(SG) Global Strat. : Albert Edwards : Ice Age freeze bites as US deflation fear

Ice Age freeze bites as US deflation fear now exceeds that of the eurozone

The last few weeks have seen much to occupy investors. The rapid unwinding of expectations for Fed tightening has led to a slide in the US dollar. This in turn has offered some relief (temporary?) to commodities and emerging markets. Within equity markets, leadership of the continued slide in indices has shifted from energy to banks. And let’s not forget Japanese 10y bond yields have moved into negative territory – the first G7 country to do so, but almost certainly not the last. But amid the chaos, one thing seems to have gone almost unnoticed. For me, the most significant market mover since the start of the year has been the collapse in US inflation expectations – to below the level for the eurozone!

* Why have banks been leading the markets down? Maybe the markets have at long last realised that the central bank emperors do actually have no clothes. And to the extent they continue to intervene, they are making deflation risk worse, not better. William White of the OECD was one of the most prescient of the 2008 crisis and he is now becoming increasingly vocal on the mess central banks are making of things with their interventions.

* The slump in US inflation expectations this year has been extraordinary – especially at a time when the oil price has moved broadly sideways. US inflation expectations, as the Fed likes to measure them (5y in 5y implied breakevens from unravelling the yield curve), have now slumped below the ECB’s favoured measure – inflation swaps

* Our Ice Age deflationary thesis is once again coming to the fore. The folks at Horseman Capital provided a topical Star Wars analogy of the mess that Janet Yellen now finds herself in – the dark side beckons.