Albert Edwards

Oh, the ignominy of thinking that China's widening of the Yuan trading band was anything other than uber-bullish and indicative of as soft a landing as can be imagined as the mainstream herd promptly, in a desperate attempt to seek affirmation from other members of the herd as always happens (see Jeremy Grantham for more), said this would be a move that guaranteed no hard landing. Albert Edwards takes the 'massive over-confidence in the ability of the Chinese authorities to achieve a soft landing' to task and furthermore indicates that between a rapidly diminishing current account surplus, a real effective exchange rate that is arguably (thank you IMF) not undervalued anymore, and the velocity with which nominal GDP has slowed recently (akin to 2007), the very fact that they widened the trading band suggests it is now a lot easier for them to achieve significant devaluation of their currency (to escape the hard landing) both technically and politically. Since widening the band, the PBOC has already devalued two days-in-a-row. Ironically, the bilateral imbalance with the US is reaching new records (seasonally adjusted) and will peak (seasonally unadjusted) just in time for some temperamental headlines right before the US election.

One of the biggest surprise stories of the past several months, in addition to economic activity skewing record warm weather, and the New Normal seasonal adjustments (which as Albert Edwards noted earlier are giving data an upward bias for each of the past three years), is the consistently "better than expected" jobs numbers. There is one problem: as discussed previously, the rising jobs are purely a quantity over quality trade off, as every month more and more temp jobs take the place of permanent ones, especially those of former professionals from the FIRE sector. In fact, in January temp jobs soared by the most on record, and the total number of temp workers was just shy of all time highs. Ironically, as this happened, discretionary online retail companies have seen their stock price soar to record highs. One of the primary drivers for this has been the increased "efficiency" at these companies' hubs - their warehouses. Which just happen to be staffed with temp workers. The following infographic presents the reality behind these American "sweatshops" - because this is the "quality" of job that is rising rapidly in the current economy (at the expense of traditional permanent jobs) to give the impression of an economic recovery. There is no point in making an ethical judgment - work conditions are as they are. Just as workers at FoxConn likely have far better conditions than their peers, at least in their view, so do these temp workers view their life as better than the alternative, which is unemployment. It is, as they say, what it is.

Nothing that we haven't said already many times, but always good to hear someone, in this case SocGen's Albert Edwards, observe what is patently obvious - namely that the start of every year now sends a consistently wrong signal that the economy is improving due to seasonal adjustments that no longer are applicable in the New Normal. This coupled with the liquidity boost that takes places just prior to each and every run up completely explains why 2012 is not only deja vu, as it continues to be a carbon copy replica of 2011 (when the market peaked in late April), but is really a treja vu, mimicking the action of 2010. After all it was none other than Reuters who in its puff spin piece tried to caution readers that we have been here before: "This time last year, the U.S. economy was adding jobs at a similar pace of more than 200,000 a month between February and April...Growth was nipped in the bud by the Arab uprising, which sent oil prices soaring. In 2010, prospects had looked even stronger. Between March and May, companies were adding a net 309,000 new jobs each month, and first-quarter growth came in at a 2.7 percent. The rebound proved temporary." And yet here we are, wondering if this time it's different. It isn't. Albert Edwards explains: 'With bond yields breaking out to the upside and the equity bull run continuing, investors are back to their same old hopeful habits. Many are thinking that if we have seen the all-time lows on bond yields investors will be forced into equities. We already can observe leading indicators rolling downwards in exactly the same way as they did in 2011." And here is why Edwards will once again be unpopular with the permabull, momentum chasing crowd: "Expect new lows on bond yields by Q3 and this equity rally to turn to dust – just as it did in 2011."

Exquisite.

"We are a hair's breadth or, more exactly, one recession away from a market panic on outright deflation -- a panic that will send the central banks into a printing frenzy that will make their balance sheet expansion so far seem like a warm-up act for the main show." Albert Edwards

The last six months' market behavior is somewhat breath-takingly similar to the same period a year ago. With global central banks pumping (RoW replacing Fed for now), energy prices soaring, and since the market is the economy - hope is rising that we are doing better; the drivers of the asset price reflation are similar too. While Treasury yields appear to be bucking this sentiment-euphoria, perhaps it is the because the US is the hottest market and all the world's money comes here that we are 'decoupling'. It seems the stakes are higher and scale of known unknowns even larger this time as the can that we are kicking is gathering a lot of trash as it rolls down the road.

While the bulk of tangential themes in Albert Edwards' latest letter to clients "The Ice Age only ends when the market loses hope: there is still too much hope" is in line with what we have been discussing recently: myopic markets focused on momentum not fundamentals ("It's amazing though how the market can get itself all bulled up and becomes convinced that we are the start of a self-sustaining recovery. And funnily enough there's nothing more likely to get investors bullish than a rising market"), short-termism ("One thing you can say for the market is that it has an extremely short memory"), and that so far 2012 is a carbon copy of 2011 ("One thing you can say for the market is that it has an extremely short memory. Let us not forget that the performance of the equity market so far this year is almost exactly the same as we saw at the start of 2011 (in fact the performance has been similar for the last 5 months"), his prevailing topic is one of hope. Or rather the lack thereof, and how it has to be totally and utterly crushed before there is any hope of a true bull market. And just to make sure there is no confusion, unlike that other flip flopper, Edwards makes it all too clear that he is as bearish as ever. Which only makes sense: regardless of what the market does, which merely shows that inflation, read liquidity, is appearing in the most unexpected of places (read Edwards' colleague Grice must read piece on why CPI is the worst indicator of asset price inflation when everyone goes CTRL+P), the reality is that had it not been for another $2 trillion liquidity injection in the past 4-6 months by global central banks, the floor would have fallen out of the market, and thus the global economy. In fact, how the hell can one be bullish when the only exponential chart out there is that of global central bank assets proving beyond a doubt that every risk indicator is fake???

