China’s Implosion Could Spell ‘GloBal D-D-D-Depression’

Don’t shoot the messenger , reb started the ball rolling again when he  wrote:  Important Notice:



Sincerely, The Government

It got me to thinking whether I should try to become a little more bullish in my predictions, until I was confronted with another unpleasant reality

Super bear warns on US and China

THE US economy is likely to enter into a depression and the “implosion” of the Chinese economy will cause disastrous consequences for the whole world, Societe Generale strategist Albert Edwards said.

Advising investors to “bail out” of their stock investments now, Mr Edwards, whose super-bearish stance on the global economy proved correct last year, predicted another 40 per cent decline in the S&P 500 index caused by dismal profit reports and poor economic data during the first half of this year.

“In 2009 it is not the mounting risk of depression in developed economies that will come as a major surprise,” Mr Edwards wrote in a note to clients, “it is economic implosion in China and the global and geopolitical risk thereof.”

Over a year ago, Mr Edwards had predicted the US would enter into a deep recession because of the excessive amount of debt it had accumulated.

Saying recent data points to “something far worse than deep recession,” Mr Edwards’ forecast for 2009 marked an even more bearish shift in his outlook for the global economy, and a further departure from the mainstream of economic strategists who expect a US economic recovery in the second half of the year.

In forecasting a depression in the US, Mr Edwards means that he believes the US will see a peak-to-trough decline in its gross domestic product of more than 10 per cent.

In China, Mr Edwards expects the worst domestic upheaval since the Tiananmen Square protests in 1989 may cause the Chinese authorities to undertake a “mega-devaluation” of the Chinese currency, the yuan, in an effort to stay in power, as “the very survival of the regime depends on growth”.

A devaluation of the yuan would cause the rest of the world’s economies to competitively devalue their own currencies in response, Mr Edwards said, sparking a “1930’s-style trade war” that “could see a rerun of the Great Depression”.

Mr Edwards bases his forecast for an implosion of the Chinese economy on several technical factors.

He points to data showing China’s electric power output declined over the last three months. The data usually correlates with China’s GDP.

He also noted the sharp decline during recent months in the Organisation for Economic Co-Operation and Development’s leading growth indicator for China’s economy.

Mr Edwards said reasonable explanations for the decline in China’s electric power output, such as the effect of a switch to oil-based power, were belied by sharp declines in industrial production growth and export levels in other Asian economies.

Ignore at our own peril perhaps?  Okay, I’ll repeat my previous warning if you’d like:

“So much for our robust economy, but what about a speedy recovery?    Dun and Bradstreet’s Economic & Risk Outlook report seems realistic and very credible to me.  Then again I’ve been calling a similar scenario for well over 12 months now. The bursting of the commodities bubble and a softening Asian economy on top of a sea of personal debt doesn’t make for a robust economy that Howard and Costello claimed to have left us.”

16 Responses

  1. I’ll kick proceedings of with a reference to something that’s concerned me for some time and that is among other obvious indicators the issue of China’s global inflationary effect in coming years, given it’s low cost production has played in reducing inflation in years past. And what happens if China’s economic engine actually implodes’? Shit I hadn’t even contemplated that scenario.

    Corporate socialism
    John McPhilbin
    Wed 23 Jul 08 (05:45pm)

    When you really think about what is actually occurring not only in global financial markets but in the real economy Janet, there seems to have been a fundamental shift that will no doubt continue to cause some major challenges for some time to come .

    I know Mr’s Howard and Costello laid claim to being the masters of the economy and interest rates but that is simply no longer a viable claim, and it never really was. They were simply riding a favourable economic wind. Nor am I sure the Rudd Government have the wherewithal to steer us through what are rough waters ahead.

    There are a number of potential and very challenging factors that will need to be addressed.

    1. Personal debt and poor savings record: It’s claimed that AUSTRALIANS are the world’s worst when it comes to saving, an Investment and Financial Services Association report said.

    The IFSA report, released last year, showed that on average Australian households have $160 in debt for every $100 they earn.

    In fact, only recently it has been reported that bad debt and household interest servicing levels have reached historic records, even before the major banks raised their lending rates independently of the RBA.

