'The great meltdown': A prominent bear says investors are dismissing a rare drop in consumer prices — and warns it could be more damaging to markets than the pending recession
Investors are not paying enough attention to the possibility that deflation — a sustained decline in prices — could hit the US economy, said Albert Edwards, a global strategist at Societe Generale. A gauge of consumer prices that excludes volatile food and energy costs turned negative in March for the first time since January 2010. Edwards said deflation would be good news for investors who have gold in their portfolios. Click here for more BI Prime stories.
While it has become clear that the US economy is no longer growing, one offshoot of the contraction is only just beginning to emerge. The Labor Department reported last week that the consumer-price index excluding volatile food and energy costs fell by 0.1% in March. It was the first such decline for the so-called core CPI reading since January 2010, and reflected massive drops in the prices of airfares, hotels, and other things Americans splurged on before the coronavirus pandemic put normal life on hold. This datapoint also represents the first red flag that deflation — a sustained decline in prices — is creeping into the US economy. And according to Albert Edwards, the global strategist at Societe Generale well-known for his bearish views, investors are not paying this prospect the attention it warrants. "Falling core CPIs are likely to be much more of a shock to investors than slumping real economy data — which is being largely dismissed," Edwards said in a recent note. Among the implications of outright deflation would be a downward spiral in consumer and business spending. At its worst, deflation is a self-reinforcing cycle: reduced consumption during a recession prompts businesses to cut their investments, which then raises unemployment and limits spending all over again. If this economic downturn produces deflation, the recovery that many are anticipating in the second half of this year will be in jeopardy. The example Edwards frequently cites is Japan, which was stuck in a decade of deflation after its property market collapsed in 1991. He has dubbed the potential deflationary fallout from this crisis as "the great meltdown" and expects it to reassert itself as a dominant investment theme in the near future. For now, investors are drawing optimism from news that Gilead's drug Remdesivir may be an effective treatment for COVID-19. Stocks gained for a second straight week on this news, as well as on signs that parts of the economy have roadmaps for reopening soon. Additionally, the Federal Reserve's stimulus continues to lift sentiment and even stoke speculation that its huge money-printing efforts will create inflation. To wit, the 10-year breakeven inflation rate — which serves as an indicator of expectations — leapt from 0.5%, its lowest reading since 2009, after the Fed announced its open-ended buying of assets. At 1%, the breakeven rate is still pricing in minimal inflation. But Edwards reckons that investors will be caught flat-footed by the opposite outcome, which is deflation. "A GDP slump might be ignored, but a slide into deflation will shock investors," he said. In terms of the investing implication, he expects that real bond yields (adjusted for inflation) will also decline to the benefit of those who have gold in their portfolios. Unlike bonds which would yield next to nothing, gold presents as a safe-haven asset that can produce income and serve as a hedge if and when inflation returns.SEE ALSO: GOLDMAN SACHS: Stocks are expected to see unprecedented moves this earnings season. Here are 18 under-the-radar trades that could pay off big. Join the conversation about this story » NOW WATCH: Pathologists debunk 13 coronavirus myths
More like this (3)
Summary List Placement Since gold topped out at $2,089 an ounce on August 7, the precious...Summary List Placement Since gold topped out at $2,089 an ounce on August 7, the precious metal has declined by as much as 11%. The correction in gold should be viewed as temporary rather than the start of a further decline, according to a note from UBS. Investors should use the recent sell-off as an opportunity to add exposure at lower prices, as the longer-term bull case is still intact, UBS said. Here are three reasons investors should add exposure to gold, according to UBS. Visit Business Insider's homepage for more stories. Gold prices have taken a breather in recent months, having topped out at $2,089 an ounce on August 7. Since then, the precious metal has declined by as much as 11%, at times falling below the $1,900-per-ounce level, which is a key technical resistance level, dating back to the 2011 high of $1,923 an ounce. The