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Albert Edwards: "The Global Credit Crunch Is Not Receding, It Is Intensifying"
Granted, you wouldn't know it if you followed the stock market melt up as the wild rush to eek out any and all P&L before tax loss selling season hits (assuming there even is one this year), but read on. If nothing else, SocGen's Albert Edwards, unlike many others, has stuck to his convictions.
The reasoning behind the acceleration of the credit crunch is simple and needs to be reemphasised. The unwinding of the grotesque debt excesses of the last decade have only just begun (see chart below)! Rapid expansion of government debt and QE will not and cannot prevent the revulsion that is now underway (the Fed publishes the Q2 update of the debt data today, Thursday.
In addition, banks are retrenching their loan books as policy makers force higher capital requirements. In all probability this process would occur irrespective of government involvement as banks inevitably act pro-cyclically, exacerbating both boom and bust. But as we repeatedly highlight, one of the lessons from Japan is not to mistakenly believe that banks are the problem. Similarly a healthy, recapitalised banking sector is not the solution. As Japan experienced before, it is de-leveraging that is the problem and retrenchment takes many years, rendering the economy extremely vulnerable to rapid relapses back into recession when any reverse or pause in extreme stimulus occurs. The Great Moderation relied on the debt super-cycle which is dead and buried.
Some other observations include the ongoing decline in both bank lending and the monetary base, both topics extensively discussed here previously: in essence confirming, over and over and over, that even as gobs of liquidity are injected into the market they have no place else to go but in risky assets, and paradoxically, safe ones, explaining the ongoing melt up in both equities and Treasuries.
One doesn?t have to be a dyed-in-the-wool monetarist to be very disturbed at the recent developments in the money data - although it definitely helps. The US stands out as having suffered a massive monetary shrinkage in the last few weeks. The bank lending data is even worse that the money supply data. US bank lending is contracting at an unprecedented annualized pace (our data goes back 35 years and this is a record contraction both for the three-month period shown in the chart below and over a six-month period).
Despite the three- and six-month annualised decline in bank lending (ex securities) running at
the fastest rate since the Great Depression, the year-on-year rate of decline, although
negative, is not yet nose-bleed double-digit deep. It will be soon though.
And the core empirical observation, which ties the whole deleveraging concept in a tide little packet which the Fed apparently, no matter how hard it tries to push equities higher, will have major headaches with, is the discussed continuing consumer deleveraging.
Among the more shocking credit data recently, July?'s $21bn contraction in US consumer credit was double expectations. Credit is now contracting sharply. And to the extent that this is supply led due to bank capital adequacy problems, things are set to get worse. Deutsche CEO, Joseph Akermann, pointed out recently that 2010 will see the ?next wave? of the financial crisis due to mounting bad loans from consumer and corporate borrowers. ?Banks that have fared relatively well so far will also be affected by this?." He certainly thinks ?the crisis is not over?.
Yet what it ultimately boils down to, is at what point will the Fed be satisfied that the economy is truly stable and stop the "monetary diarrhea". Contrary to the Chairman's soothing words on the stability of the economy, it is unlikely that rates will be raised for many years, thereby setting the seeds for the next credit crisis, which however assumes that the consumer will at some point return to the profligate spending ways of the past. Yet consumer psychology is tricky, and with the shadow credit system dead and burried, despite numerous reincarnation attempts, this is the biggest wildcard which the pundits seem to ignore even as they highlight how cheap the market is relative to its all time highs. What they seem to be forgetting is the ten of trillions of "money" in the liquidity pyramid that is gone for good. But at least they get some free airtime, and an opportunity to pump whatever stocks they need to go up by x% before they sell them to unwitting and naive investors/speculators, who had the misfortune of believing what they said.
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NICE!!!!!!!
The "rosy pink" portion representing the "smart financials" loading and re-loading leverage. Actually of all the debt loads the financials seem to be carrying the highest debt as a percentage of GDP !!
It would be helpful if you gave some information on the authors of some of your posts, to give more credibility. I'm not talking about Tyler Durden. Rather, Albert Edwards, in this case.
Albert Edwards is of the same ilk as Rosie and Janjuah - he called the crises well before most others. And while he did miss this rally, he has no problems making tactical calls, as he did last year i believe, despite his fundamental conviction.
