Socgen Ultra-bear Albert Edwards turns his attention to China, where he warns of rampant inflation and little hope of a soft landing.
He starts off, though, with a bit of philosophy.
The coming downturn will surely separate the investment sheep from the goats. For we have learnt little from the investment disaster of the last decade. There is one thing that has become apparent to me in my 25 years of challenging even the most persuasive investment stories. That is, confronted with a lengthy period of strong and stable growth (either economic or earnings), investors fall into two distinct camps. The first simply extrapolates the reduced volatility into the future, ascribing the lack of a recession to successful macro- economic management and taking it as clear evidence that the cycle has been tamed and that higher levels of risk can be safely taken on.
The second school of thought takes the view that the more stable the cycle, and the more recessions are avoided, merely means that they are saved up for a future economic crash as resulting Minsky-like credit excesses sow the seeds for a bust. But the longer the bears are proved wrong, the quieter they become, partly due to embarrassment, partly due to they’re being physically removed from their jobs in an industry that thrives on bull markets. We say what we see and after having witnessed the U.S. debacle, it seems clear to me that faith in a China soft landing (while not impossible) is most likely to be blown asunder by events. Investors should prepare for both a hard-landing and a yuan devaluation.
As for the coming slowdown in China, while some were reassured by the recent 9.1% GDP report (and the fact that it represented a slight, not extreme cooling) he notes that that’s only looking at things on a nominal basis, but that when you re-include inflation (the big worry there), then you’re looking at things getting hotter.
So what’s next when the bad loans pile up, property prices collapse, and exports dry up?
Stimulus, and no more currency appreciation:
Amid the growing risk of a trade war, one thing is clear: Chinese authorities are trying to soft- land a credit-fuelled property/investment bubble. They may succeed at their own bit of can- kicking, but history is not on their side. The sudden cessation of FX reserve growth (China’s very own form of QE – see chart below) may well be the last straw to break the pandas back. And if China is hard landing, I agree with the bulls on one thing: expect the authorities to become aggressively stimulative. And if as is highly likely, aggressive conventional monetary and fiscal stimuli fail to prevent a hard landing (as indeed was the case in the US in 2008) other measures will surely include yuan devaluation.