"What do people think will happen if another recession strides into sight any time soon? We are a hair?s breadth or, more exactly, one recession away from a market panic on outright deflation ? a panic that will send the central banks into a printing frenzy that will make their balance sheet expansion so far seem like a warm-up act for the main show." -- Albert Edwards in his latest note, taking a look at wage inflation (or lack thereof) in the United States:
Edwards calls the current environment the "Ice Age reality of ever lower nominal quantities" and references Lakshman Achuthan of ECRI's recent interview in which he reaffirmed his call for a recession in the U.S. as well as John Hussman's latest comment, which discusses the same.
Albert Edwards' Soc Gen colleague Dylan Grice in his most recent note described the decision behind the Bank of Japan's latest move to ease further, weakening the yen. Further, current inflation expectations remain below target in many DM economies, providing central banks further justification to continue printing.
Edwards notes that Asian currencies like the Korean won haven't been taken down by the BoJ move yet due to the risk rally that's played out so far this year, but sees that changing if markets reverse. Then, Edwards points out that "if the yen?'s decline takes other Asian currencies lower, it would leave the renminbi as the anomalously strong currency in the region - much to the annoyance of the Chinese authorities," like so:
This, of course, will not sit well with Chinese authorities, who are currently dealing with a renminbi at all-time highs in real terms, which is necessarily foreboding for the Chinese export situation:
Edwards on the inevitable consequences:
We have long stated that if the Chinese economy looks to be hard landing, as we believe it will, the authorities there will actively consider renminbi devaluation, despite the political consequences of such action.
The renminbi devaluation option is widely ignored by the markets in the same way they ignore the likelihood that the Chinese economy is hard landing. The devaluation option should be seen as ?in play? however unthinkable it is believed to be at present.
And a China-U.S. trade imbalance also residing at all-time highs on a seasonally adjusted basis, one can imagine the effect China's forceful entry into the race to the bottom might have on the United States. Edwards concludes:
The BoJ-inspired slide in the yen could accelerate now that a major chart point has been breached -- foreign exchange trading being the asset class most dominated by chartists. And to the extent that this spills over into other regional currencies, clearly this can only exacerbate the risk of a China hard landing. Investors seem reassured by the recovery in some of the Chinese PMI data recently. Yet looking at things like M1 growth and sliding house prices both nationally and in some of the key provinces does not reassure. For many mid-1990s Asian commentators, the weak yen between 1995 and 1997 helped trigger the Asian currency crisis. We may have just come full circle!