Monday, September 20, 2010

Société Générale's Albert Edwards: The descent into global C-H-A-O-S (September 20, 2010)

From FT Alphaville:
It’s Monday and time for another helping of doom and gloom from Albert Edwards.
This week SocGen’s ’strategiste global’ is in particularly bearish mood, arguing that all of the ingredients are now available for a meal of global chaos.
Bon Appétit.
First, fry some ideologically-driven policymakers for slashing fiscal deficits at a time of sky-high unemployment and inequality:
I have every sympathy with economists who say that governments are insolvent. My colleague Dylan Grice showed recently that, once unfunded liabilities are included, it is obvious that most governments are already insolvent, with debt to GDP ratios closer to 500% of GDP than the official estimates for most G7 countries (see chart below and link). It is simply too late. We’re stuffed either way and cannot escape the consequences of years of private and public sector debt debauchery, much as we might pretend otherwise.
Yet government insolvency does not prevent me from being persuaded by Richard Koo’s book about the lessons from Japan’s balance-sheet recession. The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. And any attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery and hence as Koo shows the budget deficit ends up even bigger. This is exactly the outcome I expect in the UK, especially.
Then add some Chinese currency manipulation:
Our Chief Economist, Michala Marcussen, thinks that the Chinese, in starting to buy Japanese assets, have pushed up the yen and effectively forced the BoJ to intervene. She writes, “China may thus be the big winner from Japan’s intervention; winning on three levels (1) diversifying reserves (albeit still only a small amount) and reducing its exposure to the US dollar, (2) escaping the title of currency manipulator, and (3) placing Japan in the hot seat ahead of the G20, thus detracting attention away from itself.
I would contend that China is now playing a very, very dangerous game. With the US trade deficit deteriorating again (see top right-hand chart above), and – much to my surprise – the Chinese trade surplus widening, patience is rapidly running out in the US with China’s currency policies. I believe we are now nearer to an outbreak of trade war than at any time since the 1930s. Any downturn in the global economy back into recession would almost certainly guarantee such a result, as the political pressure to do something mounts.
A touch of inequality to season...MORE
I like the "...particularly bearish mood" bit.
It was 54 106 weeks ago [math whiz -ed] that Albert put out one of the more timely analyst calls:
September 5, 2oo8
"Meltdown"-Société Générale
***Alert****Economic and equity market meltdown imminent****Alert*** 
On September 7 Fannie and Freddie were placed into Federal Conservatorship.
On September 14 Bank of America announced it was in talks to acquire Merrill Lynch
On September 15 Lehman filed for bankruptcy
On September 16 The U.S. Treasury announced the first $85 Billion tranche of AIG bailout loot, in exchange for 79.9% of the stock in the former world's largest insurance company.
On September 25 the Office of Thrift Supervision seized $300 Billion assets Washington Mutual and placed it into FDIC receivership. It is the largest bank failure in American history.
On September 29 the FDIC forced Wachovia to sell itself, ultimately to Wells Fargo.

So how ya feelin' Albert?

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