SocGen Analyst: Stocks Will Take a ‘Bath’

Friday, 28 Sep 2012 08:14 AM

By Michael Kling

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Stocks are about to take a bath, says Societe Generale strategist Albert Edwards.

To emphasize his point, he placed a photo of himself in a bathtub in his latest Global Strategy Weekly.

His wife purchased a cast iron tub, even though he questioned its cost and usefulness, he mentioned in his weekly commentary, according to Business Insider. The order, he says, seems to have prompted September's pop in iron ore prices.

Editor's Note:
See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Edwards, a long-time bear, believes that deflation will hit stocks in a big way before inflation becomes a problem, according to Business Insider. So, he's cutting his allocation in stocks for the first time in over four years.

"[W]hen I read direct quotes and commentary about [Federal Reserve Chairman Ben] Bernanke's policy of driving up asset prices in general and equity prices in particular, I almost want to cry over the ludicrousness of this position," Edwards writes.

Although the Fed's policies will lead to rapid inflation eventually, inflation will arrive though "another visit of outright deflation fear," he says.

Edwards argues that U.S. implied inflation expectations have diverged from the economic cycle. The time that happened was in the first quarter of 2008, just before he reduced his equity weighting by 30 percent.

“Bath time anyone?” he asks.

The Fed might be fighting deflation even though it's not talking about it, according to The Wall Street Journal. Deflation is central bankers' worst nightmare, so they don't even mention it out of fear it will appear. Instead, in a case of managing expectations, the Fed keeps talking about inflation, but doesn't mean deflation is not a threat, the Journal warns.

The Fed might be trying to stoke inflation, which remains low despite all its monetary easing, to counteract that deflation.

However, deflation could hit the United States from Europe.

"There’s Lehman-type deflation risk in Spain. It’s massively deflationary," Lawrence McDonald, an author and former Lehman Brothers trader, tells The Journal.

“I don’t see deflation in the U.S. I see deflation hitting the U.S. as a result of Europe.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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