ALBERT EDWARDS: Chinese devaluation is leading to 'a financial market rout every bit as large as 2008'

Societe Generale Economist Albert Edwards might have finally out-beared himself. He says the China devaluation is a step towards "a financial market rout every bit as large as 2008."

In his latest note, Edwards says the Chinese currency devaluation is the beginning of a period of serious foreign exchange weaknesses in Asia.

This will force down import prices into the US and EU economies, cause a deflationary cycle that hits corporate profits decline, ending in a Lehman-style crisis:

We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.

There are already signs a strong dollar relative to other currencies is pushing a "tidal wave" of deflation towards the US shore. Here's the chart:

Edwards sees no easy way out of a deflation-led US recession, culminating in a financial market collapse. The emphasis is ours:

While investors have already talked about the eurozone looking similar to Japan, a deflationary recession also beckons for the US. Core inflation on the Fed's preferred measure (core PCE) is hovering around the 1% level and a new round of in the currency war will see a move in core inflation below zero to accompany the headline rate. Prepare for sub-1% 10y Treasury yields and another financial crisis as policy impotence is soon revealed to all.

So hold on to your, soon to be much cheaper, hats.