    2. China’s inflation factor: Former U.S. central-bank chairman Alan Greenspan has been emphasising that prices for Chinese exports have started to rise, which will contribute to a revival of global inflation. Ben Simpfendorfer, China strategist for the Royal Bank of Scotland, puts it succinctly: “Where China was a deflationary influence over the last 10 years, it will be an inflationary influence over the next 10 years.”

    3. Is our financial sector as solid as it claim to be?: Our banks assure us that we are in a stronger position than the US to cope with any fallout, I tend to be more skeptical. Our banks have surely been aided in earning record profits off the back of complex and risky debt arrangements with other lending institutions, businesses, and individuals in recent years? This has been a global issue not just one relating to the US alone.

    Robert Arnott, Chairman of Research Affiliates LLC in Pasadena, California, seems to be sounding a very ominous warning not only for the US but globally, in my opinion, when he claims “We are coming off the greatest lending bubble … in [U.S.] history. We will feel its impact for a very long time,” Either way, the introduction much tighter lending conditions will create much anxiety for some time to come.

  2. The thing about Albert Edwards is that he has ;form’

    Edwards, 45, has recommended that investors hold fewer stocks than Dresdner’s benchmark portfolio since 1996. In November of that year he said the world had entered a period of low inflation that would push stocks into an “Ice Age” in which stock valuations would fall back to the levels of the 1950s and ’60s.

    But the S&P 500 has outperformed U.S. Treasuries since Edwards formulated his Ice Age thesis.”

    That’s right, dear Albert has recommended that one should get out of shares since 1996. With so many predictions of doom, Albert was bound to get it right one day. But it took him 12 years.

    Of course he may be right again.

    “In January 2004, Edwards wrote that he was single again and had tried his luck at “speed dating,” an organized event in which he talked to a succession of eligible women for a few minutes each in hopes of finding a match. At the end of the note, Edwards reported that four women had asked to meet him again.

    “That was a lot better than I had expected,” he wrote. “Especially as the friend with whom I went, and was following on after me as I spoke to each woman, said that one woman had asked if I was gay.”

    Seems like a ‘balanced’ character.

  3. My God John I had better do the following.

    1) Buy some land and dig a dam
    2) Grow my own vegetables, get some bees for honey and wax to make candles.
    3) Keep all my rags to stich for clothes.
    4) Get a few cattle for milk and leather to make my own shoes.
    5) A couple of sheep to shear to spin and make my own jumpers.
    6) Buy a bike and pedal everywhere.

    Think I have covered everything essential for human existence.

  4. For those not addicted to gloom and doom:

    “Many pundits (e.g. Krugman) are warning that a dire recession is in the offing. We would have agreed with them three months ago; indeed, we wrote a VoxEU column predicting a severe recession in 2009; based on the analysis of 16 previous economic shocks, we forecasted a 3% drop in GDP and a 3 million increase in unemployment in each of Europe and the US with these predictions made from VAR forecasts (see Bloom 2008 for details).

    We also worried about a far worse outcome – Europe and the US slipping into another Great Depression due to damaging policy responses. Luckily, using the latest data on uncertainty measures, our model predicts that the worst has been avoided.”

    These ‘optimists’ claim:

    “But now that uncertainty is falling back growth should start to rebound. Firms will start to invest and hire again to make up for lost time. ”

    Good news or bad news? It depends on what you look for.

  5. Shane,

    You forgot about the backyard bunker, the stocks of baked beans, weapons, razor wire and spotlights to fend off any unfortunate intruders that didn’t prepare for Armaggedon.

  6. I just could’t resist posting this one.

  7. That’s right, keep laughing (wink)

    Undermining the economy
    Chris Zappone
    January 16, 2009 – 1:20PM

    The slowdown affecting the mining business is sending shockwaves through the industry, forcing the giants and the juniors to respond with job cuts and mergers.

    Not only has the value of commodities such as iron ore, coal and nickel fallen at a time when businesses abroad are halting orders as banks cut back on credit.

    “The speed and magnitude of the global drop in demand for some of Queensland’s leading mineral exports is unprecedented,” said Michael Roche, chief executive of the Queensland Resources Council, which counts Macarthur Coal, Lihir Gold, and Origin Energy among its members.

    The mining boom of the past five years has been the main driver of growth in the Australian economy, but now that it is over, the sector is dragging the rest of the economy down with it.

