Global Bear Rally Will End In 2010

Ambrose Evans-Pritchard Daily Telegraph January 4, 2010

Accessibility links

Digital Publisher of the Year | Monday 04 January 2010 | Ambrose Evans-Pritchard feed

Advertisement Website of the Telegraph Media Group with breaking news, sport, business, latest UK and world news. Content from the Daily Telegraph and Sunday Telegraph newspapers and video from Telegraph TV. Enhanced by Google Home News Sport Finance Lifestyle Comment Travel Culture Technology Fashion Jobs Dating Games Offers News by Sector Comment Personal Finance Markets Economics Your Business Blogs Finance Video Fund Game Evans-Pritchard Jeff Randall Damian Reece Edmund Conway Tracy Corrigan Jeremy Warner Liam Halligan Kamal Ahmed Home Finance Comment Ambrose Evans-Pritchard Global bear rally of 2009 will end as Japan's hyperinflation rips economy to pieces Milton Keynes will be vindicated. Lord Keynes will lose some of his new-found gloss. The Krugman doctrine that we should all spend our way back to health by pushing deficits to the brink of a debt spiral – or beyond the brink – will be seen as dangerous.

By Ambrose Evans-Pritchard, International Business Editor Published: 6:15AM GMT 04 Jan 2010

Comments 23 | Comment on this article

Nikkei index - The shocker will be Japan, our Weimar-in-waiting Photo: AFP

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.

As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.

Related Articles Richard Fletcher: private equity faces a key test Gold will be the next bubble if we don't learn our lesson Edmund Conway: sovereign debt crisis remains a risk View from the lab: how the universe inflated into Milton Keynes Ben Bernanke will save the world, but first we bleed

We will be reminded too that the West's fiscal blitz – while vital to halt a self-feeding crash last year – has merely shifted the debt burden onto sovereign shoulders, where it may do more harm in the end if handled with the sort of insouciance now on display in Britain.

Yields on AAA German, French, US, and Canadian bonds will slither back down for a whil

By Ambrose Evans-Pritchard, International Business Editor Published: 6:15AM GMT 04 Jan 2010

Comments 23 | Comment on this article

Yields on AAA German, French, US, and Canadian bonds will slither back down for a while in a fresh deflation scare. Exit strategies will go back into the deep freeze. Far from ending QE, the Fed will step up bond purchases. Bernanke will get religion again and ram down 10-year Treasury yields, quietly targeting 2.5pc. The funds will try to play the liquidity game yet again, piling into crude, gold, and Russian equities, but this time returns will be meagre. They will learn to respect secular deflation.

Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.

The European Central Bank will stick to its Wagnerian course, standing aloof as ugly loan books set off wave two of Europe's banking woes. The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med.

More hedge funds will join the EMU divergence play, betting that the North-South split has gone beyond the point of no return for a currency union. This will enrage the Eurogroup. Brussels will dust down its paper exploring the legal basis for capital controls. Italy's Giulio Tremonti will suggest using EU terror legislation against "speculators".

Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation. The victims will start to notice this. Articles will appear in the Greek, Spanish, and Portuguese press airing doubts about EMU. Eurosceptic professors will be ungagged. Heresy will spread into mainstream parties.

Greece's Prime Minister Papandréou will balk at EMU immolation . The Hellenic Socialists will call Europe's bluff, extracting loans that gain time but solve nothing. Berlin will climb down and pay, but only once: thereafter, Zum Teufel.

In the end, the Euro's fate will be decided by strikes, street protest, and car bombs as the primacy of politics returns. I doubt that 2010 will see the denouement, but the mood music will be bad enough to knock the euro off its stilts.

The dollar rally will gather pace. America's economy – though sick – will shine within the even sicker OECD club. The British will need the shock of a gilts crisis to shatter their complacency. In time, the Dunkirk spirit will rise again. Mervyn King's pre-emptive QE and timely devaluation will bear fruit this year, sparing us the worst.

By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.

