//www.themalaysianinsider.com/index.php/business/44138-another-collapse-in-the-offing-fears-socgen
Another collapse in the offing, fears SocGen
SINGAPORE, Nov 21 — Much has been said of government stimulus packages and the nascent global economic recovery. But have investors given serious thought to the prospect of another crash?
In a report, Societe Generale (SocGen) painted a Doomsday scenario in which global economic collapse could recur in the next two years. It advises clients to go short on US dollars and European stocks, and long on government bonds and agricultural commodities.
The French bank says state rescue packages over the past year have merely transferred private liabilities on to sagging sovereign shoulders, creating a fresh set of problems.
Overall debt, whether public or private, is still far too high in almost all rich economies as a share of gross domestic product — for example, 350 per cent in the US.
“As yet, nobody can say with any certainty whether we have, in fact, escaped the prospect of a global economic collapse,” SocGen says in the 68-page report.
Under its “bear case” scenario, the greenback is forecast to slide further and global equities could sink to their lows of March this year. Property prices would tumble and oil would fall back to US$50 (RM170).
SocGen says public debt will explode within two years to 105 per cent of GDP in the UK, 125 per cent each in the US and the eurozone, and 270 per cent in Japan — even without fresh spending. Worldwide state debt will reach US$45 trillion — up two-and-a-half times in a decade. That debt burden is greater than it was after World War II, when nominal levels looked similar.
A new problem this time around is that ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run,” says SocGen. “We have almost reached a point of no return.”
If governments continue to inflate their debt, the implication is the gold price will continue to surge as gold is the only safe haven from paper money.
Meanwhile, there is the problem of paying off private debt, even if the US savings rate stabilises at 7 per cent. Assuming that all of this is used to pay down debt, SocGen says it will still take nine years for households to reduce their debt-income ratios to the safe levels of the 1980s.
Its analysts draw a parallel between the current state of affairs and Japan during its Lost Decade, except that Japan was able to stay afloat by exporting into a robust global economy and letting the yen fall. “It is not possible for half the world to pursue this strategy at the same time,” says SocGen.
Under such extreme conditions, it advises selling the dollar and cyclical equities such as technology, autos and travel to avoid being caught in the “inherent deflationary spiral.”
And although emerging markets would not be spared — as they are more leveraged to US growth than Wall Street itself — farm commodities would hold up well, led by sugar.
Mining commodities are also favoured as a hedge against a softening dollar, based on persistently strong demand from emerging markets, particularly China.
Looking at fixed income markets, SocGen asset chief Daniel Fermon says junk bonds will lose 31 per cent of their value in 2010 alone.
However, sovereign bonds will “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as a slump grinds on.
At one point, Japan’s 10-year yield dropped to 0.4 per cent. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
According to Fermon, SocGen’s report has 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 says.
Another collapse in the offing, fears SocGen
SINGAPORE, Nov 21 — Much has been said of government stimulus packages and the nascent global economic recovery. But have investors given serious thought to the prospect of another crash?
In a report, Societe Generale (SocGen) painted a Doomsday scenario in which global economic collapse could recur in the next two years. It advises clients to go short on US dollars and European stocks, and long on government bonds and agricultural commodities.
The French bank says state rescue packages over the past year have merely transferred private liabilities on to sagging sovereign shoulders, creating a fresh set of problems.
Overall debt, whether public or private, is still far too high in almost all rich economies as a share of gross domestic product — for example, 350 per cent in the US.
“As yet, nobody can say with any certainty whether we have, in fact, escaped the prospect of a global economic collapse,” SocGen says in the 68-page report.
Under its “bear case” scenario, the greenback is forecast to slide further and global equities could sink to their lows of March this year. Property prices would tumble and oil would fall back to US$50 (RM170).
SocGen says public debt will explode within two years to 105 per cent of GDP in the UK, 125 per cent each in the US and the eurozone, and 270 per cent in Japan — even without fresh spending. Worldwide state debt will reach US$45 trillion — up two-and-a-half times in a decade. That debt burden is greater than it was after World War II, when nominal levels looked similar.
A new problem this time around is that ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run,” says SocGen. “We have almost reached a point of no return.”
If governments continue to inflate their debt, the implication is the gold price will continue to surge as gold is the only safe haven from paper money.
Meanwhile, there is the problem of paying off private debt, even if the US savings rate stabilises at 7 per cent. Assuming that all of this is used to pay down debt, SocGen says it will still take nine years for households to reduce their debt-income ratios to the safe levels of the 1980s.
Its analysts draw a parallel between the current state of affairs and Japan during its Lost Decade, except that Japan was able to stay afloat by exporting into a robust global economy and letting the yen fall. “It is not possible for half the world to pursue this strategy at the same time,” says SocGen.
Under such extreme conditions, it advises selling the dollar and cyclical equities such as technology, autos and travel to avoid being caught in the “inherent deflationary spiral.”
And although emerging markets would not be spared — as they are more leveraged to US growth than Wall Street itself — farm commodities would hold up well, led by sugar.
Mining commodities are also favoured as a hedge against a softening dollar, based on persistently strong demand from emerging markets, particularly China.
Looking at fixed income markets, SocGen asset chief Daniel Fermon says junk bonds will lose 31 per cent of their value in 2010 alone.
However, sovereign bonds will “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as a slump grinds on.
At one point, Japan’s 10-year yield dropped to 0.4 per cent. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
According to Fermon, SocGen’s report has 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 says.
