Albert Edwards: We're Not Ready For The "Frenzied Orgy Of Balance Sheet Debauchment" Yet

TBI ^ | 5-25-2011 | Gregory Whiteg

[blam]

Albert Edwards: We're Not Ready For The "Frenzied Orgy Of Balance Sheet Debauchment" Yet

Gregory White
May 25, 2011, 8:02 AM

We're still in line for one more deflationary step before the Fed and other central banks engage in the next level of monetary expansion that creates rampant inflation, according to Societe Generale's Albert Edwards.

Edwards sees government bond yields falling again, before governments and central banks engage in a new pro-inflationary movement. He cites Russel Napier's opinion, that the S&P 500 is set to fall to 400, but suggests this move will be coupled with a decline in bond yields, as the economy takes a tumble simultaneously.

From Albert Edwards:

My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.

Edwards argues that while more and more inflation is being passed through from China, U.S. consumers have tied their inflation expectations to commodity prices more than ever. As a result, a decline in commodity prices would result in a sharp decline in consumer inflation expectations, and thus bond yields would follow.

One more leg-down to come in bond yields:

[RexBeach]

Perhaps.

But only this week, Bond King Bill Gross began backtracking on the direction of yields on Treasury securities after June 30.

Personally, I think we may have some movement in the markets, but the markets have known about QE2 ending for months and months now. This may be one of those hallowed moments when the market does precisely the opposite of what most observers expect. Sooner or later, consensus is almost always incorrect.

Reminds of Y2K. Remember that? Everyone frantic about their computers and such? What happened? Not much.

[blam]

"Reminds of Y2K. Remember that? Everyone frantic about their computers and such? What happened? Not much. "

Probably blow over in a few months, eh?

[RexBeach]

I think all we will hear are crickets.

Bonds have been rallying for weeks. If most bond investors were afraid of getting creamed after June 30, the bonds would be getting crushednow.

At yesterday’s Treasury auction, a 2 year T-Note had yield of .56%. Your mattress has a better rate than that.

In any case, we’ll see what happens.

[Barnacle]

OK. If you have liquid assets, where do you put them now?

I'm thinking commodities.

[RexBeach]

That all depends on your and your circumstances.

[Kenny500c]

There is probably a lot of balance sheet damage due to this move down in yields, will Bill Gross get bailed out by the taxpayers?

Of course he will.

Not just Gross, but all the players who were sure bond prices were headed down and used massive leverage which they have learned has few consequences (for them) if their bets don’t pan out.