At the start of his latest note, SocGen's Albert Edwards highlights a recent warning by the Chinese central bank that that financial risks associated with “grey rhino” events - highly obvious yet ignored threats - may surface next year, and reminds readers that going into the 2008 Global Financial Crisis, many of the massive macro imbalances and credit bubbles that ultimately sunk the global economy were all too apparent.
Yet, with his usual gloomy irony, Edwards notes that back then these "grey rhinos" were dismissed as serious threats by mainstream commentators - the same way they are being dismissed now - "in large part because they had been in plain sight for a long time, and yet the global economy had continued to go from strength to strength. Hence naysayers, such as myself – who had correctly identified the extent of the credit bubbles and global imbalances, and hence the likely depth of the coming crisis – were dismissed as stopped clocks (and I still am)."
The SocGen strategist takes this trip down memory lane for two reasons: first to point out that it is not angst about the unknown that gets traders killed - it is complacency about what is obvious to everyone that is the real danger:
I remember being told many years ago on a South African game reserve that the buffalo was the most dangerous of the big five game animals. In large part, this is because of the complacency shown towards them relative to the other, more obviously dangerous big five game animals (ie the lion, leopard, rhino and elephant). It's also a fact that unlike the other big five, the buffalo gives no warning of an imminent charge (see link). It’s complacency that gets you killed, and the same goes for investors with the macro-risks. We all know what the big macro-imbalances are out there, caused by years of loose money, but investors continue to ignore them at their peril.The second reason is to give the context for his report, in which Edwards shifts away from his usual observation subjects, to focus on what he believes may be two potential epicenters of the next crisis, to wit:
We spend most of our time on these pages focusing on the two biggest threats to the global economy - the US and China, but Japan, the eurozone and UK certainly have glaring macro imbalances and financial bubbles that might burst at any time. The UK probably has one of the worst and most obvious problems, caused by years of easy money, but Brexit has diverted attention from the slump in the saving ratio.
Looking at the collapse in the UK savings rate, a topic he has discussed previously, Edwards writes that despite the slump in savings, the UK economy has actually decelerated substantially below 2%, and while most mainstream market commentators have attributed this weakness to Brexit uncertainty, Edwards believes there is "a far simpler explanation": namely fiscal tightening.
Two years of massive UK public sector fiscal tightening, in both 2016 and 2017, removed some 1¼% from both years' GDP growth (see chart below). Without that savage fiscal tightening, UK GDP would have quite happily skipped along at a 3% rate, well in excess of the eurozone, where the fiscal impulse was neutral. Contrary to what most mainstream economists would have you believe, weak UK GDP had little to do with Brexit uncertainty.
...MORE
