Wednesday, June 17, 2009

Soc Gen: "Expect New Equity Lows In H2", China Is The Global Achilles Heel

Just released, a new and highly relevant Weekly Strategy report out from Albert Edwards of Societe Generale. Not only does Edwards, who was previously vilified then praised for calling the 1997 Asian Bubble, see a significant drop in equities before the end of the year, his main concern is every optimist's greatest green shoot: China.
Most areas in the markets have now discounted a V-shaped recovery. Any doubt will trigger a rapid reversal in prices. I continue to be extremely sceptical and see recent events as part of a 1930s-like, long march to revulsion. Talking about long marches, nowhere in the world fills me with more scepticism than the Chinese economic recovery. The continued enthusiasm for all things China reminds me so much of the way investors were almost totally blind to the fact the US growth miracle was built on sand. China could be the biggest disappointment yet.
Edwards follows up with some very amusing observations on mass delusions:
It is amazing how easily group-think takes a vice-like hold in the financial markets. As the BRIC economies meet for their debut summit, few dare to speak out against the new, ‘New Paradigm’. We also saw this same investor mania 13 years ago with the Asian Bubble, which the consensus thought was a growth miracle. But to go that far against the consensus invites a deluge of hate mail. That is why I keep a copy of a World Bank book entitled Thailand’s Macroeconomic Miracle: Stable Adjustment and Sustained Growth It was published in October 1996, less than a year before Thailand’s (and Asia’s) economic collapse. It is all too easy for investors to buy into beguiling ‘growth’ stories which are in fact utter nonsense. If the bubble of belief in China’s medium-term growth prospects finally bursts it will have huge investment implications. I will be writing far more about this subject over this summer. But one thought, if China is doing so well how come Chinese company profits in the year to April are down some 30% yoy (see chart)?

SG have an excellent Asian economist, Glenn Maguire, who, unlike me, has been totally right about the recovery in the Chinese data this year (e.g. for example his Asian Economic Scrapbook – link). But it was notable that when the 6.1% yoy rise in Q1 GDP was published he said the real outturn was actually more like 3.5% yoy, but that the authorities “smooth” the data at turning points. Let me put that into plain English. The Q1 6.1% GDP outturn is simply a lie - and it helps explain why the Chinese data is derided by so many economic commentators. Many have highlighted that the GDP seems inconsistent with other data such as electricity output. This latter series remains weak. In May it declined 3.2% yoy and by 3% on the smoothed basis.

Yet few dare to point out that the emperor’s clothes might be absent. When, for example, the International Energy Agency had the temerity, a few weeks back, to suggest that the Chinese authorities were inflating the data (link), they were met with a robust broadside from the Chinese National Bureau of Statistics. The NBS said on its website "“It is regrettable that the point of view in the original article is groundless…...We believe that, for an international organization, this approach lacks seriousness”"– link. I think this is a case of me thinks thou doth protest too much. Nevertheless, an article on Radio Free Asia reported that The National People’s Congress had found “serious fabrication” in official statistics – link and link.
The China doomsday scenario is nothing new, although mocking Edwards would be deja vu (and reckless) based on his prior correct prognostications. Furthermore, it is in both the US and China's interest to perpetuate the con game that everything in either country is fine. Yet the truth is that the economies of both countries are accelerating their deterioration, yet the respective governments, in an attempt to hold the wool over everybody's eyes, will be unable to do anything to really address the issue, until in tried and true fashion, it is much too late.

Instead of feigning concern over declining 401(k)'s and the lack of Joe Sixpack's latest credit fueled Plasma TV spending spree, our President should address every single weakness that America is suffering from, highlight it, and provide realistic alternatives to fix it, instead of betting the farm on increased leverage and speculative second derivatives of hope. The same goes double for our biggest creditor, although both imploding at the same time due to a disconnect between reality and perception, would have a poetic symmetry to it.

hat tip Oso Sphere: Related Content
Print this post
blog comments powered by Disqus