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Albert Edwards On The BRICs As A "Bloody Ridiculous Investment Concept"... And A China Hard Landing

Tyler Durden's picture




 

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.

Why the feud with the BRICS?

Eurozone equity markets have suffered badly this year amid the crisis that has engulfed the region. Speaking to clients, they still retain a preference for the rapidly growing emerging markets (EM) against the highly indebted and struggling developed economies. Yet, much to many investors' surprise, EM, and especially the so-called BRIC equity markets (Brazil, Russia, India and China), have performed even more poorly (see chart below).

 

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.

 

 

As my former colleague James Montier always used to point out, investors are suckers for a good story. When you look at the evidence, there is absolutely no correlation between investment returns and economic growth because investors overpay for growth stories and there is no margin for error (see Dimson, Marsh and Staunton at the London Business School 2005 - link). In addition, The Economist magazine reports that Paul Marson of Lombard Odier has extended this research to emerging markets. He found no correlation between GDP growth and stock market returns in developing countries over the period 1976-2005. A classic example is China; average nominal GDP growth since 1993 has been 15.6%, the compound stock market return over the same period has been minus 3.3%. (link)

 

 

Yet investors persist in the BRIC superior growth fantasy. But it is no different from many of the other investment fantasies I have witnessed over the last 25 years - only to see them end in severe disappointment. If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe, most especially in Brazil and India (see chart below).

As for China...

We have identified a China hard landing as one of the biggest investment shocks next year. The crucial driver investors are missing is the change in global liquidity as measured by growth in EM foreign exchange reserves (see charts below). Confidence often ebbs as growth slows and EM economies are seeing a sharp drop in reserves and liquidity tightening. In this context did anyone spot the Chief Economist of the China State Information Centre calling for a yuan devaluation now that reserves are falling (link). Shall we call this Investment Shock II?

 

How conveneint of the PBOC to confirm Edwards' thesis literally minutes after this note's publication.

 

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Wed, 11/30/2011 - 08:42 | 1929252 hugovanderbubble
hugovanderbubble's picture

Brazil Corrupted

Russia Mafia

China Overheated

India War vs Pakistan coming...

 

Bye Bye BRICS

 

And AUSTRIA & FRANCE WILL BE DOWNGRADED YES OR YES....Rating Agencies ARE TERRORISTS

Wed, 11/30/2011 - 12:40 | 1930687 pslater
pslater's picture

"Rating Agencies ARE TERRORISTS"

Wrong.  Politicians are enabled by the 'progressive' teachings of the universities are the terrorists.  The rating agencies are the last canaries to die in the coal mine.  CDS are the first canaries.

Wed, 11/30/2011 - 08:44 | 1929255 hugovanderbubble
hugovanderbubble's picture

BACK TO PROTECTIONISM

END OF GLOBALIZATION

Wed, 11/30/2011 - 10:21 | 1929756 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

I'm very happy about this.  Frustrating Soros and Rockefellar is a good thing.

Wed, 11/30/2011 - 14:27 | 1931395 Totentänzerlied
Totentänzerlied's picture

This would be a disaster for America, if farming/ranching is once again profitable for third-world peasants, who would grow all our illegal narcotics?

Wed, 11/30/2011 - 08:47 | 1929256 Irish66
Irish66's picture

REK

Wed, 11/30/2011 - 08:48 | 1929258 qussl3
qussl3's picture

Germany is fucked.

If both the EZ and BRICs blow up they can export to the martians i suppose.

At least their consumption figures are up. (haha)

Wed, 11/30/2011 - 09:05 | 1929290 OttoMBMP
OttoMBMP's picture

Happy?

Of course, Germany will run into trouble. This is inevitable. And the consumption and "financial-services" based economies (i. e. economies without base) are in even deeper trouble.

But to print will not save anyone. It will just add to the the bill. (Who does not know that?)

And as Germany (at least so far) is not prepared to accept the last silly "option", her "partners" are quite happy, because they know whom to blame for the coming collapse: the good old scapegoat, Germany. "They started 2 world wars and now again they destroy their peaceful, innocent neighbours." It is just ridiculous.

 

Wed, 11/30/2011 - 09:13 | 1929329 lolmao500
lolmao500's picture

Well I have a german friend and he still believes Germany will always be good and can never be in trouble.

Doesn't matter I tell him German banks have so much debt it will crush Germany when reality sets in or that Merkel and the other puppets in government are total sellout or that Germany will have soon nowhere to export too...

But but but Germans are hard working people! It cannot happen!

