- According to Albert Edwards of Societe Generale, commodity prices are at high risk of a major reversal.
- Edwards noted that a Chinese data point that typically drives commodity prices has just suffered a sharp drop.
- When prices fall, Edwards expects a “major reversal in inflation sentiment.”
According to Albert Edwards of Societe Generale, commodity prices are at high risk of a major reversal.
The company’s global strategist said in a note on Wednesday that despite euphoric optimism about the strength of the global business cycle and its inflationary implications, investors could experience a major cyclical shock compared to expectations.
He sees commodity prices at risk of a reversal due to the sharp decline in China’s credit impulse. The credit boost measures the change in new credit issued as a percentage of GDP, and has historically been viewed as a driver of commodity prices. “While so many investors focus on the super-loose (some would say insanely loose) fiscal stance in the United States, they are missing the deflationary impetus that is heading to China,” Edwards added.
Fears of overheating inflation have been at the center of investor concerns in recent weeks, even as U.S. central bank officials signal price pressures will be transient.
Investors generally see
When investors cram into commodities to hedge against inflation, they are actually creating upstream cost pressures (as PMI business surveys point out), Edwards said. These cost pressures result in a ‘cascading effect’ of upstream commodity price pressures, and aggregate CPIs are quickly impacted as food and energy prices rise, he said. he adds.
In turn, as investors watch the rising prices of industrial commodities, their beliefs that inflation is also on the rise are reaffirmed.
“The circular, or as George Soros calls it, the ‘reflexive’ nature of
He added: “When commodity prices start to fall, expect a major reversal in inflation sentiment. And expect momentum to become self-reinforcing and reflective on the downside as well, while how it was on the rise! “