Société Générale’s key strategist, Albert Edwards, has warned of an impending bloodbath in stock markets. October is a traditional month for share crashes.
He said: “Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst.”
Edwards went on to say: “So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the [US] manufacturing ISM slides below 50 into recession territory in coming months.”
We are, he said, about to witness a “valuation nadir last seen in 1982.”
Mervyn King, Governor of the Bank of England has suggested more British banks may have to be nationalized in order to get them lending normally again. The alternative is many years of sub-trend growth.
Here’s the statement:
“The measures taken over the past six months were designed to stabilise the banking system and prevent failure. What’s become apparent is that nobody knows what level of capital they need to hold in order to be willing to make judgements about lending on the same criteria as you would regard as normal… In the long run, the only way to overcome this is for banks to get back to a position where they’re sufficiently well-capitalised that the degree of risk aversion that they exhibit towards their lending practices returns to a more normal level of risk aversion and not the extreme risk aversion which is being exhibited today.
“Higher capital would resolve that. How much capital, we simply don’t know. There was an interesting contribution from Alan Greenspan which suggested that several percentage points extra capital would be needed in American banks over and above the levels that regulators are pushing them to to get them to a more normal lending state.
“What’s very important to distinguish between and to my mind this is the big lesson of the last three, four five months, is that there is quite a big difference in practice between the levels of capital that banks need to be stabilised – in the sense that the creditors are reassured that the banks can continue as viable entities – and the levels required to persuade banks to exhibit normal levels of risk aversion. How big that gap is is absolutely impossible to say. I know of no scientific basis on which you can set that figure, but it looks as if it will be quite big.
“And what that means is that it will take time for the banks to get that extra capital. They are bound to be cautious about the rate at which they expand lending. It is a difficult problem to deal with. If the banks are going to continue as private sector entities they will naturally behave in a risk averse way for a while. That’s one of the lessons of history in terms of balance sheet problems.
“They could put in more public sector capital if they decided to do so but that has to be a judgement for government, and it does have ramifications for the Government’s shareholdings in banks because the amount you’d need to put in would undoubtedly be significant relative to the size of privately owned capital at present, and that does raise a whole series of awkward questions – but that is a matter for the Government.”
Not a nice prognosis and signs that the recent “bull” market and green shoots could all be in vain.
We have been told for years that a virulent ‘flu pandemic is only a matter of time. Last year, the World Bank forecast it would depress the world economy by 5pc.
Well, it’s here. The outbreak of “swine” ‘flu in Mexico, where 150 people have died as I write, has been classified as a pandemic by the World Health Organization (WHO). There have been a number of cases in the US and a couple in the UK, although no deaths as yet.
With the entire world in the grip of a gathering recession/depression, this is what we don’t need. Britain is already facing a fall in GDP of around 4pc this year, and the effects of the ‘flu outbreak could push that up to depression levels (10pc fall in output from peak to trough) with massive implications for unemployment.
The City of London does have emergency plans for just such an occurrence and they are now being activated. The nation as a whole has enough antiviral drugs, such as Tamiflu, to cover half the population, but has rejected stockpiling face masks because they have to be replaced frequently and could be easily contaminated.
Already, markets are feeling the pinch, many headed south, while banks may need even more capital before this episode is over.
One of Britain’s leading economists Peter Spencer, Chief Economic Advisor to the Ernst & Young ITEM Club, has warned that “printing money” to buy assets such as corporate bonds and consumer loans, was needed now or the country faces a repeat of the Great Depression.
“My concern is that people don’t fully understand the dangers lurking out there. The Bank of England needs to move towards quantitative easing immediately – you don’t have to wait until you get to zero percent interest rates. If someone is choking to death you don’t think twice about giving them an emergency tracheotomy. There may be dangers, yes, but the alternative is that they die,” he said.
“We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you’re in real, real trouble.”
He continued, ominously, “Our forecasts are relatively optimistic. The recession is already baked in. The question is whether we go from here into a decade of deflation – if they make more mistakes that is pretty much on the cards – or some pretty horrific numbers this year and some positives later on. They have days – not weeks – to play with.”