I think it was in November that he upped his equity stake to grab a bounce, or as he might have said: cynically participate. He still kept his target of S&P500 at 500 points, though.
I haven't been able to follow his work through summer, but I remember he said in spring he'd write a lot about China being a big joke. Anybody updated on that, or carry any links? Thanks
If you hadn't been spending so much time in your cave, you would know that Albert Edwards is the global investment strategist at Societe Generale.
He is apocalyptically bearish and a dyed-in-the-wool deflationist, which explains why he gets ZERO coverage anywhere in the MSM.
My cave is great, thx.
If he such a bear, then he missed the monster rally. Not sure why I should listen to him.
If you listened to him and others like him and cashed out in 2007, you would have missed the monster crash and not give 2 shits about this recent Fed induced rally...
I am going to give you a gem.
This article is from May 30, 2008. It is a discussion between Albert Edwards and his x partner James Montier on what they see occurring over the next 12 months. It's accuracy is stunning.
Read it and tell me how much respect you now have for what Albert Edwards has to say.
http://bigpicture.typepad.com/comments/files/053008_Welling_Edwards-Montier_REPRINT.pdf
Thanks for this classic.
I love how much they bash on Irving Fisher.... they should read "Booms and Depressions" and rethink how much they should quote his bull calls which completely wiped away the wealth and career of undoubtedly the most intelligent economist who ever lived. In atonement he figured out the fundamental aspects of deflation and produced comprehensive policies that were quickly suppressed or ignored.
Thank you Ms. Lizzy
Newspaper stocks...government bailout coming
http://www.fitzandjen.com/2009/09/newspaper-stocks-soaring-.html
No offense, but that was rumored and factored into the stocks 200-400%+ ago. I'd hate to meet the buyers today (if there are any humans in those names anymore). One of the hottest sectors off the BK lows since Spring.
Liquidity shrinkage preceeded the last down leg. Not by very long.
That was different. This is a liquidity and credit shrinkage among consumers. Last was among banks. In the rearview mirror it is now obvious that this is about a predator class of banks and consolidation in the industry. BSC, LEH, MER, and effectively C were euthanized and GS and JPM have been the main beneficiaries of that crisis. There is not yet a liquidity problem for banks. They can get free easy cash from the fed in exchange for already eaten cheeseburgers or not yet flown frequent flier miles.
The bigger banks will start sopping up the deposits of hundreds of regionals who are being starved of revenue from shrinking consumerism and paying the price for the bigger banks gambling problems via higher FDIC premiums that all but wipe out their miniscule profits. The predators are biggering themselves through a highly orchestrated scheme with the FDIC.
Excellent post! Great insight!!
Tyler, if you could post the whole note, it would be much appreciated.
Report tips on why the Shit hit fan WWW.TELLTHECOMMISSION.COM (they have $5 mill to write a report)
Bernanke lied, the dollar died.
The DXY seems to want to hold this 76 level though. And bonds are very well bid, yet again. Will the f'in stock matket fall for one darn session!?!?!? good lord already!
So if every household, every company, every bank and every government is going to default on their debt anyway, does it make sense to go buy as much crap as I can right now?
I mean, we're all headed for bankrupcy. What was that earlier post? That debt is at $118 trillion, or something like that? That will never be paid off, ever, without devaluing the dollar by 99%.
So in the next economic catastrophe (i.e. next year), to what extent are all debts going to just be written off?
I should go pick up that Mercedes. Or max out my credit cards to buy gold.
If you seriously think the entire world is about to default, then buying a Mercedes is insane.
Buy food that stores well, ammunition, and friends. You will need those in abundance in a world in an advanced state of default.
cougar
Paging all Federal Reserve Loadmasters. This is going to require the mother of all airdrops. And then some more.
http://www.federalreserve.gov/releases/z1/Current/
America is not alone in the stimulus but as the world's largest economy it is the most noticeable and attracts the most attention.
If you ever stub your toe, a quick way to end the pain is to burn yourself. You'll quickly find you no longer notice the pain in your toe.
Global stimulus:
http://www.brookings.edu/~/media/Files/rc/reports/2009/03_g20_stimulus_p...
Selected highlights:
Euro:
http://www.efca.be/downloads/archive/21c6973a-03a4-43cb-a901-f1855a10c7b...
Saudia Arabia (9.4% of 2008 GDP):
http://www.brookings.edu/~/media/Files/rc/reports/2009/03_g20_stimulus_p...
