, see chart below). After a year in the doldrums the US economy started to accelerate notably through 1987 as the impact of 1986 interest rate cuts and a lower dollar worked.

…click on the above link to read the rest of the article…

Albert Edwards: “Citizen Rage” Will Soon Be Directed At “Schizophrenic” Central Banks

Albert Edwards: “Citizen Rage” Will Soon Be Directed At “Schizophrenic” Central Banks

Perhaps having grown tired of fighting windmills, it was several weeks since Albert Edwards’ latest rant against central banks. However, we were confident that recent developments out of the Fed and BOE were sure to stir the bearish strategist out of hibernation, and he did not disappoint, lashing out this morning with his latest scathing critique of “monetary schizophrenia”, slamming all central banks but the Fed and Bank of England most of all, who are again “asleep at the wheel, building a most precarious pyramid of prosperity upon the shifting sands of rampant credit growth and illusory housing wealth.”

Follows pure anger from the SocGen strategist:

These of all the major central banks were the most culpable in their incompetence and most prepared with disingenuous excuses. And 10 years on, not much has changed. The Fed and BoE are once again presiding over a credit bubble, with the BoE in particular suffering a painful episode of cognitive dissonance in an effort to shift the blame elsewhere. The credit bubble is everyone’s fault but theirs.

First, some recent context with this handy central bank holdings chart courtesy of Deutsche Bank’s Jim Reid which alone is sufficient to make one’s blood boil.

For those familiar with Edwards’ writings over the years, the gist of his note will come as no surprise: after all, how many different ways can you say that central banks have broken the market, have caused a credit bubble, and will be responsible for the crash when they finally run out of cans to kick.

…click on the above link to read the rest of the article…

Citi On Why Negative Rates Are Like Potato Chips: “No One Can Have Just One”

Citi On Why Negative Rates Are Like Potato Chips: “No One Can Have Just One”

Now that Japan has let the negative rates genie out of the bottle, or as DB put it, ‘opened the Pandora’s Box‘ and in the process unleashed the latest global “silent bank run” and capital flight, prepare to hear a whole lot more about NIRP in the coming weeks because as Citi’s Steven Englander put it, “Why are Negative Rates like Potato Chips? No one can have just one.”

This is what else Englander said:

You can admire the policy boldness of the BoJ move into negative rates, and recognise its powerful asset market effects – positive for equities and negative for JPY. Experience in other countries that have entered into this territory should sober you up on the likely economic and inflation impact. No country that has gone into negative rates has experienced major shifts in its growth and inflation profile – minor, yes; major, no. As a consequence every dip into negative rates has been followed by additional moves.

Negative rates are a powerful inducement for cash to leave the banking system, but there is little evidence that investors take the cash and build steel plants with it. They buy foreign and financial assets, which is probably more than enough for the BoJ.

Some further thoughts from Citi’s FX desk, and why the BOJ ultimately shot itself, and other central banks, in the foot:

As the dust settles on the BoJ reaction, USDJPY is somewhat higher and risk currencies have begun to rebound following an initial dip. However, the price action has not been one-sided. Partly this seems to reflect the tendency of many investors to dismiss the rate move as diluted given its tiered implementation. Of the investors I have spoken to since the decision, a significant majority were inclined to poke holes in the decision.

…click on the above link to read the rest of the article…

Albert Edwards Hits Peak Pessimism: “S&P Will Fall 75%”, Global Recession Looms

Albert Edwards Hits Peak Pessimism: “S&P Will Fall 75%”, Global Recession Looms

2016 has thus far been a year characterized by remarkable bouts of harrowing volatility as the ongoing devaluation of the yuan, plunging crude prices, and geopolitical uncertainty wreak havoc on fragile, inflated markets.

With asset prices still sitting near nosebleed levels after seven years of bubble blowing by a global cabal of overzealous central planners with delusions of Keynesian grandeur, some fear a dramatic unwind is in the cards and that this one will be the big one, so to speak.

