Societe Generale’s Dylan Grice has attacked those who label him pessimistic and Keynesian stalwarts in his latest Popular Delusions report.
He defends himself and Societe Generale’s other famed bear Albert Edwards writing (emphasis ours):
We have no qualms about being thought of as extreme bears … but the truth is that being realistic isn’t the same as being pessimistic and we’d bet on the prepared realists over the blind optimists every time.
Grice than jumps to everyone’s favourite comparison, Japan vs. the United States. It’s here he pokes a subtle stick at Paul Krugman and Joseph Stiglitz (emphasis ours):
Nobel Prize winning economists such as Paul Krugman and Joseph Stiglitz worry that the developed world faces a slide into prolonged Japanese-style debt-deflation. But people whose opinions deserve respect, such as Rob Parenteau and Marshall Auerback, worry about it too.
But what Grice is really getting at is how to insure yourself for worst case scenarios. He rattles off quite the list, (China hard landing, Middle-East tensions, and a bond market blowup), including a means of insurance for Japanese style deflation.
Grice suggests you buy into a deal that pays out in the event of deflation.
The following chart shows 0% 5y inflation floors for the US and Eurozone. They are priced at 360bps and 220bps respectively. That means that someone fearing US deflation could, by making an upfront payment of 360bps, secure five annual payments of any end year YoY inflation rate below 0%. (Very) roughly speaking, the buyer makes money if deflation averages a rate lower than -360/5 =-0.7% per year for the next five years.
Not a bad deal, if you fear deflation, which Grice sees as much less threatening than inflation in the long-run.
Photo: Societe Generale