SocGen's Edwards: The Factors That Could Trigger The Next 2008-style Crash

At an outlook briefing permabear Edwards pointed to a number of factors which could trigger this next crash including Bank of Japan (BoJ) policy, quantitative tightening (QT) or even the fear of recession itself.

BoJ action

One major surprise would be, he said, if the BoJ started to tighten, which it has already begun in some form by stopping the purchases of government bonds with a longer duration than ten years.

This in turn, the strategist said, would lead the yen to unexpectedly strengthen, which would have a major impact on markets as the majority of investors are positioned for the currency to weaken.

"The market is starting to figure out that this could be quite meaningful," Edwards said. "This could be far more important than the Federal Reserve as a lot of major trends start with Japan.

Ten potential market surprises for Japan in 2018

"Of all the central banks, the BoJ have gone stir-crazy when it comes to monetary policy.

"Most investors are looking for the yen to weaken," he continued. "If the BoJ tightens, then instead of weakening the yen strengthens and breaks through ¥107 [against the dollar] - that would be a major surprise which could destabilise the markets.

"It is now entirely conceivable that the improved economic and inflation picture prompts a surprise BoJ tightening, leaving the market badly wrong-footed and prompting a massive 2008-like unwind of carry trades."

Political fallout

Amid another crisis, Edwards warned alternative political parties formed as a result of public anger would be far more radical than Labour Party leader Jeremy Corbyn on both the right and the left, which would limit the ability of central bankers to manage the fallout.

He explained there was a wrong assumption in markets that if asset prices collapsed during the quantitative tightening (QT) cycle then all policy makers would have to do is reverse the levers and be even more aggressive with QE or negative interest rates and asset prices would reflate.

"This will not happen," Edwards said. "The cycle will play out and asset prices will follow the cycle down, especially if it is a deep downturn, and given we are so overvalued at the moment this is likely.

"Central banks can create inflation if the economic pain is bad enough, there are no [economic] limits. The only limit is political.

"It is the politics rather the economics, which is my biggest worry in the next global downturn."