As usual, Soc Gen's Albert Edwards does not pull any punches: "Once again, investors see China plays as the only investment game in town. Dylan and I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s." Already we have seen traces of Edwards proving correct after the Chinese market has swooned dangerously in the past week. Should the world realize that, as Edwards claims, even near-unlimited liquidity is insufficient to keep the system going, then the China-initiated avalanche will be severe. Not only that, but in the recent fake economic renaissance (sorry, unwind QE1, QE Lite and QE2 and then we'll talk how real this recovery is) Edwards sees nothing less than the shades of the dreaded 1990s economic Triple Dip...
Here is conventional wisdowm, as transcribed by Edwards:
The investment case for emerging markets (EM) and commodities is appealing: weak growth in the West and in Japan, burdened under the weight of excess private sector and now public sector debt. Most now accept that easy monetary stances in the West are being transmitted almost 1-1 to the EM economies ? indeed the IMF has conclusively shown this to be the case, link. Loose money and strong EM growth with its high commodity intensity is the underpinning for the bull market in commodities, mining stocks and the like.
And here is the canary in the coalmine:
Once again, China?'s leading indicator is pointing towards a very significant slowdown in economic growth ahead. The last time the Chinese OECD leading indicator was this weak, commodity prices had just reached their euphoric mid-2008 peak, having spent the first half of the year resolutely ignoring the clear signals that the economy was about to slow sharply. Commodity and EM bulls ignore the weak Chinese leading indicator at their peril.
And another version of the China leading indicator:
It?s not just the OECD leading indicator that is very weak. The Chinese National Bureau of Statistics publishes its own leading indicator. And it absolutely confirms the OECD?s version of the future (see chart below and link).
And here is why we would love to get a suddenly irrationaly optimistic (but always agenda-toting) Jan Hatzius and Albert Edwards in the Octagon - the 1990's Triple Dip, which the Dutchman apparently was too young to remember.
Indeed it is not just EM/commodities that are running on fumes. The rally in the US equity market seems to be underpinned by some stronger than expected economic data. Yet we once again urge caution and remind our readers of the early 1990s experience. Then we went through a few years of private sector de-leveraging in the wake of the Savings and Loans crisis (see chart below). It wasn?t until the second half of 1993, well after the recession finished, that the private sector?s appetite for debt recovered and ?normal service? was resumed.
During the early 1990s deleveraging process, the economy remained extremely fragile. There was not just one slump in the economic data in the aftermath of the initial recovery out of recession, but three relapses, as the economic data went on a rollercoaster ride (see chart: we use consumer confidence to show the volatility in growth, but the ISM is just as good). During that period each growth scare drove bond yields to lower lows.
Similarly this year after its initial recovery, investors were caught out by the slide in the economic data. This now seems to be perking up. If the early 1990s deleveraging experience is anything to go by, investors should expect more relapses ahead and the markets to respond accordingly as we grind ever closer to outright deflation.