Sunday, September 29, 2013

Société Générale's Albert Edwards '"Is the Fed blowing bubbles to cover up growing inequality... again"' (September 27, 2013)

I've been asked why we continue to run pieces by Mr. Edwards, especially in light of our disparagement of fellow bear David Rosenberg.
The flippant answer is Albert amuses, Rosenberg doesn't.

More seriously, 1) Edwards made three calls in 2008 that were quite amazing, links below. 2) He has been more correct on interest rates (sub 2% 10-year) than anyone which is helpful because if you can get interest rates right you can pretty much figure out everything else.
(he is currently looking for sub 1%!)

I still don't understand this from a year ago but may have to just suck it up and move on.
Via ZeroHedge:
When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The "99%"

The premise in Albert Edwards' latest letter "Is the Fed blowing bubbles to cover up growing inequality... again" is simple: the unprecedented social inequality in the US (and the rest of the world - as pointed out here), and what it will ultimately lead to. Regarding what it will lead to, Edwards believes, is that "growing inequality drains the swimming pool dry. The crunch, when it comes, will be ugly." Simple enough.
Digging a little deeper.

It is ironic that nearly five years ago, we first posited that the only result QE would achieve as a result of reflating asset prices to astronomical levels, while transferring (in)finite wealth from the middle class to the 0.1%, would be an inevitable tear in the social fabric resulting, eventually, in outright conflict and/or war (and, ultimately, hyperinflation because the Fed will stop at nothing to reflate the debt, especially in a rising rate environment - even paradropping money from helicopters, something even Deutsche Bank agrees with now). Back then everyone called this (as so often happens) a naive conspiracy theory. Now, even respected strategists are starting to see things our way. From Edwards:
Some argue that central banks had no choice in the face of under-consumption, while conspiracy theorists might even conclude there has been some sort of unspoken collusion among policymakers to "rob" the middle classes of their rightful share of income growth by throwing them illusionary spending power based on asset price inflation. We will never know. But now it all makes more sense!
Naturally, economists being the last to voice concerns about the status quo (and their sanctity of their tenures of course), are even more muted. But even they are starting to admit the underlying threat.
Set aside any moral or political concerns you may have about rising income inequality - worries about poverty, justice, undue political influence or even social mobility. According to Mr. Dervis, co-author of the book, the research collected in “Inequality in America,” shows that a growing number of economists suspect that once inequality passes a certain point it may jeopardize economic stability and economic growth. As the book argues, "rebalancing of the distribution of income may play a role in unlocking the U.S. economy's growth potential in a sustainable way."

That is exactly the point Warren Buffet, Bill Gross and Stanley Druckenmiller make. You don’t have to be a communist to conclude that high levels of inequality not only adversely affects long-term growth, but also increases the economy’s vulnerability to recession.
Edwards then goes on to observe if in a world of record income inequality, all that matters is one's "starting point", i.e., being born with a silver spoon in the mouth. His conclusion: why certainly....MORE
That conspiracy theorists bit is funny in that back in 2010 Albert was saying "Albert Edwards, Societe Generale: "Theft! Were the US & UK central banks complicit in robbing the middle classes?". I think the psychologists call that projection. That said he is remarkably on message. From 2011: "Société Générale's Albert Edwards on Income Inequality and Serial Bubble Blowers (Nov. 23, 2011)".

Anyhoo, here's the string of calls he made in 2008:

June 26, 2008
Société Générale: “We see a y-shaped global recession. We are going down before looping backwards”
May 8, 2008
This Week’s Advice: Canned Food, Guns and a Ham Radio

On September 5, 2008 we posted "Meltdown"-Société Générale" which linked to Albert's research note of a couple days earlier:

***Alert****Economic and equity market meltdown imminent****Alert***
A good call.

On September 7, 2008 Fannie Mae and Freddie Mac were placed into conservatorship.
On September 14, 2008 Merrill Lynch agreed to be acquired by Bank of America.
On September 15 Lehman filed their bankruptcy petition.
On September 16 AIG became a 79.9% subsidiary of the U.S. Treasury.

Within 10 more days the Nation's largest thrift, WaMu was seized and five days later Wachovia gobbled up.

Good times, good times.

Finally he foresaw the emerging markets bubble but too early (2010) leaving some chips on the table
It's hard to hate the big lug for that, we were also early, August 2010:
Climateer Quote of the Day: Hot Money and Emerging Markets Edition
"Emerging market speculation tends to appear at a juncture in the economic cycle when 
declining yields on domestic bonds combine with an excess of capital to make 
foreign investments particularly attractive."
-Edward Chancellor
Chapter 4, Fool's Gold: The Emerging Markets of the 1820's
What was old is new again.
That passage came to mind when I saw this headline at Clusterstock:
The U.S. Slow-Down Is Sending Investors Overboard Into Emerging Markets
One of these days I'll get around to telling the story of National City Bank and their early adventures in securitizing sub-prime loans back in the 1920's.
National City is now Citigroup.
What was old is new again.