ALBERT EDWARDS: Investors are ignoring the 'most underrated risk' in markets - one that could spark an imminent blow-up
- Societe Generale's notoriously bearish strategist Albert Edwards says that investors are ignoring the "most underrated risk" in markets right now.
- Edwarsds says no one seems to be expecting a hard landing in China, but the risk is much higher than most people believe.
- You just need to look carefully at the data to see how troubled China looks.
China's slowing economy is being overlooked by investors worldwide as the potential source of a major global economic bust in the near future, according to one of the most famously bearish strategists in the industry.
Writing to clients on Thursday, Societe Generale strategist Albert Edwards argued that a "hard landing" in the Chinese economy could be considered the "most underrated risk of complacent markets."
Edwards, who is well known on Wall Street for his doom-laden predictions for the markets, argues that China's ability to navigate the 2008 crisis fairly unscathed has blinded investors, and made them ignore signs that a crash may be imment.
"China'’s policymakers are regarded as having had a very ‘good’ crisis in 2008," he wrote to clients. "Since then, naysayers, such as myself, have been consistently wrong in projecting that policymakers would lose control and that a grotesque credit bubble would burst and lay the economy low."
He continued: "Once again fears are mounting about the Chinese economy slowing rapidly, but few fear a bust."
His basic argument is that while Chinese stocks are selling off amid fears of a slowing economy, the market simply expects a moderate and managable slowdown, rather than a hard landing. This, he says, is misplaced when you look at the actual data.
Edwards has long warned clients to be particularly vigilant about economic developments in China, and said that recent data coming out of the world's second-largest economy should be of much greater worry to the markets than it seems to be right now.
Among the most worrying signs from China is that it has now dropped into current account deficit after years of surpluses.
"The swing," Edwards says, is "likely to be permanent."
This will, in turn, "increase the fragility of the renminbi at a time when economic growth is slowing sharply, led by the industrial (secondary) sector."
"And with export growth to the US only temporarily buoyed to avoid tariff hikes, this slowdown is likely to intensify," he added.
Signs are already there that this is happening, particularly when looking at the country's job market.
"Most worrying of all for Chinese policymakers is that the economy has slowed to the point that employment has begun to fall, most visibly in the slump in the latest employment component of the PMIs," he wrote.
"The shedding of manufacturing jobs has been apparent for a few years now (ie sub 50), but if the services sector is also now shedding labour again, then that is really serious for policymakers," he added, pointing to the chart below:
Edwards compares what he thinks may be going on in China right now to the aftermath of the 2001 bubble in tech stocks, which prompted a recession in the US economy.
In that aftermath, the Federal Reserve, and then Chairman Alan Greenspan, were seen to have had a "good crisis" - and were effectively credited with stopping the crash from having an even worse impact.
"Alan Greenspan and the Fed were seen by investors to have had a good crisis, and together with Greenspan’s mythical equity market put, investors became overcomplacent," Edwards said.
"The bust, when it came, was worse, precisely because over-confidence in policymakers’ ability to control events led to excessive risk and debt being taken on," he added, referring to the 2008 crisis.
Don't be surprised if the same happens in China.