On a cold Tuesday afternoon on January 12, around 950 financial professionals gathered in a hotel basement to hear terrifying theories on how the next financial collapse will come about.
It was hosted by Albert Edwards, an economist at Societe Generale and the voice of market bears — the name given to people who think imbalances in the financial system will lead to a collapse at some point.
In a little over 100 slides, Edwards and speakers Russell Napier and Andrew Lapthorne took apart the global economy and monetary system.
There was one big theme that formed the backbone of the presentations — global growth is no longer enough to service global debt. Creditors will have to take losses. Translated this means the banks that lent the most money with the least amount of reserves may go bust.
Worst hit are the emerging market economies, many of which are dependent on China to stoke demand for the commodities they produce. This plan worked well for many years after the 2008 financial crash, and emerging markets loaded up on debt.
But as the world shifts from buying more goods to buying more services, so China is shifting its economy from manufacturing and industry. Commodities prices have plunged as a result, along with the currencies of the countries that invested in them.
This makes it more expensive for them to pay off debt denominated in dollars. Unlike debt denominated in their own currency, they can’t just print more.
It’s not just emerging markets in trouble. US companies have also loaded up on debt after central banks around the world lowered interest rates to record lows.
How will it play out? In the words of Albert Edwards, “it will turn very ugly indeed.”
Now that the dollar is strengthening, imports into America will get cheaper compared to US exports. This will lead to low inflation or deflation in the future, eating into corporate profits.
This can lead to some dodgy behaviour from executives, who have incentives to massage and inflate earnings figures. Companies that rely on a strategy of misleading investors will get found out eventually.
Meanwhile, Chinese companies are rushing to pay off their US debt, before the dollar strengthens anymore, making it too expensive.
Investors in emerging market debt are getting crushed. The Morgan Stanley fund isn't alone in halving in value.
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