Societe Generale's notoriously bearish strategist, Albert Edwards, has warned that the deflation threat currently dogging the euro zone is greater in the U.S. and that equity markets will soon be "ripped to smithereens."
"The deflationary fault line on which the U.S. sits is every bit as precarious as that of the euro zone, but is being disguised," he said in a new research note on Thursday.
"The scales will soon lift from the market's eyes."
Despite years of central bank easing, consumer price growth across the world has begun to stagnate with the euro zone recently falling into deflationary territory - when consumer price growth turns negative. An official flash figure for the 19-country region last week showed prices fell by 0.6 percent year-on-year in January.
Across the Atlantic, consumer prices increased 0.8 percent in the 12 months through December, the weakest reading since October 2009. The U.S. might be posting better figures than the euro zone, but Edwards argues that it's not a like-for-like comparison.
"My former esteemed colleagues Marchel Alexandrovich and David Owen pointed out to me that if U.S. core CPI (consumer price index) is measured in a similar way to the euro zone, then U.S. core CPI inflation is already 'pari passu' (on an equal footing) with the euro zone despite the former having enjoyed a much stronger economy," he said.
He adds that U.S. numbers differ because they are measured with "shelter inflation" which is derived from housing costs based on rent, not the price of homes. This has been preventing U.S. core CPI from falling away sharply, to the extent that it has in the euro zone, according to Edwards.
With this warning, Edwards now believes that there is "ample room" for global yields to fall further over the next two years. He believes that market participants will see sub-1 percent yields on the U.S. 10-year sovereign, down from its current level of 1.8015 percent.
Edwards is known for his markedly pessimistic predictions, and regularly touts the idea of an economic "Ice Age" in which equities will collapse because of global deflationary pressures. On Thursday he maintained his view that equities are likely to fall below 2009 lows.