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Albert Edwards On The Resurgence Of
The "Conspiracy Of Optimism" As
Groupthink Is Back To Record Levels
As regular readers know too well, one topic Zero Hedge enjoys ridiculing with the
disdain it deserves is groupthink of any form. The phenomenon, which is nothing but
transference of laziness by those who manage other people's money with complete
disregard for the consequences of their actions, was among the main reasons for the
Great Financial Crash. As nobody was willing to engage in any form of critical
thought, and with the market "only" going up, any investment thesis was predicated
solely on what the "other guy" was doing. Of course when it all blew up, it was time
to blame the evil rating agencies. After all, heaven forbid someone actually think about the logic behind the credit ratings of hundreds of billions in synthetic CDOs, or
worse still, take responsibility for their own stupidity and laziness. We are now
precisely in the same place we were when the market peaked last time around, with
groupthink rampant, with any attempt at opposing thought squashed for fears it will
end the party early, with sellside analyst optimism at all time highs, and with the
administration actively encouraging rampant lies and perpetuation of the myths that
take hold in the market with no factual footing whatsoever. The "conspiracy of
optimism", as dubbed once by James Montier, has once again fully taken hold. As
SocGen's Albert Edwards points out "despite another post mortem on forecasting
failure, nothing has or will change": this is true... until the next crash. Then the
finger pointing will begin anew, theatrics about the change in the Status Quo will
resume, and once again the Fed will attempt to reflate the latest bubble crash. Only
this time there will be no reflation, as the central planning committee's reign of terror
will be over, and the fiat monetary system will have ended. Below we present
Edwards' most recent solemn and very troubling thoughts on the latest break out of
the great groputhink malaise, which will only last as long as the great chairsatan has
some control over events. Luckily, with the amplitude from a stable market
equilibrium shifting ever greater in either direction, and as the Fed's very existence
(remember: the whole point of the central bank is to contain price stability) is
repudiated, the time until the reset is now shorter than ever before in history.
Edwards laments:
I was leafing through a critical report into the IMF’s performance in the run-up to the
financial crisis by the Independent Evaluation Office of the IMF (see IMF
Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance
in 2004-07 – link ).
"Groupthink” mentality effectively sums up the reports criticism in one word. In
Chapter 4 entitled Why Did The IMF Fail To Give Clear Warning?, the series of sub-
headings reads just like my erstwhile colleague, James Montier’s papers with
pronounced cognitive bias being cited as the basis of the view that almost everythingin the garden was rosy.
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But suppose you were a dissenter – well ... “Staff incentives were not well aligned to
foster the candid exchange of ideas that is needed for good surveillancemany staff
reported concerns about the consequences of expressing views contrary to those of
supervisors, management, and country authorities.” Or let’s shoot the messenger!
Dissenting voices were ridiculed throughout the mid-2000s as the US and UK
housing bubbles defied the pessimists’ pronouncements of collapse. For the vast
majority of the analytical community, the fact that the cassandras were proved wrong
gave them more and more confidence that there was, in fact, no bubble to burst at all,
whereas it was clear to many that the crash would end up being all the deeper when it
eventually came.
But what has changed? The new groupthink is that the Chinese economy will not
crash in the same way as the US economy did in 2008. China’s own Great
Moderation has continued for so long, the mainstream will only extrapolate this into
the indefinite future. And in developed markets, despite two gut-wrenching equitybear markets in a decade, QE2 has taken analyst optimism back to all-time highs
(see chart below).
A topic Zero Hedge presented previously is that while companies are now getting
more bearish, the sellside doesn't want the party to end, and its optimism is at an all
time high. The same goes for economists, who following in the footsteps of Goldman's Jan Hatzius stunning reversal in opinion, are now deliriously bullish on
everything.
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None of this is of course surprising: it is a matter of national interest for the banks and
their employees to promptly reflate the bubble at all costs. Otherwise, the great reset
will send them all packing and looking for a job that actually involves doing
something socially useful. As before, Edwards believes the great wind-down on
groupthink will begin with China (despite Stephen Roach's optimistic view that the
entirely export-led country can promptly shift its entire economic system to one
driven by the consumer class : sorry, ain't happening... not without a catastrophic
global economic realignment).
So we await some sort of correction in risk assets. But is this just a technical
correction within a bull market for risk assets or something more?
Personally, I would categorize the entire move up in the equity market since March
2009 as a bear market rally which at some point will fall flat on its face. Investors
seem to have forgotten that in a post-bubble world, recessions become far more
frequent events. Certainly in the UK I don’t have much doubt that fiscal tightening is
taking us back into recession, let alone now the increasing likelihood the Bank of
England will soon raise interest rates.
But it is China and the commodity markets where I remain most concerned. Many
seem to have forgotten just how vicious the collapse in prices in H2 08 was – i.e. they
have forgotten just how all-persuasive yet wrong the prevailing groupthink was back then.
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And for those who need a natural antidote to Roach's perpetual optimism on China,here is Edwards' punchline:
Far bigger brains than my own seem pretty sure that China is a bubble destined to
disappoint. Most recently I was reading a piece by Edward Chancellor of GMO
entitled Entranced by China’s Bubbling Economy (see Financial Times 7 Feb – link ).
He points out that bubbles can be identified before they burst by using simple
valuation tools. China has all the characteristics of “a truly great bubble” with
the housing stock set to exceed 350% of GDP this year, the same level of Japan at
the height of its real estate bubble in 1990. Construction accounts for around a
quarter of China’s economic activity which Edward notes is coincidently the same
level that Ireland attained before it’s dramatic explosion. Oops!
Meanwhile, the major external imbalances that reflect the easy money policies that
ruined the US, UK and Eurozone peripheral economies persist. The Chinese trade
deficit with the US reached new highs in 2010 (see chart below). In many ways the
persistence of the huge surpluses in China, Germany and Japan suggests that nothing
much has changed. Economic implosion in the indebted countries has been prevented
by the public sector simply replacing the excess debt of the private sector. The
solution to the private sector debt excesses has been more debt and monetization of
that debt. The real issues have been simply avoided.
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But at least one consensus trend trade has just bitten the dust. Emerging markets had a
fantastic decade run because they were cheap (see chart below). But as ever, thisoutperformance was extrapolated way into the future. Groupthink failed yet again.
The one traditional refrain on Wall Street has been to "never fight the Fed".. or by
implication the great worldwide central banker cartel, which are now interchangeable
as all the money printers are all in on the Ponzi. Yet with the massive moves in gold
and silver, the market is telling us that ever more are taking the other side of that
trade. Perhaps the only place where "this time it is different" is that the Fed is now
losing. As Bernanke is now openly monetizing every dollar in gross issuance, what
else does he have in his bag of trick? We contend that there is nothing left. And with
QE3, QE4, etc. just a variation on a theme of dollar destruction, the end game is nowhere. Only this time even the Fed knows the outcome is given.
So let the groupthink have its last moment in the sun for a few more week, or months,
or at even years. Those who wish a return to a normal and efficient market system are
already putting in place the structural supports for a systemic "Volkswagen" on the
lazy parade of groupthink Koolaid drinkers, who will "never see it coming." Only this
time, the resulting squeeze, and subsequent reset, will make even the Volkswagen
chart from late 2008 pale in comparison.
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