I'm pretty sure most Germans are still in denial mode.

Wed, 11/30/2011 - 09:40 | 1929465 Smiddywesson
Smiddywesson's picture

Yes.  The USD reserve currency sits atop a teetering mound of similarly bankrupt currencies.  The American printing press won't save their economy.  Similarly, Germany is endebted, and surrounded by a world of bankrupt nations.  Refusing to print is the right thing to do, but the would be survivors from all those other sinking ships will swamp its life raft.

The result of runaway debt and globalization is everyone is going to the bottom of the sea together.  There is no escape from this.  That's why central banks are spending unbelieveable amounts of the old (paper) money to stall the crash while they accumulate enough gold to soften the landing. 

We can argue about what paper money will look like after the crash, but when this is over, all trade deficits will be settled in gold, and the people with the gold are going to want the price as high as they can push it.

Wed, 11/30/2011 - 08:50 | 1929259 slaughterer
slaughterer's picture

Any story Jim O'Neill comes up with to sell GS clients is usually to the detriment of said client and the benefit of the Squid.  Squid must have shorts across the board on BRIC ADRs, and are probably bankrolling "renegade" short-hit-piece outfits like Muddy Waters, et. al.  to incease short profits.  

Wed, 11/30/2011 - 08:50 | 1929260 PulauHantu29
PulauHantu29's picture

Luckily, the Great Recession is over...sayeth the Bernank.

Wed, 11/30/2011 - 09:41 | 1929477 Smiddywesson
Smiddywesson's picture

What's that down there, a green shoot?  Naw, just another leprechan.

Wed, 11/30/2011 - 08:53 | 1929267 kralizec
kralizec's picture

At first I thought SocGen's Dr.Doom merely wanted to take the focus off the EU collapse (if only for a few moments), then the ChiCom report hits...I guess a collapse of some form or other is the order of the day pretty much everywhere...it's all the rage, ya know?!

Wed, 11/30/2011 - 08:56 | 1929273 kaiten
kaiten's picture

I never understood why India was considered as the next superpower. It has 1.2bn people packed on an area third the size of US, i.e density of population is 12(!) times of US. Imagine US with a population of 4bn. Can you say congestion?

Wed, 11/30/2011 - 08:59 | 1929278 alicabacon
alicabacon's picture

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Wed, 11/30/2011 - 08:59 | 1929280 EvlTheCat
EvlTheCat's picture

You're going to break topcallingtrolls heart with this one....

Wed, 11/30/2011 - 09:04 | 1929291 bigdumbnugly
bigdumbnugly's picture

so why was silver down so far on this news?

only to see it go 90 degrees vertical three minutes ago

Wed, 11/30/2011 - 09:44 | 1929492 Smiddywesson
Smiddywesson's picture

Better to ask "why is news relevant to silver" as you know the price is manipulated.

Wed, 11/30/2011 - 09:07 | 1929305 Tense INDIAN
Tense INDIAN's picture

have you been reading about INDIA lately .....people are already speculating about 6% economic groth ...far lower than the 9% needed.....

government debt is high ....govt bonds are not finding buyers......rupee is the worst currency fallling fast.....we havent even had a LEHMAN like event and already IT companies are feeling the pinch.....Kingfisher airlines is bankrupt......and the rest will follow....banks like SBI  are feeling the heat on their bad debts.......atleast AMERICANS are blesed with their huge countryside where people can settle ....lok at the crowd in INDIA

Wed, 11/30/2011 - 09:08 | 1929311 Nemo01
Nemo01's picture

AE is loosing it - pathetic to show one year of investment returns only. The reason why the west is holding up is because the politicians / central bankers have flushed the systems with TRILLIONs of dollars. However, policy options are running out and I would like to see the same lead indicators / equity returns two years from now, when Germany have imposed deflationary austerity all over Europe, and the US banking system is the onle buyer left of treasuries. Its called crowding out and it is not going to be pretty...

Wed, 11/30/2011 - 09:17 | 1929352 dcb
dcb's picture

why this is stupid. yout want to put yopur money to work in th eplaces that have done poorly, so instead of being overpriced the emergings start to be fair or below value. I'd rather by there at 40% below the top than in the us at 15% down.

Wed, 11/30/2011 - 09:49 | 1929531 Smiddywesson
Smiddywesson's picture

DCB,

You are right, but it's still a matter of timing.  EMs led the market down in 2007, and are likely to lead us out of this mess, but the bottom far, far below for the West, EMs, and the BRICS.  I'd rather not buy at all.

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