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Albert Edwards Warns Of Western Authorities' Positioning For Dismal Failure, As US Becomes Japan Redux
Albert Edwards continues doling out common sense; everyone, and the market in particular, continues ignoring it.
Ben Bernanke?s claim to have learnt the lessons from Japan has long reassured investors. Yet to my mind, perhaps the biggest lesson from Japan would have been not to allow a gargantuan credit and property bubble in the first place, for the ultimate burst would be ugly indeed. And now we know from the last payroll report that, including benchmark revisions, the US economy has to date lost some 8 million jobs in this recession. This sorry state of affairs was wholly avoidable.
I have long believed that a post-bubble world would play out in a very similar fashion to Japan?s lost decade of the 1990s. To be sure there are huge differences, but the similarities are also surprisingly close. Bubbles have a habit of playing out in a certain way.
Albert provides a good opportunity to visualize the current economic environment courtesy of the Albuquerque Journal.
Yet who cares about warnings when the latest group think mania has now devolved to once again claiming that the Great Moderation is back with a bang. Yet how can that be when the great valuation hole is currently being filled with one-time liquidity compliments of the dollar debasing Federal Reserve printing machine.
I remind readers of a few simple key facts that continue to nudge me towards the view that the Western authorities are set for dismal
failure in their attempts to atone for being asleep at the wheel.
One of the inevitable realities of macro-economic bubbles is that they will eventually move to the stage where a ?new paradigm? chant is taken up by the choir of universal group-think. I think still one of the most serious consequences of the busting of The Great Moderation nonsense is that we return to an age when recessions used to come thick and fast. In a pre-Great Moderation world, without the full pernicious use of the debt super-cycle to smooth out recession, the volatility of the economic cycle was undoubtedly far higher (see chart below). In the pre-war and 19th century it was higher still. I believe that investors are still expecting that the current recovery, sub-par as it may be, will persist for some years. Investors are not prepared for The Great Volatility that will now replace The Great Moderation.
The post-bubble whiplash in the economic and profits cycle is exactly a replay of Japan?'s experience. They too had seen an extended period of strong and steady growth going into the peak of the bubble. It took many years, repeated painful lapses back into recession, and sharp declines in equity markets before investors fully de-rated valuations low enough to reflect a new new (or maybe age old) paradigm (see chart below).
And some thought from Albert on whether March 2009 will be the equity lows. In a word (or two): hell no.
The de-rating of Western equity markets from their New Paradigm highs is still unfinished business. In Japan it took many cycles to fully purge their excess valuation. I have a clear and vivid recollection that at the peak of each mini-cycle, market strategists protested that equities were so very cheap they couldn?t possibly de-rate any further; yet they did (see chart below).
I hear those siren voices saying the same thing now. I also heard those same voices 18 months ago before the worst of very bad bear markets unfolded before our eyes. In my view, March 2009 was not the nadir of cheapness. That is still to come. It arrives when the current cyclical upturn begins to cough and splutter. This is the continued reality of the Ice Age.
Yet even Mr. Edwards is not fool proof and he acknowledges it. In fact, he provides a useful shorthand mechanism to watch for his bearish thesis going awry. What are the indicators to watch for?
But let me be humble for just a second. One question I am often asked at the end of a presentation is “how will you know if you are wrong?” Resisting the temptation to totally reject this possibility, I think perhaps I can identify one thing that might indicate this post-bubble world had defied the law of gravity and was reinflating again. Back in the early 1990s minicredit crunch it was not until the middle of 1993 that private sector demand for credit began to grow (supply was not a problem as banks were already healthy). To gauge whether the world economy can surprise and escape this balance sheet recession, keep a very close eye on the bank lending numbers. They may hold the key.
Alas, if completely stalled bank lending to date is any indication, Mr.Edwards has a long way to go before having to face critics. In fact, if Japan, which is the benchmark for this whole fiasco is any indication, has recently announced it will seek a moratorium on debt payments by struggling financial companies. If that is not an indication of complete abdication of promoting new lending by the country undergoing its second lost decade, nothing is. Look for comparable blunders at a US institution near you soon.
h/t Greg
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"I remind readers of a few simple key facts that continue to nudge me towards the view that the Western authorities are set for dismal failure in their attempts to atone for being asleep at the wheel."
