Prepare for the next leg in the Ice Age journey into deflation

Deep deflation thoughts from SocGen's Albert Edwards:

"While there can be no doubt that survey evidence is pointing to a more robust second half, equity markets should be far more nervous than they currently are. We heartily concur with GMO’s Jeremy Grantham who remarked recently that after 20 years of more or less permanent overvaluation of US equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they don’t.

One of the lessons from Japan was that, in a post-bubble world, equities were subject to far more violent swings. We expect to see an exact replica event play out in the west. The Great Moderation - where the 1980’s debt super-cycle filled in troughs of recessions - will now give way to far more violent swings in the economic cycle more usually seen in the pre-war years and the 19th century. Meanwhile, as we saw in Japan, each economic downswing will sink us deeper and deeper into the deflationary mire."