He has turned even more bearish in his latest research note, putting forward the view that we are nearer the end of the economic cycle than the beginning, and set for a profits-driven economic slowdown where the low rate of core inflation will start to become a key concern.
Edwards highlights the fact the latest Thomson Reuters’ weekly earnings report shows the rate of negative guidance from US companies has rocketed in recent weeks to unprecedented highs, with negative guidance from 103 companies and positive guidance only nine times.
“If the margin cycle is turning down, profit forecasts over the next few weeks will be eviscerated. To me, this is consistent with recession,” he said.
“Equities have outperformed government bonds almost 90% of the time since the equity bubble burst in 2000 – so I look a bit of an idiot most of the time in underweighting equities,” he added.
“It is only in the remaining 10% that the Ice Age call looks correct, when the equity bull phase is totally unwound and equities sink to new lows against ever more expensive bonds. Since our original Ice Age call to underweight equities at the end of 1996, global 10 year plus government bonds have outperformed global equities. And though I look an idiot 90% of the time, I am now used to this state of affairs. To be fair being an idiot 90% of the time isn’t so bad.”
Another factor now attracting more market attention is the disturbingly low pace of core consumer price inflation in the US: “We have long highlighted this as a cause for concern, although we recognise that there are plenty of inflationary bubbles in financial assets as central banks print ad infinitum. It is just not in goods and services.”
Edwards added that the fear of yen devaluation will destabilise already weak balance of payments situations in the rest of Asia, and emerging markets more generally, but will also be a game changer as far as US deflation fears are concerned: “I agree with the view that a deflation scare is set to crush US equities.”