Why is it that most people defer to the attitude that they were asleep at the wheel? Why is the default position always that they were stupid or dumb or greedy?
Is it just too emotionally painful to consider that some of this was intended, planned even? I'm not saying even step of the way was thought out and micro managed. But we will never make any progress until we open our minds to think the impossible.
Why? Because in hindsight all great man made catastrophes started with people thinking it couldn't/wouldn't happen because it was impossible/improbable.
Okay... let's play the mind opening game, then.
Why do you think all this was planned? For what purpose does it serve?
I don't think it was planned. Probably what happened was group think. People not wanting to be "left out" all acted in what could be best described as the interest of the group.
I don't think "all this" was planned. The problem with thinking this way is that nothing can ever be planned down to "all this."
I'm talking about bigger picture thinking here. We in the US (wish to) think that the world revolves around America. That simply is no longer the case. We are a dying super power and the rest of the world is waking to that fact.
I do think that global powers (however you wish to define the term "global powers") wish to strip the US of it's accumulated wealth while shifting the center of power elsewhere.
Regardless of how you perceive concentrations of wealth and power and despite the tendency of most people to emotionally reject the idea of conspiracies, power and wealth is concentrated into very few hands and they do regularly talk to each other.
Just because Alex Jones stands outside one of these meetings screaming into a bull horn doesn't invalidate the fact that people of massive wealth and power regularly meet privately to talk. What do you think they talk about, wintering in Rio?
I think you mistake "the path of least resistance" with conspiracy. Our economy has been destroyed because we continuously outsourced it instead of accepting slower growth or risky innovation. We masked it with debt. Places like China gladly accepted our largesse because they had nothing. Now that they've built themselves up, they are trying to assert themselves at our expense. I guarantee you that if we put up trade barriers with China and others, they'd be utterly destroyed while we could fight our way back in ten years of re-industrializing.
On the contrary, I think those "paths of least resistance" were deliberately opened up so they would be acted upon but the short sighted economic and corporate interests of the US and the world.
If you pull back and look at a bigger picture, you will hear many respected thinkers talk about key policy changes (in the US but also world wide) enacted over the past 40 years, a trend that accelerated during the past 15 years or so. I have a real problem thinking that the vault door just happened to be left open.
Again, there is certainly a very large role played by innocent and uninvolved players who are simply following their own self interests. In fact, that behaviour is not only expected but desired.
If you hang raw meat over a bear trap, is it a surprise that you catch a bear? I'm not being simplistic. I'm simply asking people to look for alternative explanations to the current situation. It isn't all black and white and while my ideas could be entirely wrong, so could the accepted and conventional wisdom.
I don't think you are entirely wrong by any stretch of the imagination. I think you're right that the door was opened, specifically to counter the growing strength of organized labor. Once open, the path of least resistance turned a stream into a Tsunami in that Corporate America had no choice but to outsource for competitive reasons.
China has made the big mistake. They have built up excess manufacturing capacity to supply the USA with cheap quality products. In return they have taken USD and instead of selling those USD, which would drive the value of their currency to uncompetitive levels, they have parked those USD at the FED. It is like a deposit account and does not earn much so they ask the FED to invest in Treasuries to get a higher return. The US has received product for a piece of paper (the USD). What can China do with those dollars? Nothing but keep them at the Fed. What do think China would say if we told them that that they can either leave their USD at the FED or they can take back products. Simply answer .... What would they do with the product that is returned. Nothing. So they would want to keep USD at the FED. Have you ever thought of what was the greatest punishment for the countries that lost WWII (Germany and Japan). The US made them into exporting economies. They supplied product for us to consume in return for a piece of paper. All those cars (and the resources in cars) ends up in the USA. They have the potential to build over capacity and crumble when US demand slackens.
I agree except for the Germany/Japan part - those are aggressive economies naturally inclined to export/compete. I see China as the final "hot potato" for low cost consumer goods. They've built themselves up and need to sell to us in order to survive, meaning we control their destiny. Since we no longer have the ability to consume like in years past, our only real option is to destroy them with trade barriers, meanwhile rebuilding our ability to consume through reinvestment in our own economy.
