Albert Edwards Says Watch Japanese Yen and Be Very, Very Afraid

The Japanese yen goes into freefall. China’s fragile economy tips over the edge. A wave of profit-crushing deflation comes washing over the U.S. and Europe. Investors panic.

That’s the view of perennial pessimist Albert Edwards. The London-based analyst and his team at investment bank Societe Generale SA have been ranked No. 1 for global strategy in surveys by Thomson Reuters Extel every year since 2007, even with a history of saying unpleasant things that few want to hear.

“My role is to step back from the excessive enthusiasm that builds up in the market, and to just say, ‘This is wrong. This is going to go horribly wrong,’” the 53-year-old said by phone last week.


Falling Yen

The yen fell 5.1 percent against the dollar in September, its worst month since January 2013. That sent it careening through a level of support — basically a line on the dollar-yen price chart — closely watched by currency traders which had put a psychological floor under the yen since 1998, Edwards says.

The yen is now poised for a three-year slide, the first time that’s happened since 1997, the year of Asia’s economic meltdown.

A divergence in U.S. and Japanese monetary policy — with the Federal Reserve slowing stimulus and the Bank of Japan expanding the money supply by record amounts — may have been the main reason for the move. Now that the yen is past a tipping point, the psychology of foreign-exchange traders is likely to take over and turn the currency into a runaway train.

“Now we’re heading to 120, which is the 30-year support,” he said. “You break through that, and you can see it moving to 140, 150 very, very quickly indeed.”

‘Important’ Chart

Edwards found the yen’s price chart so compelling he devoted an entire client note to it last week. He called it: “presenting the most important chart for investors.”

Richard Jerram, the chief economist at Bank of Singapore Ltd. and a long-time Japan watcher, doesn’t buy the argument. A weak yen won’t spur deflation in other parts of the world, he says. Nor would a China crash have a big impact outside of countries like Australia, which supply the larger nation with raw materials.

“Basically, it’s a domestic issue,” Jerram said. “Obviously there’s a growth issue, but I’m not sure it really spreads beyond that.”

Japanese currency forecasters see things differently from Edwards, too. Analysts surveyed by Bloomberg predict the yen will be little changed at 110 by June 30. Only the most bearish estimate, from Ebury Partners, puts the currency at 120.

Like most finance professionals, Edwards hasn’t always had impeccable timing. He’s been telling investors to reduce their holdings in equities for almost 20 years.

Ice Age

In his Ice Age call from the late 1990s, he predicted that deflation would eventually cover the earth, and the resulting bear market wouldn’t end until the S&P 500 index fell to 400. The index is at about 1,950 now.

At the end of 2012, Edwards greeted clients with a holiday missive that said: ‘Expect the new year to bring nothing but disappointment.’’ The U.S benchmark proceeded to gain 30 percent.

When he’s been right, Edwards has been spectacularly right. He made his first big call in 1996, when he was a 35-year-old strategist working for the English investment bank Kleinwort Benson.

While most investors were piling into what they thought was the East Asian economic miracle, Edwards was warning of a regional blowup. He called Malaysia’s policies “Noddynomics,” after the simple-minded title character in a series of British children’s books. Edwards says the witticism cost Kleinwort its Malaysian trading license, but soon enough capital was pouring out of the country.


Where should investors now take shelter as Japan’s monetary expansion threatens to send the world crashing down around us? Ironically, the answer Edwards is giving clients is Japan itself.

“Japan is a place where we can find quite a lot of cheap, deep-value stocks at the moment,” he said. “Just hedge out the currency.”

“Now we’re heading to 120, which is the 30-year support,” he said. “You break through that, and you can see it moving to 140, 150 very, very quickly indeed.”

That was so last week. Will we see 107 before we see 110 again? A trench is now been dug out around the 108.4 level. We might be settling in for a long bruising trench war before we can reach and breach 110 again, not to even mention 120 on.
“Japan is a place where we can find quite a lot of cheap, deep-value stocks at the moment,” he said. “Just hedge out the currency.”

What’s that? Sounds so familiar… Where have I heard this before?

Ahh… Sitting on a plush overstuffed chair in a very posh Hong Kong hotel lounge filled with Chippendale-Georgian-Chinoiserie-styled furniture and listening to the big guy Baran of Symphony FP wax lyrical about finding and unlocking value within the capital structure of Japanese stocks. A meeting/informal interview on the sides of a hedgie conference held in HK.

[I had passed muster with the head trader in their then skeletal Singapore office in the initial rounds, and even managed to get through an impromptu meeting/interview with the partner who was their main quant guy running their models. He was on a quick stopover in Singapore and had only a couple of hours before catching his red-eye flight, so we met over late drinks at the Fullerton Post bar. Between the alcohol, the loud music and the late hours, what I thought would be a casual chat turned into a thrust and parry session. He lobbed questions about market microstructure, market impact models, multifactor models, and I returned as best I could. Apparently I didn’t goof it all up and very quickly, found a plane ticket in my email bound for HK to meet with the big guy himself. But, it wasn’t meant to be…]

Symphony FP (Japan) has been through a long 10 years, and they have tried so many things over the years. I even remembered the Japanese finance newspapers denouncing them as shareholder activists/agitators employing poison pen letters. Looks like they managed to catch a second wind this past couple of years. Good for them.

And a hurrah for Abenomics-Noddynomics.


Nikkei, USDJPY

Nikkei on the left, Yen on the right.
4-hourly charts, going back about a month:



Daily charts, going back about half a year:



The turn is looking fast and swift for the currency leg. Unlike the index, nothing below to catch the fall. Watch out below.