The Federal Reserve and other central banks have waited too long to prevent another financial calamity like the last two major asset bubbles, said Albert Edwards, global strategist at Societe Generale.
"The global economy will be thrown into chaos," he said in a Nov. 12 report
obtained by Newsmax Finance. "The rotten fruit of the Fed's seemingly innocuous inaction will now be clear to onlookers as it is ripped to shreds on the battlefield by the powerful credit monster."
By focusing too much on the labor market, the U.S. central bank has lost sight of frothy asset valuations that dwarf the tech and telecom bubble in 2000, Edwards said. He is most concerned with the debt levels of U.S. companies, which have reached record highs as many corporations sold bonds and used the proceeds to pay dividends and buy back shares.
“Money policy remained too loose for too long in the noughties and allowed a credit bubble to take hold which blew up in their complacent faces when they tried to normalize interest rates,” according to the report. “All the other actors the central bankers blame for the debacle — regulators, governments, bankers and even borrowers — had only walk-on parts.”
The Fed has held its target interest rate near zero percent
since December 2008, when the U.S. economy fell into the biggest decline since the Great Depression, in an attempt to encourage borrowing, investment and spending. The central bank has hinted that it will raise interests next month for the first time since 2006.
Corporations have taken advantage of the record-low rates to binge on debt. Investment-grade bond issuance hit a record $978.5 billion in the first nine months of 2015. That was 13 percent higher than the first three quarters of 2014, when a record $1.13 trillion was sold to investors, according to data compiled by the Securities Industry and Financial Markets Association.
Meanwhile, S&P 500 companies are on course to buy back a record $993 billion of their own shares this year, according to researcher Birinyi Associates. That puts this year on course to top 2007, a year before the last recession began.
The buybacks have helped to push valuations above long-term norms. The Shiller cyclically adjusted price-to-earnings ratio
for the S&P 500 stock index is 26 times, compared with the average multiple of 16 times.
“Once again, companies have chosen to waste their money buying their own shares at top-of-the-cycle valuations,” London-based Edwards said. “We are nicely tee-ed up for another crisis.”
Edwards 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.
Deflation is again gripping the global economy with the price of oil and other raw materials collapsing since last year. But wage inflation is set to grow as the labor market tightens, Edwards said. U.S. unemployment
has fallen from 10 percent in 2009 to 5 percent last month, the lowest since January 2008.
“We should expect a rapid acceleration in nominal wages,” Edwards said. “Although I believe things will blow up way before that, certainly by then the Fed is likely to be seen as having gotten itself way behind the tightening curve.”
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