All you need to read.

To all who still think that in the war of attrition between the USD and the EUR (because contrary to what some have "discovered" only recently, currency wars have been going on for a long, long time and will continue to do so, before morphing into trade and real wars), in which both currencies are doomed, and where the winner takes it all, if only for a few minutes, we bring to your attention the following most recent update out of the Pacific Rim (where incidentally the Shanghai Composite has resumed its relentless track lower with the obvious intention of closing 2011 at its 52 week low) in which we find i) that the dollar's hegemonic control over the world is ending, and ii) that the mercantilist relationship so long sustained between China and the US, may be shifting and reversing, and in its next metamorphosis will see Japan buying the bonds of... China (although probably not for long - see next post). As Bloomberg reports, "Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said. Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday." And before someone blows it off as merely more foreign relations posturing, "“Given the huge size of the trade volume between the Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd." As for China's reverse mercantilist move, one which will stun anyone who believes that Yuan is still undervalued, "Finance Minister Jun Azumi said Dec. 20 buying of Chinese bonds would be beneficial for Japan because it would help reveal more information about financial markets in China, the world’s largest holder of foreign currency reserves." Speaking of, has Albert Edwards gloated yet that given enough time, he always ends up being proven right, in this case about the CNY's upcoming devaluation?

Bloomberg headlines confirm the Chinese export-led growth dynamo is growing dimmer by the day:

• CHINA'S `NOT TOO OPTIMISTIC' ABOUT EXPORTS IN 2012, CHEN SAYS
• CHINA'S TRADE GROWTH MARGIN DECLINED IN DECEMBER, CHEN SAYS
• CHINA EXPORTS 2 PERCENTAGE POINTS LOWER IN EACH MONTH OF 4Q
• CHINA 2011 IMPORT GROWTH RATE 5 PCT POINTS HIGHER THAN EXPORTS
• CHINESE COMMERCE MINISTER CHEN DEMING SPEAKS AT GENEVA BRIEFING

Translation: the next several Chinese monthly surplus reports will not be pretty, and even more importantly, The Chinese trade defict, as predicted by Albert Edwards some time ago, is finally coming (read here, here and here). Lastly, it means the CNY is about to reverse: expect Congress to go nuts once China undergoes several weeks in a row of Renminbi devaluation. The trade war that will follow should be quite epic.

Just in time for the Chinese 50 bps RRR cut, we get a note from Albert Edwards reminding us just why this desperate and sudden move from China comes: "We have identified a China hard landing as one of the biggest investment shocks next year." Not only that, but the SocGen strategist takes a long overdue swipe at the world's most ridiculous concept, Jim O'Neill's BRIC debacle: "Despite recent poor  performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym - Bloody Ridiculous Investment Concept." It appears that the PBOC was well aware of this re-definition when it decided to announce to the world that it has started easning once again last night.

Two weeks ago, courtesy of Gresham's Law, we brought to our readers Jim Grant's greatest hits: a compilation of the most memorable TV appearances by the famous newsletter writer. Today, we are happy to present another controversial luminary - Russell Napier: the renowned financial historian and consultant for CLSA, as well as author of the engrossing Anatomy of the Bear, who only together with Albert Edwards, has predicted that the S&P would eventually drop to 400. Napier has articulated some fantastic insights on the generational cycle, bear market bottoms and currencies in recent years. His insights, unlike those of TV pundits whose soundbites are only there to fill the gap between two ad segments, are always something to look forward to.

Just about 48 hours after it was duly noted as the greatest threat to the Eurozone in the post bailout world, Germany finally grasps the enormity of what global moral hazard truly means. As we said before, the biggest risk facing Europe, and by that we mean undercapitlized French banks (all of them) obviously, is not Greece or what haircut is applied to the meaningless €100 billion in Greek debt when all the exclusions are accounted for. It is what happens when everyone else understands they now have a carte blanche to pull a Greece at will. And while until now we had some glimmer of hope there was a behind the scenes agreement for this glaringly obvious deterioration to not manifest itself, Merkel just opened her mouth and proved our worst fears wrong. As Reuters reports, "Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings. "In Europe it must be prevented that others come seeking a haircut," she said." Too late, Angie, far, far too late. Because, just as expected, here comes Ireland and literally a few hours ago, launched the first warning shot that will imminently lead to what will be demands to pari passu treatment with Greece. Next up: Portugal, Spain, and, of course, Italy, which however won't be faking its own economic slow down.

Anyone expecting that the events over the last 24 hours will have changed the persistently negative outlook of one of the original skeptics, will be disappointed. The SocGen strategist falls back to that old time-tested principle in complicated situations: math and logic. His summary of events released this morning: "The increasingly frenzied attempts of eurozone governments to persuade financial markets that they can draw a line under this crisis will ultimately fail – even if this week’s measures bring some short-term relief. I have minimal confidence that governments can turn this around within the confines of the eurozone project. You might be surprised though that I feel more bullish! Why? Both Dylan and I have come to the view that the ECB will be forced, by events, to monetise debt in the GIIPS and beyond. And if investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse." To be sure, we may see a brief respite as we get the traditional post-TARP knee jerk reaction, only for markets to digest the sad reality of the situation in the proceeding 48 hours. And what will that imply? To Edwards, it will be nothing short of the realization, that even with €1 trillion (or more), the ECB will have no choice but to commence outright monetization as well. And the real question will be whether or not "Germany, will leave the eurozone after being over-ruled on the ECB (again!) and in the face of such monetary debauchery?"

All you need to read.