Albert Edwards: The Economic 'Ice Age' Isn't Over

Zero Hedge also has some excerpts HERE.

It is worth repeating the very simple point that an integral part of the Ice Age thesis is lower lows and lower highs for nominal economic quantities in each cycle. So, for example, in the chart below we see progressive steps down in each cycle almost unnoticed unless you take the longer view. It is this process that drives the Ice Age re-rating of government bonds and the de-rating of equities each recovery bringing a partial reversal to the process and each recessionary phase taking us to shocking new lows, both in bond yields and in equity multiples. I do not believe this process is complete, especially as I do not see the economy as reaching exit velocity of GDP in excess of 3%. Indeed, growth is still anaemic and vulnerable.

We note that, amid the carnage in the government bond market, implied inflation not only remains subdued but has fallen decisively. Maybe that reflects an acknowledgement that the economy is indeed nowhere near exit velocity. Certainly the divergence between the ISM and inflation expectations has been unusual and history suggests it is inflation expectations that eventually catch up with the economic reality ... And with events unfolding in emerging markets as they are, I see a good chance of a repeat of 1998 where a deflationary wave of manufactured goods washed up from Asia. Deflation risks remain high.

But where does that leave us in terms of QE. I fully concur with the legendary Marc Faber who when asked during a Bloomberg TV interview if Bernanke meant what he said on starting to taper sooner rather than later, responded "If you say that if he means what he says, then you believe in Father Christmas. He said if the economy does not meet the expectations of the Fed in one years' time, they will consider additional measures. In other words, if the economy has not fully recovered by mid-2014, more QE will be forthcoming. As I said already three years ago, we are going to go with the Fed to QE99."

I tend to agree with that view. The economic reality in the West will force further rounds of QE. And in addition do not forget one over-riding structural trend towards fiscal insolvency and unlimited money printing; the latest BIS annual report highlighted the fiscal Kilimanjaro that has to be climbed due to rapidly aging populations in a number of countries, most notably Japan, the US and the UK.