Societe Generale analyst Albert Edwards is out with his latest report. He is annoyed with the current media blabber that “There isn’t a bubble in asset prices” even when central banks keep pouring in an unprecedented amount of money into the financial system. Many analysts argue that central banks learned their lesson in 2008 and can easily take prudent policy measures if anything goes wrong. That’s nonsense, says Albert Edwards. As the chart below shows, central banks have no other option but to keep printing money to avoid default. And the U.S. is sandwiched between PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries.
Albert Edwards on the case of anchoring
Edwards was among the few people who saw the global financial crisis coming in 2008. But like others, he was ignored amidst the euphoria. This time, too, Albert Edwards sees several signs of bubbles. And the most visible of them is housing prices. He says it’s normal to see a 10% jump in housing prices in London within a month. U.S. home prices have also been rising consistently. Edwards noted, “I have never ever seen anything like the current frenzy. We are in the midst of the mother of all housing bubbles.“
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The current bubble is propelled by extremely loose monetary policy. It’s the aim of central banks to move house prices briskly upward. People think that the current scenario is not a bubble simply because mortgage volume and transactions are way below their peak. That’s a case of anchoring, says Albert Edwards. In 2007, equity strategists argued that equity valuations were not even close to the 2000 bubble, so equities were cheap. The same thing is happening today. Housing transactions and mortgage volumes are below their 2007 levels, but that doesn’t mean there is no unsustainable bubble.
Albert Edwards: China’s situation is alarming
Chinese authorities are also losing control over housing price hikes. House prices in first-tier cities such as Shanghai, Beijing and Shenzhen grew at a startling rate of more than 15% in September. As the chart below shows, house prices in Asia’s largest economy have accelerated at an alarming rate since March 2013. Chinese policymakers are focused, just like their Western counterparts, on keeping growth going with the help of stimulus measures. Of course, that increased China’s growth rate to 7.8% in Q3, a respectable figure. But if you look at China closely, the country is crippled with the credit crunch, bad debts and shadow banking. That’s an unsustainable situation.
Albert Edwards says that the global economy looks like an appalling mess. The long-term equity investors can’t find anything worth buying. U.S. price/sales ratios are hitting record highs, suggesting that there is nothing undervalued in the equity market left to buy. Many brave investors who see what’s coming are withdrawing from the equity markets because they can’t find anything cheap to buy, says Albert Edwards.