Investors should brace for a deflationary shock that will drive 10-year Treasury yields to zero or below, according to Albert Edwards.

Edwards is the global strategist for Société Générale and is based in London. He publishes a weekly strategy report, upon which this article is based.

Edwards is known for his “ice age” thesis, which posited that, beginning in 1996, the correlation between bond and stock yields would break down, and 10-year bonds would outperform stocks. His template was Japan and its “lost decade” of growth, which began in 1990. That forecast has been largely accurate, although it was disrupted temporarily by quantitative easing (QE).

He is optimistic that global economies are going through the last act in the ice age. One final bust will take place over the next three to six months before we transition to what he calls the “great melt.”

Deflation and a drop in real yields will accompany that final bust.

Economic growth has stalled despite a fiscal stimulus of about 3.5% of U.S. GDP. There is substantial unemployment, and the impact of the pandemic is crushing economic activity – through lockdowns and changed consumer behavior. That is the underlying cause of the short-term deflationary hit facing the U.S. Outside the U.S., core inflation measures have already collapsed.

In the U.S., core CPI is 1.6%. Some analysts say it may pick up, but Edwards disagrees. The signs of inflation, such as a spike in used car prices, are anomalies. Beneath the surface, the U.S. is behaving similarly to Europe and Japan.