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SocGen strategist: QE is making things worse

Feeling overly optimistic about rising equity markets, improving economic prospects or the return of more normal financial conditions? Here's a sure cure: Spend a couple of hours with Albert Edwards, a cheerful uber-bear who has been offering up a consistently bleak world view since before the tech-stock bubble years of the late 1990s.

On a one-day visit to Toronto, the London-based strategist with Société Générale skewers monetary policy makers, including Canada's own Mark Carney, as well as "incredibly expensive" equity valuations and analysts who believe the current business cycle has only just begun, when it's actually closer to a bitter end. He predicts China's "classic credit bubble" will burst and that Beijing and other Asian governments will launch a wave of currency devaluations, effectively exporting deflation to the West and triggering far worse global problems than the last Asian currency crisis of the late 1990s.

The title of the chart book handed out to an attentive investment audience reads: "It's dark and we're wearing sunglasses."

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Faced with all this, Mr. Edwards' advice to investors is fairly simple. "Doing nothing is a very valid option."

The one-time Bank of England economist has been deeply skeptical of policy makers who exude confidence as they force untested or expired medicine down the throat of an ailing economy, only to make it sicker. "Policy makers are doing exactly what they did in 2005-2006," he says. "What is different? It's the same failed policies. Loose monetary policy pushing up asset prices to try and keep the economy going. And history suggests it does end very, very badly."

He highlights some of Janet Yellen's pre-crisis comments to show that, like other Fed policy-setters, she didn't see a self-induced collapse of the U.S. housing bubble having "an exceedingly large" effect on the economy. But he jokes that his real objection to her appointment as Fed chair is that she's too short. He then produces a chart comparing the S&P's average annual return to the height of the last three Fed chiefs. The best performer by far was Paul Volcker, who stands 6-foot-7. Each of his successors was shorter than the last, culminating with Ms. Yellen, at an even 5-feet.

Mr. Carney, who is more than tall enough to run a central bank, doesn't escape Mr. Edwards' skewer. "I think one should always have a skeptical attitude when people have such high levels of certainty in what they're doing. I'm not the only commentator who thinks that Canada's been left with a massive housing bubble. [Mr. Carney] has come to the U.K. and he's touched his hands on the housing market, and within three months, it's exactly the same. It's a gift. Send him to Detroit."

I rush to the bank governor's defence, noting that he hasn't pursued particularly unconventional policies. "No. His omnipresence was enough. He's in the papers now as a style guru. They're saying middle-aged men should look like Mark Carney." No wonder Mr. Edwards doesn't like him. His preferred garb is an untucked shirt and casual pants. But why dress up for the apocalypse?

True to form for someone who once launched an online petition calling for Mr. Carney's predecessor, Mervyn King, to be stripped of his knighthood for his response to the financial crisis, Mr. Edwards adds: "These people are doing the best job they can. But I'm surprised how ready they are to pull the QE lever at the slightest weakness in the economy. Just leave it. It's not a catastrophe. Yes, it's slow growth, but why do they think what they're doing is making it better and might not be making it worse? And when it all blows up in five years' time, they'll have moved on to another job anyway. And other people will be left with the mess."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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