Comments: 23

Japan Govt debt to gdp is very high but Japans total debt to gdp is not as shocking. Private debt to gdp has collapsed over the last 20 years and Japanese corporations have cash. Be wary of judging a country on govt debt to gdp alone... its clumsy

Milton Keynes will be vindicated? Is that Maynard Keynes or Milton Friedman? Difficult thing, prediction. One major terrorist event could blow awry all calculations, as it did in 2001. An event that lead to a disastrous loosening of US monetary policy, which is a key reason for the present bust. As to predictions of Japanese wheelbarrow money this year, it seems we've heard this every year for the last dozen years. The only really noticeable effect of the downturn in Japan is the disappearance of the once ubiquitous Japanese language students in London. The one sure prediction is that the US role in the global economy will shrink. Today the Daily Telegraph reports that Goldman Sachs could leave London, it claims to avoid taxes and regulation. This is very strange indeed because the FT has just made Lloyd Blankfein, Goldman's boss, FT Person of the year. Behind the spin lies the truth, Goldman is downsizing. Its empire is shrinking. Goldman Sachs is, of course, the only investment bank left on Wall Street. The other truth is that City of London will continue to lose its role as a major player in global markets and its dominance over the British economy. The City has done down the industrial exporting sector of the British economy for years, starving it of capital. Now it will have to invest in Britain's long term growth, not in short term casino money. The only prediction that can be made with any degree of certainty is that in Britain VAT on food will be introduced, at about 5%, as a temporary measure, of course. It is timely to remember that Colbert's efforts to rebalance the French economy by exporting and get it out of debt by taxes on food, led to the French Revolution!

I'm lost-------Milton or John Maynard?

You correctly identify the the pieces of the puzzle but I don’t think you have them in the correct places, debt will need to be repaid and for many austerity will be required. The strong Euro is more akin to the Yen in the 90s than sterling and the dollar (despite your warnings of imminent collapse). In PIIGS austerity will continue, they could drop from the euro but this would mean relegating their currencies to third world status and perversely may strengthen the Euro and create big trouble for sterling. The Yen can fall alleviating some of its problems, however King's QE and 30% devaluation of sterling together with the UK debt burden may produce a run on the pound forcing the actions now being taken in Iceland, Ireland, Greece etc. After the election austerity will become policy. Bernanke will face an increasingly hostile political establishment after 2 years of burdening the US taxpayer with massive debt with no evident result and will find it more difficult to continue his failed policies. The US government facing an ever hostile electorate will introduce austerity. BRIC will introduce austerity as they adjust to lower export volumes. The problem is that as economies re-adjust, politics in the populace becomes increasingly radical. The buying opportunity will not be this year - we have a way to go yet

"There's an interesting juxtaposition in the Telegraph today. Ambrose sounds so worried yet Roger Bootle is so positive." Cassandra was the daughter of King Priam and Queen Hecuba of Troy. She spent a night at Apollo's temple, at which time the temple snakes licked her ears clean so that she was able to hear the future. However, when she did not return his love, Apollo placed a curse on her so that no one would ever believe her predictions. Never had your ears licked clean, Dave? My money's on Cassandra rather than the cockeyed optimist, Roger Bootle.

Thanks Ambrose. You have been consistently the most accurate of columnists and ought to be up for the New Year Honours for services to mankind, let alone journalism. Presumably the bottom-touching opportunity means we have much lower levels to come on the FTSE?

This is a worth while read - but only for its entertainment value. The only thing you should worry about is the UK. Households and soon Goverment are almost technically bankrupt. I can not see how the UK can remain the leading financial center in Europe. I will be publishing another article soon on my website...if you are looking for investment themes - please have a read. www.onemanstanding.com

Very interesting! As usual, AEP is largely pro-USA, negative europe. Let's balance up for the sake of fairness. I'd like to know how these snippets stack up when taken together: 1. "Far from ending QE, the Fed will step up bond purchases" 2. "The funds will try to play .. piling into crude, gold" 3. "The dollar rally will gather pace" 1+2 does not add up to 3 Also, negative for the USA, wait for the alt-A and option ARMs mortgages to explode in 10/11. As big as sub-prime. Happy new year!

