Societe Generale’s Albert Edwards has provided an insightful, but bearish, view of the state of the global economy. Here are some key extracts (full report below):
As we see a short-lived economic recovery failing only two years into the cycle and a plunge back into recession, we remind investors that this was exactly the Ice Age template that Japan showed us. A fragile recovery undermined by private sector deleveraging collapses as a semi-bankrupt government tries to rein in runaway deficits…
I and many others have been pointing out for a long time now the simple fact that the global economy has been living way beyond its means for years. A massive transfer of income to the very rich has occurred while middle class real incomes stagnated. The middle classes only tolerated this because Central Bankers created housing booms to keep the impoverished middle classes borrowing and spending to give them the illusion of prosperity and stop them from revolting. I believe the Fed and Bank of England, in particular, were wholly complicit in this ‘daylight robbery’.
These unsustainable private sector, debt mountains were transferred to the public sector in 2008 to prevent the adjustment to the depression-era reality that the debt unwind would undoubtedly have brought about. Yet, those debts are as unsustainable in the hands of the public sector as they were in the private sector. Central bank polices haven’t changed though. Print and print and print. And if that doesn’t work, print some more. And as London burns, the point I have always made is that the US and UK are not like Japan in one very special way. Although Japan suffered a decade of pain it is a very homogenous, equal society (see below). The UK and US are not…
In the Eurozone, the markets are now realising what should have been obvious from the start. The authorities are in very little position to halt the rot. During the bubble (aka The Great Moderation) the Eurozone had the same mechanics of mutually assured economic destruction that was seen on a grander scale between China and the US, viz the excessively loose US monetary policy causing a housing and spending boom that resulted in a huge trade deficit, financed in the main by a willingly mercantilist China printing money ad infinitum to keep their fixed exchange rate link (incidentally it’s a bit rich for the Chinese to complain about the US profligacy when they are just as bad when it comes to cranking the printing press).
The Eurozone has been no different to this unstable US/China nexus, with some member countries enjoying (suffering?) super loose monetary policies through no fault of their own (unlike the US), leading to housing and spending booms causing huge trade deficits funded in the main by Germany with a Chinese-style trade surplus, with their banks lending money to the deficit nations in the periphery to keep the party going.
So, during the Great Moderation, although the overall trade situation of the Eurozone seemed to be in external balance with the rest of the world, under the surface the situation was always every bit as unstable and poisonous as the US/China situation…
The best summary of the situation I have seen so far.
The only thing that could have been added by Albert was the catalyst of the destruction of the middle class and enrichment of the rich was globalisation.
And once all the money was spent in China, the US, and to a similar degree the world asked for loans from them, spent that money in China too and now they are stuck paying it back with a reduced ability to actually generate profit.
“And as London burns, the point I have always made is that the US and UK are not like Japan in one very special way. Although Japan suffered a decade of pain it is a very homogenous, equal society (see below). The UK and US are not…”
What will happen in China? Last time inflation jumped tanks were needed on streets
“These unsustainable private sector, debt mountains were transferred to the public sector in 2008 to prevent the adjustment to the depression-era reality that the debt unwind would undoubtedly have brought about.”
I think this was one of the greatest thefts ever to take place and it just goes to show how little control people have over their own governments.
Insightful comments. Edwards and Russell Napier have both predicted the S&P will get down to 400 although they differ on how it’ll get there.
Edwards thinks that will happen while treasuries yields are super low, where as Napier thinks a ‘reset’ of treasury yields (whereby the emerging markets stop buying the USD and treasuries) will cause the final leg in the bear market.
More on that here:
http://runredhot.com/?p=3941
“do not appoint an academic to head up the Central Bank. Their certainty of view (often an academic characteristic) is simply far too dangerous”
dont just apply this to central banks, but all walks of life…