Société Générale "Bear Case" Looks at Global Collapse

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The US has Nouriel Roubini and the UK has Ambrose Evans-Pritchard — well, maybe not quite, with all due respect to Mr. Evans-Pritchard; but you get my point. Both commentators, regardless of their credentials, are frequently telling us how bad things really are if only we had the vision to read between the lines. Well, Mr. Roubini was proved spectacularly right on several occasions during the decade and so, to be fair, has Mr. Evans-Pritchard. But it is with a sense of déjà vu that every time I start to read one of his articles in the Telegraph, I have a feeling I am going to come away depressed. On this occasion it wasn’t his own (often well researched and always well written) work but a report by the French Bank Société Générale that was the substance of his report.

In a report entitled “Worse case debt scenario SocGen’s asset team headed by Daniel Fermon, explored the dangers facing the global economy in the years ahead. The Telegraph article focused  on the “Bear Case in which the dollar will slide further, global equities will re-test March lows, property prices will tumble again and oil will fall back to $50 per barrel.

The factors likely to steer the world’s economies into such a collapse were largely driven by debt and the various governments responses to it. Although governments have metaphorically shot their fiscal bolts at a huge cost in public debt there are many doubts as to what will happen from now on as growth stumbles in OECD markets. The report says even without fresh spending, public debt would explode within two years to 105% of GDP in the UK, 125% in the US and the Euro-zone, and 270% in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade but with aging populations it will be harder to erode debt through growth.

The only answer is for the west to inflate themselves out of the problem. But as was once famously said, inflation is a bit like being pregnant, you can’t opt to be a little bit pregnant.

The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (actually more like 14 years), 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.

Needless to say, the report has generated quite a lot of interest among SocGen’s investor community suggesting as it does that they should sell dollars and short cyclical equities like technology, autos and travel to avoid being caught in the deflationary spiral that would result. Farm commodities should hold up the bank said and (although not mentioned) supposedly so would metals prices; if nothing else than as a hedge against inflation.

So I wasn’t disapointed, as expected  I came away depressed but also somewhat alarmed. Governments probably had little alternative other than to borrow and stimulate, the downturn has been dire and the damage could have been even worse, but it does raise the question what now? 2010 is going to be a tough year, there are some encouraging signs but there is also much to be concerned about; unemployment, debt and the taxation that will be required to pay it off are going to be significant drags on the OECD economies for much of the next decade and inflating our way out of it is not the silver bullet some would have us believe. Nor will emerging markets save us. China has it’s own problems and steering a course from exporter to consumer will present major challenges for them too – but that’s story.

–Stuart Burns

Comment (1)

  1. Donald Rapp says:

    How long can wealth be created by bidding up the price of paper assets? How long can Governments keep borrowing with zero prospect of ever paying it back?

    See my book: “Bubbles, Booms and Busts” published by Praxis/Springer in 2009, available from

    Donald Rapp

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