Today we feature a double dose of SocGen inspired gloom and doom. The first is from a predictable source, the Albert Edwards, the bank’s resident perma bear. I love Albert’s work but tend to treat his warnings with a touch of salt. Nevertheless, I think his Ice Age thesis has some structural foundations and I also think that he is spot on when he warns that next time around central bankers will find themselves in a deep, deep hole – with radical forms of QE the only way out. And lest we forget, Edwards isn’t the only person who thinks this is what will happen next – on Tuesday I suggested that Cross Border Capital think a radical QE$ is on its way.
Anyway, yesterday Albert Edward’s suggested that another tool in the armory of central bankers will be negative interest rates. He points to a paper from the San Francisco Fed titled “How Much Could Negative Rates Have Helped the Recovery?”. According to Edwards, the paper makes the case that if the Fed had cut Fed Funds further, negative interest rates would have helped push CPI inflation back up to target much quicker, as the economy would have been stronger (see chart below).
“In the next recession our ‘all-knowing’ central bankers will pull any and every policy lever they have to hand and that in my view includes the Fed pursuing deeply negative interest rates…I do not believe the Fed wants to rush to cut Fed Funds into negative territory, but the cost of not doing so will be very high if others are doing it (via a strong dollar). The Fed will be forced to participate as avoiding deflation will be the number 1 priority – not the profitability of the banking sector. Investors should contemplate a brave new world of negative Fed Funds, negative US 10y and 30y bond yields, 15% budget deficits and helicopter money.”
The $64 trillion question is when this radical intervention will happen? My money is not on an imminent breakdown – in fact, we could be a year or two away from it, if not even longer. My hunch is that we might have a slowdown that almost tips into a recession but we manage to skirt an outright collapse in confidence. Then again, that view is based purely on guesswork, and perhaps that sharp slowdown is even closer than we first imagined. That’s the notion floated today in another SG note, this time looking at Newsflow Indicators. According to the SG paper, their latest reading of proprietary economic newsflow indicators called ECNI suggests “severe damage to global growth momentum. With a typical lead time of around three months, the sharp drop in our indicators suggests a continued contraction of global industrial production”. Crucially this tidal wave of negative sentiment isn’t just restricted to Europe and China – the US is also being caught up in the deluge of negative headlines.
“Currently, our US economic news flow indicator (in red in the chart below) is at levels that count among the 7% lowest readings since 1998, justifying comparisons with 2000 and 2007. This conveys a much more cautious message than the ISM index (in grey in the chart below) which seems to be lagging on the downside…..Two leading indicators, the US yield curve and our US ECNI, have realigned and are pointing to slower growth. After the sharp drop in US economic newsflow, it now matches the signal from the US yield curve that is close to inversion (already the case when looking at 1y forward rates).”
The ECNI newsflow chart from SG is below.