French bank tells clients how to prepare for potential 'global collapse'

Société Générale tells clients how to prepare for potential 'global collapse'

Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.
By Ambrose Evans-Pritchard
Published: 6:12PM GMT 18 Nov 2009

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.

simuvac

.....I always knew you seen the big picture. Your post are always well received.

Danger of collapse

I recently posted the following diary on opednews:
by peothre

on Monday, November 16, 2009 at 10:38:43 PM

Stimulus kills. The Federal Reserve and the government stimulus programs of the 1930s stoked the coals of the Great Depression. Now stimulus is being used to redistribute wealth as well.

: : : :

The billions of dollars in bailout money are now being used to purchase positions in commodities and tangible assets. The dollar is highly overvalued, particularly in light of the banking and industry bailouts, and it becomes clear that the massive injections of cash that were supposed to stimulate the economy will instead be used to effect a massive redistribution of wealth. Those who are now flush with cash will convert it to tangible assets before the dollar collapses. When people run for the exits vis-à-vis the dollar, it will be too late. The dollar will be abandoned, and its value will fall to a small fraction of what it is today. Those who cashed in their dollars for tangible assets early on will have done incredibly well. The transfer of wealth will have been accomplished. The first stages of this scenario are happening right now, as can be seen by the recent appreciation of precious metals to record values against the dollar. Six months to a year would not be an unreasonable time frame within which to expect a collapsing dollar, hyper-inflation here in America, and the accompanying catastrophic contraction in disposable incomes and savings. Americans will be caught in the cross currents of an unsustainable national debt and an over-expansive monetary policy.