Albert Edwards – The Fed Credit Bubble and What It Will Do to the Markets

Albert EdwardsFor nearly 25 years, the European Union (EU) has held together despite challenges from bankrupt institutions, separatist movements and members with widely divergent economic prospects. But that cohesion is being tested, according to Albert Edwards, by inside Eurozone countries that are losing their competitiveness. But his greater concern is the impact the Fed-induced credit bubble will have on the markets.

Edwards is the global strategist for Societe Generale and is based in London. He spoke at a private luncheon for clients earlier this month in Boston.

“The eurozone is a doomsday machine for some economies,” Edwards said, “particularly Italy.”

The problem, according to Edwards, lies in the fact that countries like Italy have become economically uncompetitive due to lower productivity. As a result, their real exchange rate is rising – the prices of goods produced in those countries have become too expensive to sell abroad.

“The only way to stand still is to deflate wages,” he said. Deflating wages is a euphemism for salary cuts in order to lower production costs.

Moreover, he said dissent – something the EU does not like to deal well with – will exacerbate Europe’s economic difficulties. “Unlike in the Brexit voting in the UK, young people in the weaker eurozone countries overwhelmingly want to leave the EU because of high unemployment,” Edwards said. Spain’s economy has grown 4%, yet youth unemployment is still close to over 40% as it is also is in slow-growing Italy.

In Italy and Spain, as time goes on dissatisfaction with the EU is likely to grow as the older population who remember the WW2 and favor the EU are replaced by a more dissatisfied younger cohort, he said.

“What will happen in the next recession?” Edwards asked rhetorically.

In a broader context, Edwards said his clients don’t know what to do about the fact that global financial assets are overpriced.