    Since hitting an all-time high of 473.5 index points in early July, the Reuters-Jefferies index of commodities, a broad measure of prices, has moved than halved to 218.9 index points as of this morning.

    December coal exports from Queensland, at 11.81 million, were 10% lower this year than last, Mr Roche said.

    Mr Roche said his member companies “are hopeful” that stimulus packages in Europe and China will start to reverse the slump in demand for minerals around the middle of the year. “The economic momentum of India and China has been slowed, not terminated.”

    Casualties so far

    Since the drop in commodities prices, the tally of projects put on hold or scrapped has lengthened and appears to be gathering pace.

    This week, Rio Tinto, struggling under the $55 billion debt racked up acquiring aluminium producer Alcan, has halted expansion on its Corumba iron ore mine in Brazil, as well putting underground ground mine development in NSW on hold.

    Rio also announced yesterday that iron ore production had been cut by 18% and that it would it would reduce its workforce and cut production at its Argyle diamond mine in WA.

    Partly as a result of these factors, Rio’s shares were hammered yesterday, losing 8% of their value – but they rebounded this morning.

    The company’s ambitious plans for an automated rail system for use in Western Australia have also been shelved in order to save capital.

    Debt-saddled OZ Minerals put its Scuddles mine in WA on “care and maintenance” mode this week as the company conserves funds to refinance its $1 billion of debt.

    The move will put 70 contract and full-time employees out of work, saving the company $22.1 million in operating costs.

    OZ Minerals has been in a trading halt since November 27. – when its shares were trading at 55 cents.

    WA-based Argyle Diamonds, the world’s largest supplier of diamonds, is laying off more than 100 staff, making it the latest victim of the downturn in commodities prices

    Alumina, the No. 1 producer of the material used in aluminium, put off expanding its Wagerup refinery in WA because of sliding demand triggered by falling orders from carmarkers.

    Lay-offs mount

    Rio Tinto also announced 15,000 job cuts worldwide in an effort to reduce overheads, pay off debt, and reposition itself for weaker commodities demand.

    In December MacArthur Coal flagged 180 lay-offs along with production cuts aimed at staying profitable in the weaker business environment. The Queensland-based company blamed lowered demand, triggered by “unprecedented times.”

    Also in Queensland, Xstrata is closing its Handlebar Zinc mine, which will leave 149 without jobs. The latest round of retrenchments comes after the company let go of 230 workers involved in coking coal production in December.


    The shrinking revenues and business levels in the mining states, along with the difficulty in accessing funding because of the credit crisis, has forced companies to take a hard look at their viability in the current climate.

    Grey Egerton-Warburton, lead director of corporate finance at WA-based Hartleys, said he had seen an increase in merger and acquisition activity in the sector in recent months.

    “We’re undertaking a lot of M&A work for resources and industrial clients,” he said. “It’s often more attractive for companies to come together at this time in the cycle.”

    Mr Egerton-Warburton said he had played “matchmaker” with development and exploration companies.

    “Companies that are cash poor but project rich make very good matches for those with cashflow or cash reserves who can use this time in the cycle to grow.”

    Conflicting problems

    With the record shortage of available labour fresh in the minds of project managers, companies are hesitant to jettison too much staff too quickly.

    Although there has been “some impact on jobs” in WA’s resource sector, Chamber of Minerals and Energy of Western Australia acting chief executive Nicole Roocke said most agreed that demand would eventually pick up.

    “There is still strong global demand for resource commodities and while the next 12 months will be incredibly challenging the history of the sector demonstrates an upturn will occur again and we need to prepare for that.

    Smaller players in hibernation

    For smaller companies dependent on outside funding and future commodities demand, their survival options are more stark.

    “Many exploration companies are now simply closing shop and going into hibernation mode until the market improves,” said Peter Strachan of Western Australia-based StockAnalysis in a note to clients.

    “They are slimming down boards and laying off technical management, reducing costs to a minimum and holding tight.”

    Companies reason they could discover huge new reserves in the current environment “and the market would take no notice, so they might as well hibernate,” he wrote.

    Mr Strachan points to companies such as Salinas Energy, which reduced its board and closed its Perth office in order to stay profitable.

    Not all bad news

    And although the market for commodities has collapsed and the outlook for the industries is uncertain, there are signs of life for some companies.

