China’s Crash Will Swirl Over To The West: Albert Edwards

Blaming the foreign investor and the short-seller seems to have become China’s go-to excuse for the recent uncontrollable state of affairs in the Asian economy. The latest from Albert Edwards criticizes China’s latest policy measures in unequivocal terms and lambastes its inability to learn from previous financial crises in the Asian region.

Albert Edwards yet again makes a full disclosure at the beginning of this report, saying that his opinion does not coincide with Societe Generale’s and he is merely a “teenage scribbler” who is presenting the alternative view.

China should have learned from Pakistan, says Albert Edwards

China’s attempts to control its stock market collapse by suspending trading were also criticized by the famous strategist. Edwards said China should have learned from the mistakes of its much-loved neighbor, Pakistan. In 1998, to curb the rapid fall in its KSE100 index in the aftermath of nuclear tests, officials placed a “floor” on trading, meaning trading would be suspended when the index touched a certain lower limit. When the ban was lifted, the KSE fell even more drastically than before.

U.S. and Europe will follow China’s example sooner or later

More importantly, in the report, Albert Edwards is not just critical of China, but he also predicts that Western countries are going to crash in the same fashion. He said that a re-rating of equity markets in the U.S. and Europe from their bubble-like valuations is going to happen sooner or later:

“The Fed and the ECB have created similarly grotesque stock market bubbles in an effort to shore up their anaemic economic expansions. Do not be surprised when the S&P collapses in exactly the same way as the Shanghai stock exchange, and don’t expect the panic monetary measures that will be enacted (more QE) to prevent the ultimate denouement of this global equity Ponzi scheme.”

Edwards further cautioned that when the bubble in the West collapses, there will be no warning that will indicate an imminent stock market crash. The crash will hit quietly and is always hard to predict; it can be triggered simply because of loss of price momentum.

China advertised its stock market bubble

Albert Edwards goes on to explain how China’s trading ban has eclipsed even Pakistan’s misguided attempts to control its stock market collapse. While Pakistan enforced  the “floor” for 108 days, China has banned selling of shares by major shareholders for six months, trapping investors and exacerbating the already prevalent sense of fear in the Chinese equity markets. Such policy measures only fuel the chaos and show that authorities have lost control over the situation.

Edwards’ shock over China’s handling of the financial crisis is because he had higher expectations from its policymakers. In the past, China approached the 2008 financial crisis maturely, and its executives displayed realism at times whilst commenting on the Chinese economic boom. For instance, in 2010, Chinese premier Wen Jiabao said that “Chinese economic growth was unstable, unbalanced, uncoordinated and unsustainable.”

In Edwards’ estimation, Chinese authorities had sufficient insight into their problems, but the confidence he had was misplaced. He said that China has been losing credibility since its use of state-run media to advance the stock market bubble. As a bubble is never sustainable, it did not help China’s worsening economic profile as well. On a median PE basis, stocks on the Shanghai and Shenzhen exchanges are overvalued even after the recent shakedown and are triple the value of the S&P 500.

Eurozone will break up as populace revolts

Edwards stood by his view that the European Union will eventually break ranks as people in the disgruntled peripheral countries realize that they have had enough. Despite Greece’s implementation of fiscal adjustments like lowering public spending, reductions in minimum-wage reductions, fire-sale privatizations, and deep pension cuts, depression did not leave the region. While commenting on Torika’s inability to find the link between reforms and growth, Albert Edwards quoted from James Galbraith’s article on “IMF’s Tough Choices on Greece:”

“The IMF and Greece’s other creditors have assumed that massive fiscal contraction has only a temporary effect on economic activity, employment, and taxes, and that slashing wages, pensions, and public jobs has a magical effect on growth. This has proved false. Indeed, Greece’s post-2010 adjustment led to economic disaster – and the IMF’s worst predictive failure ever.”

Albert Edwards said that the number of austerity measures Greece had to suffer through would have disintegrated any other nation. The country has endured massive spending cuts which stand out in comparison to other peripheral countries. He further noted:

“The almost unprecedented depth of Greece’s real and nominal GDP declines can be seen against those

of the other peripheral nations. No wonder the Greeks have said enough austerity is enough. I do not believe any other democratic, industrialized nation could have tolerated a similar depression without society totally disintegrating.”

In the end, SocGen’s global strategist drew a parallel between Argentina’s default and Greece’s possible default and exit from the Eurozone. Edwards said that even though Argentina is in trouble these days, when the economy initially defaulted in 2002, it only contracted in one subsequent quarter and later grew 66% in six years. Albert Edwards said that the prevalent consensus on Greece could be wrong as it was in the case of Argentina. If Greece manages to climb out of the recession after default, it will encourage the anti-euro population of other troubled economies to leave the Eurozone.