Debt can be renewed and reissued as it profits both the lender and ostensibly the borrower who uses it for wealth creation, but stimulus is dead money, especially as it accumulates on balance sheets and in worthless assets (in the sense of working capital) like gold.
Adam Smith has a lot to say about all of this in "Wealth of Nations". He talks about poor countries where money is buried in cans and not put to work and the consequences of this on an economy as well as attempts to prop up lending and the rest.
Those at the Federal Reserve must have studied up on the lessons of the Depression, but I wonder if they reviewed the cliff notes that the wealth of wisdom and insight provided by Adam Smith so very long ago?
Albert Edwards mentioned the Z1 release today will have updated debt data... Here are graphs of it showing the increased rate of private sector deleveraging (i.e., all debt, not just bank credit):
http://www.thoughtofferings.com/2009/09/total-borrowing-continues-contra...
Of course none of these discussion points matter to leading policy makers and TBTF institutions who are still stuck upon the failed concept that we are witnessing a crisis of confidence & liquidity and not one of solvency. Soon it will be plain for all to see that a lack of solvency throughout the economy is the root even as stocks and treasuries continue their climb in tandem fueled by the gobs of free Benbucks all the while the velocity of these Benbucks nears zero.
I agree to a point. Edwards says deleveraging is the problem. Wrong. Deleveraging is the solution. Excess leverage accumulated over the past 20 years is the problem.
+1 - The solution to a problem cause by too much debt, is not more debt.
If any question why we died, tell them because our father's lied.
Rudyard Kipling
The first part of Edwards' piece (from alphaville)
“Money makes the world go down”.
One of the key reasons I remain in the bearish camp is that I believe monetary stimulus will have only a limited impact in reviving the global economy. Massive quantitative easing (QE) around the world has undoubtedly melted the clots of some of the most clogged arteries of the global financial system. That has made things less worse, which is not the same as better.
Indeed, debt aversion is causing bank lending and the money supply to slump (outside of China). In this environment it is difficult to see a self-sustaining recovery taking hold.
When you look at the ever shrinking rate of bank lending to the private sector around the world it is clear as the nose on my face that the global economy is still very, very sick.
The reasoning behind the acceleration...
Paul Volcker allowed out of house to speak about economy and financial regulation
After speaking the truth, Larry Summers orders Paul to be stuffed back in closest.
http://www.fundmymutualfund.com/2009/09/paul-volcker-long-way-to-go-for-...
Thank you.
No actually, Summers sent Volcker across the street to Farragut Square to feed the pigeons, and read the primer on becoming a Goldman pledge and the want ads incase he can't get past page one.
does anyone know if the USA was a net importer or net exporter in 1929?
http://books.google.ca/books?id=0wVWNT5tojAC&pg=PA19#v=onepage&q=&f=false
thanks a bunch ANON, I've looked for this previously and couldn't find it. It is undoubtedly much easier to pay off debt if you actually produce things, other than debt, that your creditors buy.
Lies and heresy. Even children today know you can pay off debt with fiat currency printed for the purpose, end of story.
Now, would you prefer to be burned at the stake, or broken on the wheel? America in 2009 is all about choices.
Fire please, I'm a big time pyro.
Largest net exporter on the planet. And we loaned money to the Europeans so they could buy our "cheap tin crap." :-)
This is why all the panty-knotting around here about Smoot-Hawley is way off base. China has far (far far) more to lose than the US if a trade war starts.
If you think about it, it makes sense. We have millions of laid off workers. If suddenly shoes become too expensive to import due to a trade war (or declining dollar), some enterprising soul here in the US of A will open a shoe factory and take advantage of rapidly cheapening American labor. In three years, you will probably have 20 shoe factories operating in the US. On the other hand, in China, the same situation throws 1M+ laborers onto the street. Absent their largest market, no new shoe factories will be opening up to absorb those workers. Next step, deflation, depression, civil unrest. Exactly like America in 1933.
Is there anywhere to find Edwards' commentaries (other than here)? I've looked through SocGen's site before and can never find any of his work. I used to look back when he and Montier had the dynamic duo going.
The reason why an Albert Edwards would miss the rally, is because they have no faith in the fundamentals.
