Thursday, November 4, 2010

UPDATED: Société Générale's Albert Edwards: Emerging Markets and Commodities (November 4, 2010)

Update below
Original post.
For long-time Albert watchers this introduction is hilarious. From FT Alphaville:
We’ll skip the stuff on the Ice Age, looming recession, competitive devaluation, protectionism and the 60 per cent off equities forecast (all of which is getting a little bit repetitive) and get straight to the freshest bit of the latest Global Strategy Weekly from SocGen’s Albert Edwards.
And it concerns the consensus trade of the moment – emerging markets and commodities.
The argument that QE2 will be transferred to emerging markets is, says Edwards, entirely valid. Unfortunately this irresistible force is about to hit an immovable object, he believes.
Dylan Grice and my erstwhile colleague James Montier have one key point in common when it comes to their investment approach – namely they both recognise the futility of economic forecasting. Dylan’s mantra (apart from “make the tea Albert”) is “there is no such thing as toxic assets, only toxic prices”. Hence, like James, he is happy to invest if the asset is cheap enough. This approach also applies to insurance. Where there is a credible risk and insurance IS CHEAP, then one should buy that insurance. Hence his recent note on the high risk of runaway inflation in Japan sending the Nikkei to 63,000,000 in 15 years came to the conclusion that insurance is cheap and it is available.
In the same context, his note last week showed that to the extent that EM had become the liquidity and momentum trade de rigueur, valuation was not a binding constraint and prices could rise significantly if we were to reach the same excesses seen in 2008 (see charts below). Even a wizened bear such as myself would buy out of the money calls if they were cheap enough as a hedge against my central case being wrong or, indeed, too early...MORE
UPDATE: Société Générale's Albert Edwards Does Not Capitulate, Sees Emerging Markets Bubble Pop Triggering A 60% Decline In Equity Prices