Boy, they’re bearish at SocGen: banking, China, you name it…

September 17, 2009

They’re a cheerful lot at Societe Generale. Here is uber-bear Albert Edwards pointing out that things are getting worse, not better, in the west’s financial plumbing. As if that’s not ominous enough, Dylan Grice has come up with a chilling analysis of the nasty similarities between China today and Japan a quarter of a century ago.

Edwards’ pessimism has been something of a comfort to the dwindling bunch of bears, as they’ve watched asset prices romp away while they were caught in cash or (worse) short. Grice’s arguments open up a whole new stretch of forest for them to roam.

In the early 1980s, Japan was going to overtake the west; as its stock market capitalisation passed that of Wall Street, predictions that its economy would be bigger than that of the United States within 20 years became commonplace.

We were urged to look at the state we were in, and become more like the Japanese. Their form of savings-based, quasi-state capitalism produced spectacular growth, an enviable trade surplus and obviously worked better than ours.

Substitute China for Japan, and you have, roughly, the conventional view of the People’s Republic today. Grice maintains that it was the demographics that did for Japan, as the population effectively stopped breeding as they got richer.

In China, of course, they haven’t been allowed to breed, thanks to the one-child policy, which has produced an imbalance between the sexes on a scale that only a war would cure. That’s only part of it, says Grice:

The geopolitical shift towards China now underway dwarfs that seen in Japan in the 1980s, and probably anything yet seen in the history of the modern world. A commensurately seismic mania would lead to excesses beyond all proportion to the periodic bouts of frothiness seen so far.

As it did in Japan, the west’s pressure for scrapping capital controls will be the air compressor that inflates the bubble. The Chinese want Shanghai to be an international centre by 2020, as the Japanese did with Tokyo in the 1980s.

The inevitable mix of national hubris with abundant liquidity will be just as intoxicating. The lesson from Japan is that the journey towards China’s climactic bubble is actually only just beginning.”

Only just beginning? Oh well, that’s all right then. Enjoy the waves while you can. That Tsunami’s miles away…



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