Investment Postcards from Cape Town

Albert Edwards, London-based strategist of Société Générale, has always been a firm favourite among Investment Postcards’ readers. His latest research report appeared earlier this week and saw him remaining firmly in the bearish camp.

Edwards’s “Global Strategy” report is subtitled “Money makes the world go round down” and argues that monetary stimulus will have only a limited impact in reviving the global economy. “Massive quantitative easing (QE) around the world has undoubtedly melted the clots of some of the most clogged arteries of the global financial system. That has made things less worse, which is not the same as better,” said Edwards.

Edwards highlights that debt aversion is causing bank lending and the money supply to slump (outside of China) and he has difficulty to see a self-sustaining recovery taking hold in this environment. Testimony to his argument is a massive monetary shrinkage in the US in the last few weeks. “The bank lending data are even worse than the money-supply data. US bank lending is contracting at an unprecedented annualized pace (our data go back 35 years and this is a record contraction both for the three-month period shown in the chart below and over a six-month period),” said Edwards.

Edwards concludes that the global crunch is not receding, but intensifying, stating that the unwinding of the “grotesque debt excesses” of the last decade has only just begun. “As Japan experienced before, it is deleveraging that is the problem and retrenchment takes many years, rendering the economy extremely vulnerable to rapid relapses back into recession when any reverse or pause in extreme stimulus occurs.”

Source: Albert Edwards, Societe Generale, September 17, 2009.

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