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A Furious Albert Edwards Lashes Out At Central Bankers: "Will These Morons Ever Learn?"

Albert Edwards is angry, and understandably so: almost exactly two weeks after warning readers to "sell everything and run for your lives" and the market was on the verge of its first correction in years, several powerful verbal interventions by central banks from the Fed, to the BOJ to the ECB have staged yet another massive rebound which has nearly wiped out all the October losses.

Central-planning aside (and ask how much the USSR would have wished for central planning to indeed have been "aside") we share his frustrations, almost to the point where we would reiterate word for word Edwards' furious outburst, as follows: "Simply put, the central banks for all their huffing and puffing cannot eliminate the business cycle. And they should have realised after the 2008 Great Recession that the longer they suppress volatility, both economic and market, the greater the subsequent crash. Will these morons ever learn?"

Obviously, they will never will because their very entire existence is based on the assumption that what they do can impact the business cycle when all it does is merely delay the inevitable. In this case, a recession whose arrival will be so violent, it will crush not only US stocks, but the overall economy, which has for the past 6 years existed purely on the Fed's CTRL-P fumes. Fumes, which by the looks of things, will evaporate at just the worst possible moment: just when half of the world's entire growth in 2015 is expected to come from the US (the other half from China).

So what is it that has peeved Edwards so much about the latest mispricing of, well, everything by the Mandarins of Marriner Eccles:

The bottom line is that there is far too much over-confidence in the US recovery. Fragile and vulnerable in itself, the US recovery now battles against the rest of the world, which like a horror movie is dragging it down into a hellish Ice Age underworld. The problem is that at, these stratospheric valuations, the market does not need to suffer an ACTUAL recession to see a crash. Like October 1987, just the fear of recession will be enough to trigger a massive market move.

Specifically, Edwards looks at implied inflation expectations - remember, this is critical for a recovery in a Keynesian context - and finds none.

The problem is that most risk assets, and especially equities and corporate bonds, are very expensive and priced for a long cycle. Meanwhile, this recovery has failed to generate any cyclical upward pressure to inflation - indeed quite the reverse. The global economy resembles a knackered old V8 engine which is now only firing on one cylinder (US). Hence, any data suggesting that the US economy is now also flagging were always likely to cause a meltdown as investors feared the imminent arrival of Japanese-style outright deflation. We note with interest that US 5-year inflation expectations in 5 years’ time have not fallen anything like as quickly as 5y expectations (see chart below). This suggests to me a continued misplaced market (over)-confidence about central banks’ ability to control events

 

Sure enough, the events from last week showed just how fast and how violent such a move would be, at least until the central bankers stepped in once again, and with chatter of QE4, made sure bad news if good news again, if only for a few weeks. However, with just one more POMO left, if only in theory, the fears of how the global economy will fare without the Fed's monetary tailwind propping up everything are going to resurface very fast.

And it is not just the US where the market is underpricing risk. Look at the chart at the top: that's right, the other place where Edwards is focusing on is China itself.

Two key items of Chinese data seem to have escaped close investor attention over the past week – maybe because of the flash crash. While I mentioned last Wednesday, what really surprised me that day was not the reaction in the wake of the US retail sales, but the fact that there was no reaction to the overnight news that China’s CPI inflation had slid to only 1.6% in September from 2% - I expected that to trigger a strong US Treasury rally in the European morning. Anyway, we have long warned that CPI inflation would gravitate downwards towards the GDP deflator, and that is indeed what is happening. Along with the 7.3% Q3 GDP data, the GDP deflator was also released showing economy-wide inflation is only around the 1% mark. Clearly, China too remains at a deflationary  precipice.

 

Source: Datastream


Finally, I was also surprised to see that the $100bn decline in China’s Q3 FX reserves, the largest quarterly fall ever, drew limited comment. As I have explained, this reflects deterioration in Chinese competitiveness from its excessively strong real exchange rate and a deteriorating of its balance of payments. If we have been warning that slower growth in FX reserves represents monetary tightening, then a decline of this order of magnitude is like a credit crunch! These data will ultimately prove to be more important than last Wednesday’s US retail sales. As I said two weeks ago “sell everything and run for your lives”.

 

So if Edwards is right, and the only two sources of growth in 2015 are taken out of the picture, watch how from 4% growth in 2014 the world grinds to an economic halt in the coming year. Which of course, would mean a global recession, if not worse, and this time not all the snows in Antarctica will save the narrative.

The only question is Edwards will be right this time, or if the "morons" will once again have the last laugh?