Société Générale's bearish strategist Albert Edwards has warned the current market situation is "even worse" than the lead-up to the Global Financial Crisis (GFC) as policymakers are "so scared" of financial bubbles bursting, they are putting the needs of Wall Street before the needs of the economy.
By central banks flagging when they intend to hike rates, Edwards said the predictability compresses risk premia, which in turn encourages higher leveraging and risk-taking.
This meant the current tightening cycle remains positive for risk assets as central banks continue to want "to soothe the nerves of the financial markets" but it is not so good for 'Main Street'.
Edwards said: "So scared (or is that scarred) were central bankers after the summer 2013 taper tantrum, they have now gone out of their way to reassure financial markets.
"Thus recent tightenings of monetary policy, whether by the Fed, ECB or Bank of England, were all perceived by markets as ‘dovish' tightening and hence led to even more buoyant financial markets.
"Policymakers are so scared the financial bubbles they created might burst that today what might be good for the economy is subservient to the needs of Wall Street."
He added the Fed's desire to soothe the nerves of financial markets has "made a mockery of their tightening cycle".
"The current situation is even worse than in the run-up to the 2008 crisis," he warned.
He also pointed out 'Main Street' interest rate hikes do have an economic impact that "will ultimately end in recession, and like an increasingly stretched elastic band this tension will eventually snap with disastrous financial market consequences."
Edwards referenced the Bank for International Settlements (BIS) chief economist Claudio Borio's "clear warnings of impending disaster" pointing to high debt levels, frothy valuations and low government bond yields.
"Many clients we meet have similarly apocalyptic views to our own but remain fully invested. They cannot see an immediate trigger for the financial Armageddon that they accept is heading slowly our way."
However, Edwards warned China could provide the trigger which causes markets to crash and catch investors off guard, due to the country's rising debt levels.
He said: "China's credit-fuelled economic recovery since mid-2016 has been critical to the revival of global trade and economic activity around the world, but now, after puffing up the economy with credit ahead of the October Party Congress, the policy brakes are very firmly being applied once again."
Edwards pointed to comments from Gordon Johnson of Axiom Capital, who warned the doubling of new credit issuance in China this year should have resulted in stronger growth. However, this had not been the case.
Johnson said: "The China credit multiplier, after years of diminishing returns, is finally exhausted. It seems the level of credit necessary to stimulate growth in China could prove elusive at this point.
"We do not recall any economist's forecasts exiting 2016 pointing to China's new credit issuance more than doubling year-on-year in 2017, yet that is exactly what has happened.
"Had this been our base case, we would have expected all economic indicators in China to be moving substantially higher at this point in the cycle."
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