decline in gold is somewhat unusual, as during the sell-off there have been concerns over US fiscal stimulus, renewed COVID-19 restrictions, and heightened US-China tensions, which have weighed on risk sentiment. Typically a risk-off environment like this would have favored safe havens such as gold. The correction in gold should not be viewed as the start of a further decline in prices, but instead as a temporary correction, according to a note published by UBS on Tuesday. Here are three reasons why investors should take advantage of the recent sell-off in gold and add exposure to the precious metal. Read more: 4 reasons why the stock market will be volatile throughout October. And 3 reasons why this presents opportunities, Evercore says 1. "A supportive Fed." With ongoing gridlock in Congress surrounding a new fiscal stimulus bill being passed, "We anticipate that the Federal Reserve will remain accommodative. Alongside its commitment to keep rates on hold for longer, the central bank will likely increase its Treasury purchases and focus on longer-dated bonds, in our view. This should limit any technical rise in nominal rates," UBS said. 2. "A far from certain US election." A contested US presidential election outcome is a possibility, UBS said, adding that it could "add to further volatility and result in safe-haven flows, though more into gold, the Swiss franc, and the Japanese yen than into the US dollar, in our view. The greenback's longer-term trend is also downward due to its weaker interest rate advantage and the extent of US indebtedness. Since gold is priced in US dollars, a weaker dollar favors it [gold]." 3. "A more indebted world." "We think central banks are willing to tolerate a period of moderately higher inflation before raising rates (as the Fed's move toward average inflation targeting confirms). A more indebted world after COVID-19 favors lower rates, but also supports higher inflation levels given the unpredictability of fiscal stimulus. Gold thus offers a hedge against inflation as a 'real' asset," UBS said. UBS concluded that it expects gold to reach $2,000 per ounce by year-end, and could reach as high as $2,300 an ounce in a downside market scenario, representing potential upside of 5% and 21%, respectively. Gold traded up as much as 1% to $1,905 per ounce in Tuesday trades. Read more: 'We are going to see some big shifts in the coming 3 to 6 months': Investing pioneer Rob Arnott sounds the alarm on 'quite a few bubbles' in the market, including the tech boom - and tells us where he is finding bargains nowJoin the conversation about this story » NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America
Summary List Placement Global stocks slid on Thursday, while the dollar edged up, after the...Summary List Placement Global stocks slid on Thursday, while the dollar edged up, after the US Federal Reserve gave no indication that any new stimulus measures would be forthcoming, as the economy continues to recover from the effects of the coronavirus pandemic. In its last meeting before US presidential elections in November, the Fed raised its forecasts for US economic growth, inflation and predicted unemployment will shrink faster than it expected three months ago. "The recovery is here, it's well along," Fed Chairman Jerome Powell said at a press conference on Wednesday after the decision to leave US interest rates at 0.25%, as expected. The central bank now expects gross domestic product to shrink by 3.7% this year, an improvement on its last estimate in June of a 6.5% decline. It forecast core consumer inflation will remain below its 2% target, but will average 1.5%, up from 1.0%, while it now expects unemployment to reach 7.6%, compared with its last forecast of 9.3%. And yet, US indices slid broadly, reacting more to the lack of any signal that more fiscal stimulus may be forthcoming. Futures on the S&P 500, the Dow Jones and the Nasdaq 100 fell between 1.0 and 1.4 percent, suggesting a second straight day of declines when the market opens later in the day. The dollar, meanwhile, rose for a third day against a basket of major currencies, to last trade up 0.1% at 93.21, set for its first monthly gain since April. Gold, which tends to move inversely to the dollar, fell by nearly 1% to $1,951 an ounce, set for its largest one-day loss in two weeks. Meanwhile, European shares fell, pushing the Stoxx 50 down by 0.7%, following a widespread decline on Asian equity markets overnight, when the Nikkei dropped 0.7%, the Shanghai Composite fell 0.4% and the Kospi lost 1.2%. Financial markets, and stocks in particular, have profited from trillions of dollars of cheap money that the stimulus programs that the Fed, and other central banks, have implemented this year to shore up the economy, encourage