Asian countries are at risk of falling into a deflationary death spiral unless they take action to boost demand for goods and services, said Albert Edwards, head strategist at Société Générale.
Thailand, Singapore, Taiwan and South Korea are sliding into a quagmire that will require monetary stimulus, he said.
“These countries need to devalue [their currencies] — and fast,” he said in a June 11 report
obtained by Newsmax Finance. “The situation reminds me of the events leading up to the 1997 Thai baht collapse and subsequent Asian crisis.”
The Asian financial crisis was triggered by a combination of events including a hike in U.S. interest rates that made Treasurys more attractive to investors. Thailand was forced to abandon its fixed exchange rate as its foreign reserves dwindled. Currency devaluations swept the region and markets plunged.
The International Monetary Fund later bailed out South Korea, Thailand and Indonesia. The U.S. avoided a recession, but the worries about Asia triggered a 7.2 percent drop in the Dow Jones Industrial Average on October 27, 1997.
Japan’s efforts in the past three years to devalue the yen are reminiscent of the currency’s slide in the mid-1990s, Edwards said. The yen this month
fell to a 13-year low against the dollar as Japan has maintained its “quantitative and qualitative easing” program of buying 80 trillion yen ($665 billion) of bonds a year to push down interest rates.
“When you are printing yen like confetti, the currency will fall,” Edwards said. “This simply cannot and will not be tolerated any longer in the rest of the Asian region.”
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. Stocks and bonds have gained since then, but central banks also have intervened on a record scale to support growth.
Thailand’s 1.3 percent drop in its consumer price index last month is the most recent indicator of Asia’s deepening deflation, he said. South Korea’s exports fell 11 percent in May from a year earlier, the fifth straight annual decline.
For now, the U.S. and eurozone aren’t showing signs of deflation, but the threat is there, Edwards said.
“With core CPI
hovering around 1 percent in both regions, investors should be on high deflation alert,” he said “The U.S. and eurozone are still undoubtedly one recession away from outright deflation.”
One of the biggest difficulties in making comments about emerging markets is the reaction from political leaders, Edwards said.
Turkey is a prime example of such behavior with President Tayyip Erdogan accusing critics of being part of an “interest-rate lobby” driving the cost of borrowing higher, Edwards said.
Meanwhile, the country’s economic growth has slowed to 2.5 percent from 9.1 percent in 2010, and its unemployment rate has jumped to a four-year high of 11.2 percent.
“It has been my view for some time that Turkey has extremely worrisome economic imbalances,” Edwards said. “And if investors want to find the 2015 equivalent of Thailand 1997, they need look no further.”
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