The repercussions of China's currency devaluation will not be contained to Asia, but rather, will send powerful deflationary ripples throughout the world, said Societe Generale's Albert Edwards in a note to clients Wednesday.
"Make no mistake, this is the start of something big, something ugly," stated the note. "Investors should prepare for a tidal wave of deflation from Asia."
China's central bank devalued the official yuan reference rate starting on Tuesday for two consecutive days by 1.9 percent and 1.6 percent. The reference rate sets the midpoint of the 2 percent daily trading range allowed.
The yuan plunged to the upper end of the 2 percent range on Wednesday until the final minutes of trading before closing down 1 percent. China intervened in the market, according to reporting by The Wall Street Journal, to prop up the yuan, showing how the government is wary of things getting too out of control.
The most cataclysmic prediction in the report comes when Edwards describes how the deflation from China will hit U.S. shores, lower corporate profits and send the American economy into a recession.
"As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008," wrote the strategist.
The always colorful Edwards included a photo of himself on a deck with snorkeling gear in the note, illustrating to investors to be prepared for the deflationary tidal wave and market fallout.
Source: Societe Generale, Albert Edwards
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