Albert Edwards: investors are missing the real danger

Albert Edwards, global strategist, Societe Generale

Investors are spending most of their time fretting about two “big picture” issues right now, says Albert Edwards, Societe Generale’s famously bearish global strategist. Number one is the risk that trade tensions between the US and China escalate into a full-blown trade war. Number two is the risk that rising US wage inflation encourages the Federal Reserve to raise US interest rates more rapidly. However, investors may well be missing the real danger: the risk of higher trade tariffs being imposed on European (German) cars.

German carmakers control “more than 90% of the US market” for luxury cars. And that’s just the tip of the iceberg. The eurozone exports a lot more to the US than it imports, which is “in very large part due to the undervalued euro”. The weak euro is in turn a direct side effect of European Central Bank (ECB) monetary policy. Unlike the Fed, the ECB under Mario Draghi is still delaying the tightening process for as long as it can, which means the euro is only likely to get weaker or remain weak against the US dollar, exacerbating trade tensions.

For now, the US charges 2.5% tariffs on car imports. That compares with the EU’s 10% and China’s 25% (falling to 15% from July). “It doesn’t take a genius” to see what’s coming after the completion of the current US probe into whether vehicle imports have damaged the US auto industry – higher tariffs on EU imports. The ECB “might have papered over the cracks in the eurozone for now… but it has also raised the likelihood of a full-blown US/EU trade war”.

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