The U.S. turning Japanese is now becoming widely accepted. Certainly, it seems to be behind Treasury bond pricing, even if it isn’t quite a consensus view among equity investors. With ever more indicators pointing to a relapse of the U.S.’s recession and the growing risk of deflation–Mohamed El-Erian at the bond fund Pimco gives it a 25% probability.
As for doubters, who argue the U.S.’s circumstances can’t be compared with Japan’s, Edwards says: “they are right.” Right, that is, because “things now in the U.S. are much, much worse than Japan a decade ago” which is to say a decade after the start of Japan’s bust.
Which is maybe why Edwards figures the end game will play out more quickly in the U.S. than in Japan. He sees the U.S. market bottoming out over the next year or so, rather than after yet another decade.
But maybe that’s just impatience talking. Edwards admits he’s getting tired of being bearish. His old companion in arms, James Montier, now at the buy side firm GMO, turned positive on shares last year and continues to find value, particularly in European markets.
More worrying for Edwards, though, is the risk that the deflationary bout he expects to trigger the final bust won’t happen, or won’t last long. That, instead, the U.S. economy will flip from low and declining inflation to a sudden bout of serious inflation, prompted by the Federal Reserve, which the central bank will then be unwilling to control.
That’s a particular worry because central bankers are confident to the point of hubris that they know how to control inflation when it finally springs up. Remember, they’d also allowed bubbles to form because, similarly, they “knew” how to react once they’d burst.