borrowing and consumer spending. The S&P 500 and the Nasdaq have hit record highs this month, fueled largely by the expectation that the Fed will firstly, keep rates low for an extended period of time, and secondly, will keep the option of providing more fiscal support on the table. "Markets always want more," Robert Carnell, regional head of Asia-Pacific research at ING, said. "But, should you keep feeding them?" The Fed signaled it will not raise US rates until at least 2023. "While risk assets might love the intravenous drip of monetary stimulus, it is time to focus on policies that the real economy need … Perhaps the market reaction here is more a realization of this and the fact that any resolution to the current impasse is unlikely until the Presidential election outcome is determined," Carnell said. Indeed, the overall health of the economy has improved rapidly, since witnessing the biggest quarterly contraction on record, between April and June. The number of people out of work has fallen to around 13.5 million from a pandemic high of over 23 million, while various gauges of economic activity, including manufacturing and consumer spending, show recovery is ongoing. "In terms of the overall economy, Chair Powell acknowledged that "the recovery has progressed more quickly than generally expected," but did caution that the recent pace may slow as 'the path ahead remains highly uncertain'," Jim Reid, a research strategist at Deutsche Bank said. "They are essentially projecting the economy to reach Q4 2019 pre-covid levels by the end of 2021," Reid said.Join the conversation about this story » NOW WATCH: A cleaning expert reveals her 3-step method for cleaning your entire home quickly
UK inflation hits lowest level since 2015 after government's dining-out scheme cuts prices at restaurants
Summary List Placement UK inflation hit a near five-year low in August, the Office for National...Summary List Placement UK inflation hit a near five-year low in August, the Office for National Statistics (ONS) said Wednesday. August's Consumer Price Index 12-month rate fell to 0.2% in August, down from 1% in July. The drop was partly fueled by the government's Eat Out to Help Out scheme, which slashed prices for dining out at restaurants and cafes, the ONS said. Visit Business Insider's homepage for more stories. UK inflation hit a near five-year low in August, in part thanks to a government scheme that cut the price of dining out. The Office for National Statistics (ONS) said the Consumer Price Index (CPI) 12-month rate was 0.2% in August, down from 1% in July. It is the lowest reading since December 2015. The ONS said the government's Eat Out to Help Out scheme, which gave diners 50% off food up to a cap of £10 during August, contributed to the rate falling. Other downward contributions came from reduced air fares and the falling price of clothes. The results come after UK unemployment rose to a two-year high of 4.1% in August, up from 3.9% in the previous three-month period. Read more: MORGAN STANLEY: Buy these 6 stocks poised for gains as the economic recovery continues and Congress mulls more coronavirus stimulus "The UK has dodged a deflationary bullet and avoided the fate of the Eurozone, which slipped into deflation of 0.2% in August," said Richard Berry, founder of goodmoneyguide.com. The Bank of England's Monetary Policy Committee is due to announce its next interest rate decision on September 17, and most market watchers expect August's inflation reading to have limited impact on the central bank's policy-making. "As a result the Bank of England is unlikely to be bounced into knee-jerk action at this week's Monetary Policy Committee meeting," Berry said. "The prospect of business as usual on monetary policy will soothe market nerves and has set UK stocks on course for another strong day." Read more: Morgan Stanley pinpoints the most attractive opportunity it sees for investors as a new bull run takes shape — and shares 3 strategies for generating market-beating returns Naeem Aslam, chief market analyst at Avatrade, said: "The inflation numbers have largely moved because of the government Eat Out scheme and this is the reason that we have not seen much of the movement in the Sterling price. Moreover, today is all about the FOMC, and therefore, traders are unlikely to bet big ahead of this key event." But Sam Cooper, vice president of market risk solutions at Silicon Valley Bank, said the 0.2% rate "will provide further argument for the BOE to ease policy further should headline inflation continue to remain stubbornly below the central bank's 2% target." The UK's FTSE index is down 0.3% as of 3:54 a.m. ET. Join the conversation about this story » NOW WATCH: Animation shows how long it takes for trash to break down