SocGen's Edwards: Calamity Looms but Fed Needs to Raise Interest Rates
By Rob Williams
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(Photo: Dollar Photo Club)
The Federal Reserve needs to start raising interest rates next week to avoid a repeat of the dot-com and housing bubbles that eventually crashed, said Albert Edwards, head strategist at Societe Generale.
“One of the key lessons of the 2008 Great Recession is that allowing cheap money to inflate asset prices excessively ultimately ends in economic tears,” he said in a Sept. 10 report obtained by Newsmax Finance. “There is ample evidence to suggest that developed market asset prices (collectively bonds, stocks, and real estate) have never ever before been so expensive.”
The Federal Reserve has kept interest rates near zero percent since 2008, when the global economy declined the most since the Great Depression after the collapse of the U.S. housing market. Since then, the central bank has waited for signs of sustainable growth with falling unemployment and rising inflation.
Fed policymakers this year have discussed raising interest rates as the U.S. economy showed signs of healing. The unemployment rate fell to 5.1 percent in August, the lowest in seven and a half years. It had reached a 26-year high of 9.9 percent in 2009 after the Great Recession.
The Federal Open Market Committee meets next week and will announce its decision on interest rates Sept. 17.
'Bigger Crisis'
“It is too late now to avert a calamity. When they do tighten and try to normalize rates, the asset bubble will likely burst and cause an even bigger crisis than in 2008,” Edwards said. “But the longer they leave it, the more excess will be accumulated and the worse the ultimate deflationary bust will be so they might as well just get on with it now.”
Edwards established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation.
“One of the key lessons of the 2008 Great Recession is that allowing cheap money to inflate asset prices excessively ultimately ends in economic tears,” he said in a Sept. 10 report obtained by Newsmax Finance. “There is ample evidence to suggest that developed market asset prices (collectively bonds, stocks, and real estate) have never ever before been so expensive.”
The Federal Reserve has kept interest rates near zero percent since 2008, when the global economy declined the most since the Great Depression after the collapse of the U.S. housing market. Since then, the central bank has waited for signs of sustainable growth with falling unemployment and rising inflation.
Fed policymakers this year have discussed raising interest rates as the U.S. economy showed signs of healing. The unemployment rate fell to 5.1 percent in August, the lowest in seven and a half years. It had reached a 26-year high of 9.9 percent in 2009 after the Great Recession.
The Federal Open Market Committee meets next week and will announce its decision on interest rates Sept. 17.
'Bigger Crisis'
“It is too late now to avert a calamity. When they do tighten and try to normalize rates, the asset bubble will likely burst and cause an even bigger crisis than in 2008,” Edwards said. “But the longer they leave it, the more excess will be accumulated and the worse the ultimate deflationary bust will be so they might as well just get on with it now.”
Edwards established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation.
He said the threat of another asset bubble outweighs his concerns about worldwide deflation, an indicator of slowing demand. Central banks including the Bank of Japan, European Central Bank and People’s Bank of China have tried to stimulate economic growth by flooding the global financial system with money.
The U.S. dollar has gotten stronger not only with the expectation that a Fed rate hike will limit its supply, but also because emerging-market economies are falling apart, Edwards said.
“It’s no longer the Fed fears that are driving the U.S. dollar higher on a broad basis,” he said.
“It’s no longer the Fed fears that are driving the U.S. dollar higher on a broad basis,” he said.
“The weakness in emerging-market currencies is now sourced in the emerging-market slowdown, which has only been aggravated by the sharp fall in commodity prices.”
Bullish on Bonds
He remains bullish on U.S. Treasurys because global deflation will support demand for bonds even as central banks in emerging markets sell them.
“Embrace the coming deflationary bust whether the Fed hikes next week or not,” Edwards said.
Meanwhile, Stephen Stanley, chief economist at Amherst Pierpont Securities, said the economy is showing signs of reaching full employment, which argues for a rate hike.
Jobless claims have held steady at a four-week moving average of about 275,000 since May.
He remains bullish on U.S. Treasurys because global deflation will support demand for bonds even as central banks in emerging markets sell them.
“Embrace the coming deflationary bust whether the Fed hikes next week or not,” Edwards said.
Meanwhile, Stephen Stanley, chief economist at Amherst Pierpont Securities, said the economy is showing signs of reaching full employment, which argues for a rate hike.
Jobless claims have held steady at a four-week moving average of about 275,000 since May.
“We can safely conclude that a 275,000 reading in the first week of September is consistent with ‘steady as she goes’ in the labor market,” he said in a Sept. 10 report. “We are getting pretty close to full employment. FOMC, what are you waiting for?”
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