Yes, they will miss profits on a rally, but who did put the house on in March? People have started jumpin on around May/June and in my opinion, they will be caught in the next downdraft. The fundamentals are there for it, however (as is always the case) the market is going parabolic and is ignoring bad news.
The sad fact is this: fundamentals are calling for a pause (at the least) but the industry and media will have retail investors fearful of missing out on the big gains ahead so the market will continue going up and up, until the next big event, because the markets run on fear and greed and have no ability to price efficiently.
What part of investing in the stock market right now is not about gambling?
I think that most of the playerz right now think they can time it. They are mostly there for the Big Event of which you speak. They are market timers, which we all know is a wild double-down gamble. Most of them will blow up completely at the end of the run up. A very few will profit. Who lands where is very much a random lottery. Like all gamblers, every man-jack thinks he'll fall into the latter group. Every. Single. One.
Watching the market move up against all logic is... illogical. Like watching the Powerball lottery amount rise every week that there is no winner. It goes up because... it didn't go down. End of lesson.
It's an end-game. The winners and losers both leave the stage after this. There is no second act in this play. There will be a new show later, the actors then may not even be the same people. Different rules, different field, different policies. Nobody can guess. Play the game you've got, get out when the curtain goes down, let the dead clean up the mess.
+1
Want to talk about folly of epic proportions:
http://www.independent.ie/world-news/middle-east/extravagant-dubai-islan...
Not even Hollywood could produce a box office flop of this magnitude.
Hey guys I am newbie I wanted to ask when the economy looked it's sickest first part of 2009. How can a stock market rally commence? I mean we are are really only see the green shoots taking hold now some six months later. I don't understand it at all, even those buying in the stockmarket surely the fact we had an enormous crash just one year ago would have made people nervous about getting back into the market. Nothing makes any sense. The economy is still ailing and yet the market keeps going higher? What sort of idiot buys in a market like that? I know lots of people here in Australia who were in the market last year and are not now and have no intention of getting in they all feel something is not quite right.
where do you suppose all this FED money is going??? Are the banks lending to you? To the store owner? Home loans? No, all the bailout money is going into the market. Along with pension funds trying to play catch up and the paid to play fund managers. This is a trend that is all, no fundamentals. Almost 30 of the 'poor' volume is Goldman alone buying and selling a fraction of a cent trades. Noise and stage props in empty shell companies is what you are seeing. The music will stop suddenly in the near future...how is you timing in such things?
So people really think Edwards missed the whole rally? Well not so fast, read this:
http://ftalphaville.ft.com/blog/2009/06/04/56628/albert-edwards-uber-bull/
Preservation of Capital...that is what Paul Volcker taught me in the early 1980's. Credit can vanish in to thin air, so can all those 'profits' on stocks and real estate. It is better to be wrong and save your capital for another day than be caught without a chair to sit in when the music stops. Investments: zero, Capital 100%. Edward Albert will be ready, and so will I...gambliers govern yourselves accordingly...
So modern society is about to collapse, the whole economic system has been revealed to be a total joke. People are going to have to go back to a more simple way of life, growing their own food, and not wasting trillions of dollars on useless things like Starbucks, celebrities magazines, 60 inch televisions, etc. We will simply have to buy those things required for survival.
In the end, I believe that the entire western civilization is going to collapse. In the long run, I think this will be a good thing, since most westerners are not very happy people anyway.
I loathe these anti Obama pseudo-racist arguments all dressed up in scientific economic clothing - get with the program! Anything else is just plain racist.
I loathe these anti Obama pseudo-racist arguments all dressed up in scientific economic clothing - get with the program! Anything else is just plain racist.
"So modern society is about to collapse, the whole economic system has been revealed to be a total joke. People are going to have to go back to a more simple way of life, growing their own food, and not ...."
You couldn't be further from the truth. You must be a defeatist. The state of the U.S. economy is recovering. It may be at a slow rate, but nevertheless it's returning to a sustainable mechanism.
Ben Bernake said it a couple of days ago.
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Hey guys I am newbie I wanted to ask when the economy looked it's sickest first part of 2009. How can a stock market rally commence? I mean we are are really only see the green shoots taking hold now some six months later. I don't understand it at all, even those buying in the stockmarket surely the fact we had an enormous crash just one year ago would have made70-515 | 70-516 | 70-516 | 70-519 | 70-523 | 70-526 | 70-528 | 70-536 | 70-542 | 70-547 | 70-562 |