The latest from Albert Edwards of SocGen. Below is the summary of his report as well as some good charts from the note just released.
Albert Edwards: EM rout is merely the final tweet of the canary in the coal mine
The emerging markets ‘story’ has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P 500 (.INX), sub-1% US 10y yields and gold above $10,000.
Also see Albert Edward’s favorite China analyst- Charlene Chu Interview with Goldman on China’s Credit Bubble
The last few weeks have conclusively demonstrated the idiocy of one of the key investment themes since the 2008 Great Recession – namely that with developed economies burdened with excessive debt and in the throes of multi-year deleveraging, investing in emerging markets would not only produce superior returns but was also less risky. Regular readers will know we have long railed against this idea, having dubbed the BRIC story a Bloody Ridiculous Investment Concept.
But my former colleague Dylan Grice pointed out the perils of calling things too early. In his latest letter to investors he quotes a Rabbi Shlomo Riskin who pointed out ‚When you’re one step ahead of the crowd you’re a genius. When you’re two steps ahead, you’re a crackpot?. Arizona Jewish Post, 18 September 1998 (see Edelweiss Journal July 2013).
Albert Edwards: EMs were heading for a balance of payments crisis
And so our call at the end of last year that the EMs were heading for a balance of payments crisis and would see a currency debacle similar to 1997 was met with total indifference. We still find the same disregard to our call for a renminbi devaluation..
The global economy and markets have been far, far more vulnerable to a resumption of the 2008 crisis than the happy-clappy consensus would have us believe. At the moment, investors think that problems are isolated to a few EM countries that have allowed their current account deficits to get out of hand. I see this as the beginning of a process where the most wobbly domino falls and topples the whole precarious, rotten, risk-loving edifice that our policymakers have built.
Albert Edwards: The current EM FX turbulence leading to a renewed global recession
My outlook remains the same. I see the current EM FX turbulence leading to a renewed global recession, with waves of deflation flowing to the west from Asia as China is ultimately forced to devalue in the face of an unrelenting loss of competitiveness, most especially against its EM rivals. The structural US equity valuation bear market will then embrace the third major leg in its long and volatile Ice Age journey. With fiscal firepower essentially spent, QE will be ramped up exponentially as the Fed doves coo in universal reassurance that they can still save the world. In fact, as Marc Faber says, they will destroy it. Ultimately I expect a new phase of aggressive QE will lead to inflation that is unlikely to be containable. Policymakers have no idea how much QE is too much, other than by looking in the rear-view mirror. But, until this unfolds, I remain resigned to being Rabbi Riskin’s proverbial crackpot.