by SamHenry
Société Générale, one of the oldest banks in France, “has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.” [Telegraph UK] The bank is part of one of the main European financial services companies and also maintains extensive activities in others parts of the world. [Wickipedia]
In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).
The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.
Inflating debt away might be seen by some governments as a lesser of evils.
If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.
The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
Société Générale advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
Société Générale’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
Mr Fermon said his report had electrified clients on both sides of the Atlantic. “Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried,” he said. [Telegraph UK]
The President had his own assessment of the financial outlook before he left Beijing:
BEIJING, Nov. 18 (UPI) — U.S. President Barack Obama Wednesday warned growing national debt could undermine public confidence and “could actually lead to a double-dip recession.”
In an interview with Fox News Channel before leaving Beijing, Obama said spending is necessary to jumpstart the economy but there is a danger in running up too much debt.
He said he’s considering further tax incentives for businesses to promote jobs growth but he cautioned against adding to the national debt, which exceeds $12 trillion.
“I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.
Obama called jobs growth his “No. 1 job.” [UPI]
Taken together with the following, we are living out the Societe General’s projections:
Technically, the debt hit the new high yesterday, but it was posted on the Treasury Department website just after 3:00 p.m. ET today. The exact calculation of the debt is a 16-digit tongue-twister and red-ink tsunami: $12,031,299,186,290.07
This latest milestone in the ever-rising journey of the National Debt comes less than eight months after it hit $11 trillion for the first time. The latest high-point is not unexpected, considering the federal deficit for the just-ended 2009 fiscal year hit an all-time high at $1.42-trillion – more than triple the previous year’s record high…
But the White House budget review issued in August projects that by the end of the current fiscal year on Sept 30th, the National Debt could top $14 trillion.
It gets worse. The same document projects that by the end of the decade, the National Debt will hit $24.5 trillion — exceeding the Gross Domestic Product projected for 2019 of $22.8 trillion. [HotAir]
With talk on the Hill about possible more stimulus money being made available, we need to think about risk vs efficacy as is done in pharmaceutical circles. Clearly, we cannot continue or even maintain our country on this rocky road. No matter what anyone says, Health Care Reform 2009 will add to this debt.
People out of work for over a year have dropped off the radar. Unemployment figures are no doubt conservative. You cannot get blood from a stone and unemployed workers will load up the system with no way of paying for medical insurance. Further, those still employed will have less expendable income. They will watch all unnecessary expenses. We need to focus on the fact the consumers can’t buy us out of this one.
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HotAir – Housing starts “unexpectedly” tumble
samhenry
November 21, 2009
Oh Great Cat you do have a way of speaking that is priceless. It just makes me want to make a little book of Cat Quotes by Meow Say Tongue