    “While some companies are announcing cut backs and delays there are other companies who are progressing with expansion projects,” said Queensland Resources Council’s Mr Roche.

    “Santos, Origin Energy and BG Group are among the contenders for the creation of an export Liquefied Natural Gas industry in Queensland that needs skilled people right now.”

    Hartley’s Mr Egerton-Warburton shrugs off the idea that the industry is in free fall in WA.

    “Most sectors of the economy are slowing a bit over here, no doubt, but I wouldn’t say it’s all doom and gloom,” said Mr Egerton-Warburton. “While there are some quieter spots, it’s still an active business environment.”

  8. Don’t worry, she’ll be right mate. It’s only money!

    Maybe it’ll be a good thing and people can stop obsessing about money and start valuing the things that really matter in life.

    Is it legitimate to think like that in this era of materialism, greed and dog eat dog?

    Haven’t seen anything yet to convince me that the ‘free market zealots’ are in any way tamed or even shamed. They are still out there blaming everyone else but themselves.

  9. There’s nothing like capitalising on the misfortunes of others. Bargains galore to come in shares and housing I’m sure.

    Now I know why there’s been a higher than usual influx of sharks to our shores (lol)

  10. “Haven’t seen anything yet to convince me that the ‘free market zealots’ are in any way tamed or even shamed. They are still out there blaming everyone else but themselves.”

    You’ve hit the nail on the head Kittylitter, you do actually get it.


  11. reb@12.22pm

    Don’t need weapons or razor wire if I have eaten Baked Beans 😯

  12. Bloody Hell!

    Nortel is going bust! And now Intel’s profit is down by 90%

  13. Reb, the truth is this crisis is very very nasty. And to be truthful, it’s worse than I ever imagined it would become.

    Intel’s profits down 90% is actually a good indicator – ‘Intel inside’ is something we’ve all become accustomed to over the years,

  14. Two more to keep an eye on

    Google, Microsoft cut jobs to fight recession
    Google is closing three engineering offices and cutting 100 recruiters from its work force as the recession dampens hiring at the internet search company.

    And Microsoft is considering significant layoffs across its various divisions, The Wall Street Journal reported, citing people familiar with the company’s plans.

  15. Thin., it wasn’t that long ago that market pundits were predicting the $AU to reach parity with the greenback.

    Dollar’s biggest fall in three months

    Allison Jackson | 3:25pm A BRUISED Australian dollar suffered its biggest weekly fall in about three months this week as the global economic crisis deepened.

    “The consensus view for 2009 of improving risk appetite appears to be on very shak grounds just a couple of weeks into the new year,” Mr Cavenagh said.

    Mr Morriss said he expected the Aussie to weaken to US63c by the end of March before falling below US60c by the end of June as the Reserve Bank continued to cut interest rates and commodity prices fell further as the global slowdown eroded demand for raw materials.

    He expects the Aussie to bottom at around US54c towards the end of the year.

  16. Budget deficit fears grow? I can’t for the life of me understand why the government are terrified of running deficits in times like these. That’s right, they don’t want to be compared unfavourably with the Howard Government who were economic masters (lol) who create a boom for Australia.

    Treasurer Wayne Swan ‘deeply concerned’ by slowdown – Budget deficit fears grow,25197,24923368-2702,00.html
    THE Australian economy will struggle to stave off recession and the budget will plunge deep into deficit in the wake of a worsening world economy.

    The bleak outlook from economists and government officials came as Wayne Swan described the situation as “deeply, deeply concerning” and conceded neither the budget nor the economy would meet Treasury’s budget forecasts made in early November.

    “It is certainly hard to see growth being above the published forecasts for China, and that does mean commonwealth revenue derived from the mining boom will take an even heavier hit than we predicted (mid-year),” the Treasurer told The Weekend Australian.

    His comments came as it was announced Toyota’s Altona plant in Melbourne would be shut for eight days between March and May in response to reduced demand.

    The Government is alarmed by the weakening of the big developing countries, which it had hoped would maintain growth in the face of what was seen as a developed world downturn. The severity of the recession in the US and Europe is also far greater than Treasury had anticipated.

    “What Australia now faces over the course of 2009 is the prospect of a shrinking US economy and China not growing anything like it was expected to,” Mr Swan said. “That is a deeply, deeply concerning situation.”

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