Posted By: Ambrose Evans-Pritchard at Jan 15, 2009 at 13:27:42
Albert Edwards at Societe Generale has issued another terror alert:
Sell everything. Hide in a bunker with plenty of whisky. The S&P 500 index of US shares is about to crash through its half-century support line to 500.
"Technicals say it is time to bail out. Cut equity expose and prepare for rout. US depression looking likely. While China's 2009 implosion could get ugly."
Mr Edwards -- who is of an "Austrian" persuasion, ie hates excess debt -- was one of the very few economists to see this whole crisis coming, and to issue warnings clearly and emphatically (unlike others who now claim to have been seers, but in fact hedged). He said interests rates would be slashed to zero and that bond yields would fall to the lowest in history. All this has occurred.
The key argument is that markets have been sold a pup on the China growth miracle and have massively underestimated the risks for the global FX and trading system as this unravels.
"The Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.... Do you really trust politicians to "do the right thing"?
Mr Edwards has been tactically bullish on equities since the end of October when the MACD (Moving Average Convergence /Divergence Oscillator) for the S&P 500 broke upwards. This technical indicator broke down again two days ago.
He said the CBOE put/call ratio had dropped to the lowest level in a year (a contrary indicator)...
While a "deflationary quagmire" lies in store, this will not be a repeat of Japan's Lost Decade. Fed stimulus a l'outrance points to an inflation denouement down the road (2-3 years?).. hopefully not hyper.
He notes that China's electric power output has fallen for three months. The OECD's leading indicator for China has fallen off a cliff. Exports have collapsed across Asia.
"We continue to emphasize our long-held view that emerging economies are particularly vulnerable to a reversal in the global liquidity pump."
Mr Edwards said investors have a "touching faith" that China's authorities are in control of events.
"Could the economic situation in China become so bad that it threatens the regime itself? Of course it could. But before being swept away in a tidal wave of worker unrest it has one key tool in its economic armoury it has used before. MEGA-DEVALUATION. China has a track record of such things. At the end of 1993 the authorities devalued the yuan by 33pc."
A replay would be the surest root to a Smoot-Hawley II.
"Amid confidence that the ongoing, massive, monetary and fiscal stimulus will prevent a repeat of the Great Depression, will it instead be competitive devaluation and implosion of world trade that we should watch out for."