Unfortunately, there doesn't appear to be the political will to do the obvious as our Economic Masters attempt to restore the year 2005. Can't they see that suburban migration is over? That it was the most inefficient use of economic resources ever devised?
BGR,
You said "Since we no longer have the ability to consume like in years past, our only real option is to destroy them with trade barriers, meanwhile rebuilding our ability to consume through reinvestment in our own economy."
How exactly are we going to do this when we (the collective "we" as in consumers and the US Gvt) are up to our eyebrows in debt? From whom are we going to borrow the capital needed to reinvest in ourselves?
I agree with the premise. The question is how, assuming of course there is the political will? Which is a very big assumption.
Would the US Gvt confiscate everyone's savings/investments/IRA's/401(k)'s etc? Repudiate all debt (meaning national and/or personal) held by non US entities or countries?
Cog,
Since more than 50% of Treasury Debt is owned by foreigners, devaluing the dollar forces them to share in the pain while effectively cutting them off from our markets. Given that our present trajectory is unsustainable - we are at the same employment levels as 1999 - it's either take the pain now, or enjoy a ride to irrelevancy. The quicker we do it, the more the pain is spread to our mercantilist trading partners. Either way, we lack sufficient wealth to keep leveraging ourselves to consume their tradables.
There is still wealth in this country and more than a little intellectual capital to regain a semblance of a balanced economy before too long.
BGR,
Among other things, I'm an amateur student of Nazi Germany. In particular, the conditions and mind set that led to the insanity of Hitler and WW2. I can't tell you how often I read phrases such as yours.
"There is still wealth in this country and more than a little intellectual capital to regain a semblance of a balanced economy before too long"
You may remember that it was Germany's economic suffering that led to popular support for not only Hitler but his economic and military policies. My point is that many (German) intellectuals and political leaders saw the insanity coming but felt the available intellectual and political "capital" would be able to talk some sense into the leaders and the population in time to avert disaster.
I'm not disrespecting your point of view. I so desperately wish to believe you’re correct. But I can't help but feel we are walking down the same path. The similarities are staggering.
Cog,
That is indeed a risk as massive change has a way of opening Pandora's Box. I don't see the same similarities between the US today and Weimar that apparently you see. I recall Weimar had to send its gold to the victors leaving it in a position where it had to massively inflate its currency, thus destroying domestic savers. I see our predicament as more of a "re-set" that spreads the pain. Regardless, your point stands that the unintended consequences of my favored alternative may not justify its selection. Ultimately, I'd rather take a chance on reinvigorating the US economy than continue our present course which will definitely lead to insolvency in the near future.
The parallels aren't perfect, and of course Germany didn't have the world's reserve currency, but you're assuming "our" gold is actually ours. I no longer think it is, having been leased out by the Fed (and indirectly by the Treasury) for decades in a desperate attempt to control the price of Gold and thus prop up the dollar.
History shows that every single superpower/empire over the past 4000 years eventually crashed and burned, usually because of their own hubris intellectually but directly because they exhausted their own resources and no longer were able to control those parts of the world that had the resources they wanted. They always resorted to debasing their own currency as a last resort.
Sound familiar? Anyway, good respectful conversation. Thank you.
"I think you mistake "the path of least resistance" with conspiracy."
Are corporate 5,10 and 20 year plans a figment of my "conspiratorial" mind? Yes, it was planned. Maybe not so well, maybe they thought their msm wing could cover their tracks better, but yes, planned. In case you didn't notcie, blogs kinda shed unwanted attention upon these conspiratorial thieves.
When Clinton carried Bush1's NAFTA to fruition, and uttered these words: "it will level the playing field for US, Canadian and Mexican workers" was he just "ignorant" of the consequences of dragging US workers down to the campesino level? Hardly.
When the Wall Street "experts" of of the "benefits" Free Trade in the 1980s were extolling the "virtue" of the US economy converting from a manufacturing based economy to a "service based" economy, were all us lowly worker bees just "lucky guessing" when we asked each if that meant we would all be selling each other hamburgers? Don't think so.
