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Bernanke’s ‘Ruinous’ QE Will Lead to Rapid Inflation: SocGen’s Albert Edwards

Matt Clinch, special to CNBC.com
Friday, 28 Sep 2012 | 8:50 AM ET

The Federal Reserve’s latest round of monetary stimulus could be disastrous to the U.S. economy, claimed Albert Edwards, strategist at Societe General, who also sees future U.S. economic difficulties taking their toll on global equity markets.

CNBC.com

A proud and vocal equity bear, Edwards believes that Fed Chairman Ben Bernanke’s announcement of further quantitative easing could prove to be more damaging to long-term growth than strategies instigated by his predecessor Alan Greenspan — a man he once dubbed “an economic war criminal”.

“I now think Ben Bernanke’s policies will prove even more ruinous than Sir Alan’s,” Edwards said in a research note.

“Hence we are lowering our equity weighting to 30 percent, the minimum possible,” he said.

The Fed announced on September 13 that it will buy $40 billion of mortgage-backed securities per month in an attempt to incubate a housing showing flickering signs of recovery. Bernanke stipulated that the purchases be open-ended, meaning they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.

SocGen’s Alberts concedes that his writing can be “pretty insane” and his market timing “unerringly inaccurate.” However, he mentions the last time he was this negative on equities was before the financial crisis on May 8, 2008 when the S&P index stood at 1400.

Unlike other bears, Alberts does not see the current round of stimulus as potentially inflationary and sees deflation as a much greater risk for equity prices.

Alberts uses the bond markets and implied inflation expectation surveys to measure economic cycles. He notes that the two have detached themselves from each other.

“I expect U.S. inflation expectations as measured by the bond market to decline and fall into line with five-year consumer expectations,” he said.

“The primary determinant of U.S. implied inflation expectations is the economic cycle. The recent divergence is highly unusual. The last time this occurred was, wait for it...the first quarter of 2008, just before we last reduced our equity weighting to 30 percent!”

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