We’re still in line for one more deflationary step before the Fed and other central banks engage in the next level of monetary expansion that creates rampant inflation, according to Societe Generale’s Albert Edwards.
Edwards sees government bond yields falling again, before governments and central banks engage in a new pro-inflationary movement. He cites Russel Napier’s opinion, that the S&P 500 is set to fall to 400, but suggests this move will be coupled with a decline in bond yields, as the economy takes a tumble simultaneously.
From Albert Edwards:
My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.
Edwards argues that while more and more inflation is being passed through from China, U.S. consumers have tied their inflation expectations to commodity prices more than ever. As a result, a decline in commodity prices would result in a sharp decline in consumer inflation expectations, and thus bond yields would follow.
One more leg-down to come in bond yields:
[credit provider=”Societe Generale”]