The rest of your comment shows forethought and logical consequence formation. Please remove the msm-conjured negativity of the word "conspiracy" from your thought pattern.
When I see the photos of Geithner, and Clinton, and Bernanke leaving the CFR HQ's before every major pronouncement that sticks their debt upon the middle class, and when I see the willful destruction of jobs by Free Trade agreements, outsourcing to off-shore labor(and receiving TAX BREAKS for doing so), when I know for a fact Obama received hundreds of millions from Wall Street in contributions and that Schumer met with Wall Street banksters and assured them of bailouts prior to the election, wtf else can it be labeled other than willful and thought out?
"They wur jes dumb?"
Don't these stories make one rethink the Secret Service looking into US bond forgery story a little closer. A mil consultant has an interesting post up re the dolalr claimin in one of the more imaginaitive posts that the dolalr cant fail becasue no bank will lend to anyone who cant protect the ships transiting hormuz.
http://www.informationdissemination.net/
Brilliant analysis. Don't those planes update thier avionics like every 2 years just about. The change over from the Gold standard to the F-16 standard is just fucking brilliant isn't it.
http://executiveeducation.wharton.upenn.edu/wharton-aerospace-defense-re...
Speaking of our strain of the Japan sickness: if the $ is a carry trade vehicle, then shouldn't flight to quality mean a treasury sell-off?
The story is far from exhausted,the debts be it public or corporate (financials)will become by 2010 the most problematic issues.
Japan debt was domestic no competition in the foreign markets.
speaking of Japan
http://www.bloomberg.com/apps/news?pid=20601109&sid=a0SHrXgxXFgE
My jaw hit the floor last nite when I read this. Japan is thinking of forcing banks to lend more in an attempt to force economic activity. I shudder when I read that a gov't is going to dictate lending policy.
Worse yet, the Japanese want a debt moratorium on p and i, with the tradeoff that Japanese banks will not have to record these defaults on their balance sheets. Hell, this makes the amendments in FASB 157 look somewhat tame by example. Maybe all those Amlaw 200 firms can garner some work now advising Japanese banks about the intricacies of SIVs, SPEs, etc.
Lastly, keep your eye on the Amer Bankers Assoc attempts to undo the already enacted FASB FAS 166/167 requiring off balance sheet sewage sludge to return to the TBTF sausage grinders in Jan 2010. Also watch the FDIC who has a public comment period procedure going on now as to how to handle the necessary capital increases that would be needed for banks. I've got 10 to 1 that if the ABA does not beat back the SIV issue, we may be hearing the phrase "regulatory capital forebearance"
We already have regulatory capital forebearance. There are easily 500 banks in the country who are technically insolvent that the FDIC doesn't have the manpower to take into receivership (not to mention it doesn't have the money either).
That, to me, is regulatory forebearance.
excellent point ghost....i guess i should have said "official" regulatory forebearance, i.e. a statement that tier 1 (or whatever ration they want to use, lol) would be waived for "the time being"...
I agree wholeheartedly on the matter of the 500+ banks....actually, i wouldn't call most of those forebearance but negligence in following the law that requires the fdic to shut 'em down.
Hey, forbearance works for the FDIC, their insurance reserve is below (negative) the legal limit. These laws, rules, regulations are great in better times when it comes to crushing anyone who is out of favor or just plain small. It's nothing but a technicality to be waived in circumstances like what we have now.
Freedom and justice for all? Ask Martha S. who got free lodging for miniscule infractions compared to the current Cluster Orgy.
I don't buy the analogy for bond/equity cash yield to the US market. Japan's companies were highly leveraged (even considering ex-financials); the US problem is highly leveraged consumers (financial co's were crappy for both, so that's a wash). But overall, it's not a question of predicting the US market direction; there are other places to make money (unless of course, correlations go back to 1!).
as in the 1930s and as in japan the stock market does indeed have a long way to go to the downside before it flushes the mistakes of the last 40 years from its books....the longer these temper tantrums persist in refusing the therapy the worse the consequences become....
i still stick to my dow 3000-5000 prediction made in 2008 although i thought it would have come this year.....but come it will.....
leave the cheers to the pom pom girls....they will blown away with a gust of wind and be seen no more....