China’s shocking devaluation of the yuan will have a domino effect that pushes the global economy into recession and triggers another financial crisis, said Albert Edwards, chief strategist at Societe Generale.
The People’s Bank of China this week took steps to weaken the currency by the most in two decades in an attempt to make the country’s products more competitive amid slower economic growth. The devaluation triggered a global sell-off in stocks, with the Dow Jones Industrial Average falling as much as 490 points, or 2.8 percent, in two days.
“This is the start of something big, something ugly,” Edwards said in
an August 12 report obtained by Newsmax Finance. “This move will transform perceptions about the resilience of the U.S. economy.”
Recession Looming
The danger for the U.S. is that China and other emerging-market countries will engage in a major currency war, trying to outdo each other with devaluations to make their products less expensive to U.S. customers. As the value of the U.S. dollar rises, American companies will suffer from declining overseas sales and unfavorable exchange rates.
“We expect the acceleration of emerging-market devaluations to send waves of deflation to the West to overwhelm already struggling corporate profitability and take us back into outright recession,” Edwards said. “It is the business investment component of gross domestic product that causes recessions.”
An economic contraction would challenge Federal Reserve policymakers who have kept interest rates near zero percent since 2008, when the U.S. economy shrank the most since Great Depression. The central bank also undertook several rounds of quantitative easing, or buying
trillions of dollars of bonds to help push down borrowing costs.
Fed policymakers this year have discussed the possibility of raising interest rates as the U.S. economy shows signs of healing. The unemployment rate fell to 5.3 percent in July from a 26-year high of 9.9 percent after the Great Recession.
“As investors realize yet another recession beckons, without any normalization of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large 2008,” Edwards says. He established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation.
“Investors should prepare for a tidal wave of deflation from Asia,” Edwards said. “Prepare for sub-1 percent 10-year Treasury yields and another financial crisis as policy impotence is soon revealed to all.”
Ten-year Treasurys traded at a 2.1337 percent yield as of 2:48 p.m. New York time.
China's
exports fell 8.3 percent in July from a year earlier as the country's currency strengthened.
The yuan is up 61 percent compared with the Japanese yen since Sept. 13, 2012, and 24 percent compared with the euro since April 30, 2014,
according to Yardeni Research. The yuan was pegged to the dollar in 2008 and 2009, and was allowed to appreciate 8 percent since June 2010.