@David: “The best kept secret in the investing world: Almost nothing turns out as expected.” – Harry Browne I think the best way to protect yourself is following Harry Browne's approach: 25% Gold 25% Equities 25% Gov. Bonds 20-30 years 25% Cash/shor term gov. bonds And do not forget to rebalance. This portfolio has great performance since 1971 (in 2008 a very small loss). See for instance www.crawlingroad.com for more info.

Good grief! Well, Mr Evans Pritchard, I have saved this article and will read again on 31st December 2010! I hope you are not right, but I fear that some of this might come true. What to do with any savings.... Norwegian Kroner? Aussie Dollar?

To precis: fundamental economic performance will re-assert itself thus currency values, government policies and expenditures will peforce have to follow. The trigger will be dispossessed, who will assert their requirement for a less inequitable society. 100% AE-P

Happy new year to you to A (for Armageddon) Evans-Pritchard,

"Significant cuts in state spending will only occur if the major state budget items (excluding defence and civil security) are transfered holus bolus into the private sector." Those significant cuts you talk about should come from mad projects like the replacement for Trident and from military involvement in far-away locations and wars. Queen Victoria has been dead a very long time now and we are a small island power that should have no aspiration to a world role. And as far as the transfer of other major state spending to the private sector, forget it. I presume you're thinking of the NHS. Privatisation of health provision is a Conservative wet-dream that the British electorate will never permit. With all its faults, it is still one of the great shining achievements of the post-war settlement, and seen as such by the British people. Any politicians who mount a serious assault on it will very soon be shown the door by the electorate.

Although i agree with your diagnosis your cure proposal will be far more devastating to western economies,in particular to the US. I am afraid you are not very familiar with the inflation process and its social costs. As someone who spent almost all his life in a high inflation country, i can assure you QE by FED will transform US into a Banana Republic within less than a decade.

I'm looking forward to it. I expect to do very well indeed.

Dear Sirs, Your prediction that Japan is a Weimar in waiting applies only to the UK. Japan has a massive trade surplus and can rely upon finincing it's deficit internally. The UK has to finance its budget deficit externally or via QE. If you add the banks short term loans abroad of some £ 5 Trillions that will end up with the Treasury you can guarantee that we will face a sovereign default within the next 3-6 months.

A very interesting set of scenarios of which any combination could prove correct. There are so many problems and potential disasters awaiting that it is like predicting the weather. My own view is that we are entering a period of 'feral economics' and the true value of an economy will be based upon the skills of its indigenous population and natural resources. We will see an unwinding of globalization of the past decades with 'economic prisons' as Govts try to trap the wealth of their taxpaying citizens. As this economic mess developes the more serious problems will be the social and political fallout that threaten to destabilise society.

Ambrose I will print this article and paste it to the December 2010 portion of my calender. Then in December I shall remind you to do a "did it happen" blog. I suspect that some of your critics will melt away. You rightly focus on the money supply and the need for increased liquidity. You may like to ponder the possiblity that consumer demand is actually falling faster than the money supply. If this is so we could have both a contraction of the money supply and inflation simultaneously in 2010 and beyond. I am not at all confident that the coming Conservative tax increases (to sustain state spending) will not finally kill off any hope of a recovery in consumer demand. Significant cuts in state spending will only occur if the major state budget items (excluding defence and civil security) are transfered holus bolus into the private sector. Are the Conservatives up to it? Given Mr. Clarke's emphasis on tax increases I rather think not. This is but one reason why I will not be voting for the Conservatives at the next General Election.

"The dollar rally will gather pace. America's economy – though sick – will shine within the even sicker OECD club" Bang on the nail, Ambrose. Those who have written off the US will be proved to be spectacularly wrong. And for those who like property investment, US properties in hard-hit vacation areas such as Florida will prove an excellent buy.

And a Happy and Prosperous New Year to you too, Ambrose.

Are you sure you mean Milton Keynes? Milton Friedman might be a better candidate for vindication??

gosh, that was fun!

This general picture of problems ahead may be correct in principle if not in all details. I suspect Ambrose's timing of a market bottom by year end will prove early - market falls to secular bottoms generally occur over 2-3 years. The key issue for investors (and that's all of us in one way or another) is how best to protect ourselves financially. Readers views would be most welcome.