December’s Fed liftoff may well go down as the most ill-timed rate hike in history Marc Faber recently opined, underscoring the fact that the Fed probably missed its window and is now set to embark on a tightening cycle just as the US slips back into recession amid a wave of imported deflation and the reverberations from an EM crisis precipitated by the soaring dollar.

One person who is particularly bearish is the incomparable Albert Edwards. SocGen’s “uber bear” (or, more appropriately, “realist”) is out with a particularly alarming assessment of the situation facing markets in the new year.

“Investors are coming to terms with what a Chinese renminbi devaluation means for Western markets,” Edwards begins, in a note dated Wednesday. “It means global deflation and recession,” he adds, matter-of-factly.

First, Edwards bemoans the lunacy of going “full-Krugman” (which regular readers know you never, ever do):

I have always said that if inflating asset prices via loose monetary policy were the route to economic prosperity, Argentina would be the richest country in the world by now ?and it is not! The Fed?s pursuit of negligently loose monetary policies since 2009 is a misguided attempt to boost economic growth via asset price inflation and we will now reap the whirlwind (the ECB, Bank of Japan and the Bank of England are all just as bad).

…click on the above link to read the rest of the article…

Albert Edwards Explains Why The “Global Economy Will Be Thrown Into Chaos”

Albert Edwards Explains Why The “Global Economy Will Be Thrown Into Chaos”

SocGen’s permarealist, Albert Edwards, has been the one person who for the past decade has firmly held the belief that a “deflationary Ice Age” is upon the world – courtesy of an unmanageable debt load – no matter what central banks do.

There is, of course, one way to short circuit said Ice Age, and it involves paradropping money in an act of terminal fiat desperation (the outcome is always hyperinflation) onto the general population, something which as we reported last Friday is already in the works courtesy of first Adair Turner and the IMF, and soon all other “very serious people”. Keep an eye on Japan as this is where said paradropping will be attempted first as Ben Bernanke suggested back in 2003 when he said to “consider for example a tax cut for households and businesses that is explicitly coupled with incremental Bank of Japan purchases of government debt – so that the tax cut is in effect financed by money creation.”

But before we get there, here is a snapshot of where, according to Edwards, we are now and why “there” is getting very close.

In his latest note he says, quite simply, that it is now too late to put the “Orc-like monster” of excess debt and declining cash flows back in the bottle, and why “the global economy will be thrown into chaos.”

The deeply held wish of central bankers not to de-rail the fragile economic recovery is on display for all to see as they grasp at the slightest excuse for their continued inaction. The UK’s central bank governor, Mark Carney, exceeded all dovish expectations recently in his latest rate flip-floppery. But what is this? The Fed has finally summoned up its courage and looks set to raise rates next month.

…click on the above link to read the rest of the article…

Sucking Spoilt Milk From A Bloated Dead Sow

Sucking Spoilt Milk From A Bloated Dead Sow

With US GDP growth ‘officially’ back where it belongs, in the Arctic zone close to freezing on the surface but much worse in real life, for reasons both Albert Edwards and Ambrose Evans-Pritchard (not exactly a pair of Siamese twins) remarked this week; that is, excluding the “biggest inventory build in history, the economy contracted sharply”, it’s time for everyone to at long last change the angle from which they view the world, if not the color of their glasses.

But ‘everyone’ will resist, refuse and refute that change, leaving precious few people with an accurate picture of the – economic – world. Still, for you it’s beneficial to acknowledge that very little of what you read holds much, if any, truth or value. This is true when it comes to politics, geopolitics and economics. That is, the US is not a democracy, it is not the supreme leader of the world, and the American economy is not in recovery.

Declining business investment, a record inventory build and extreme borrowing to hold share prices above water through buybacks, it all together paints a picture of a very unhealthy if not outright dying economy, and certainly not one in which anything at all is recovering. But how are you supposed to know?

The entire financial media should change its angle of view, away from the recovery meme (or myth), but the media won’t because the absurd one-dimensional focus on that perpetuated myth is the only thing that makes the present mess somewhat bearable, palatable and, more importantly, marketable, to the general public.

…click on the above link to read the rest of the article…



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