Thursday, July 30, 2015

Société Générale's Albert Edwards Descends Into A Nightmare World of Dream Demons and Market Depravity

Oops, sorry.
That was a headline from eighteen months ago.
Here's Albert's latest, via ZeroHedge:

"The Virtuous Emerging Market Cycle Is Turning Vicious" Albert Edwards Remembers The 1997 Asian Crisis
Given that some two-thirds of Wall Street traders have never experienced a Fed tightening cycle, SocGen's Albert Edwards is not surprised he gets blank looks when he tries to explain how recent events in commodity and EM markets are in many key ways similar to the 1997 Asian crisis.

SocGen's Albert Edwards explains...
Investors are right to feel that the recent rout in commodity prices differs from that seen in the second half of last year. Back then there was more of a feeling that the decline in the oil price was just partly a catch-up with the weakness seen in other commodities earlier in the year and partly due to a very sharp rise in the dollar ? most notably against the euro.

Indeed the excellent Gerard Minack in his Downunder Daily points out that ?US$ strength and expanding supply have been headwinds over the past four years. But the recent sharp decline in prices has been noteworthy for its breadth: prices have fallen in all major currencies, and across all major commodity groups (see charts below). This suggests that global growth has slowed.” But why?
One theme that has played out as we expected over the last year has been the rapidly deteriorating balance of payments (BoP) situation of emerging market (EM) countries, as reflected in sharply declining foreign exchange (FX) reserves (the BoP is the sum of the current account balance and private sector capital flows). We like to stress the causal relationship between swings in EM FX reserves and their boom and bust cycle.

The 1997 Asian crisis demonstrated that there is no free lunch for EM in fixing a currency at an undervalued exchange rate.

After a few years of export-led boom, market forces are set in train to destroy that artificial prosperity. Boom turns into bust as the BoP swings from surplus to deficit. Why? When an exchange rate is initially set at an undervalued level, surpluses typically result in both the current account (as exports boom) and capital account (as foreign investors pour into the country attracted by fast growth). The resultant BoP surplus means that EM authorities intervene heavily in the FX markets to hold their currency down. We saw that both in the mid-1990s and before and after the 2008 financial crisis (see charts below)....MORE