Collapse of the Global Economy

Société Générale Tells Clients How to Prepare for Potential ‘Global Collapse’

November 18, 2009

Telegraph - 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.

SocGen 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.

SocGen'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.

Global Equity Fund Flows Turn Negative

November 6, 2009

Reuters - Global fund flows into equities fell in the week ended Nov. 4 as policymakers shifted focus to unwinding stimulus measures, while unemployment continued to rise, making investors question what will drive economic growth next year, fund tracker EPFR Global said on Friday.

Outflows from equity funds totalled $5.42 billion during the week and outflows from all emerging market equity funds were at an 11-week high. Fixed-income funds drew net inflows of $3.63 billion -- their worst showing since early July.

Only six of 24 major global funds and fixed-income fund groups tracked by EPFR Global registered inflows during the week, despite additional liquidity resulting from another week of heavy outflows from money market funds.

Global bond funds drew fresh money for a 30th week. U.S. bond funds remained attractive, absorbing $2.1 billion, and short-term debt funds led the way. Outflows from money market funds rebounded to $27.3 billion for the week.

Global emerging market equity funds surrendered $539 million as fresh doubts about the health of Western European banks, whose susidiaries financed East European and Baltic economies, weighed on sentiment across Europe.

East European equity funds saw outflows for the first time in 16 weeks and redemptions from Russian equity funds hit a year-to-date high.

BRIC -- Brazil, Russia, India, China -- equity funds overall drew inflows for an eighth week but Brazil funds saw outflows for the first time in eight weeks.

U.S. equity funds posted outflows for the fifth time in six weeks, with U.S. small cap funds hit hardest. U.S. growth funds outperformed value funds, however.

In Japan, weak domestic demand and renewed deflation posed questions about Japan's economic recovery and Japan equity funds saw outflows for a seventh week. As deflation makes holding cash more attractive, regional money market funds benefited.

SECTOR FUNDS

- Financial sector funds saw $798 million in outflows, the biggest outflow since the fourth week of March, amid concern about further recapitalisation of UK banks and bad results from Europe. The bankruptcy of U.S. lender CIT and a rate rise in Australia also discouraged investors.

- Commodity funds continued to attract money for a ninth straight week, helped by India's $6.7 billion gold purchase to hedge its foreign reserves.

- Technology funds and consumer goods funds posted outflows of $226 million and $216 million respectively.

Carbon Trading Could Provoke a Global Financial Failure

November 5, 2009

Telegraph - The environmental charity said not only does the current system of trading permits fail to tackle climate change, it is also financially dangerous. Currently only Europe has an emissions trading scheme, where companies can buy and sell permits giving them the right to pollute the atmosphere with carbon dioxide.

Sarah-Jane Clifton, author of the report, said the growth of a secondary market in carbon trading involving “financial speculators and complex financial products, carries a risk that carbon trading will develop into a speculative commodity bubble”.

This could “provoke a global financial failure similar in scale and nature to that brought about by the recent sub-prime mortgage crisis”, she said...