Just when we were wondering what to write about, the latest Global Strategy Weekly from Albert Edwards lands.
The Soc Gen strategist has been poring over last week’s Flow of Funds report from the Federal Reserve…
…and comes to the following conclusion:
US total credit continued to disappear down the plughole, despite the government’s best efforts to inflate us back to prosperity [see chart above]. The current recovery, based in very large part on the end of de-stocking, simply cannot be sustained while credit is disappearing at this debilitating dehydrating rate.
So far, so bearish then. But when will this process of deleveraging end? Unsurprisingly, Edwards thinks it won’t be quick, for several reasons.
One is the level of household leverage:
With nominal GDP actually managing to inch up some 0.8% in the year to Q4 2009, the economy managed its first baby step along the long and winding road to normality, with US debt dipping under 350% of GDP. Household leverage has returned to 94% from its peak of 96% in both 2007 and 2008. But consider this: at the peak of the Nasdaq bubble, household leverage was just shy of 70%. There is a very, very long way to go.
Another is non financial debt:
In the case of the non-financial debt/GDP ratio, it remained at a record 240% high at end-2009. We need to “lose” some 60% of GDP worth of debt to get back to where we were at the peak of the Nasdaq bubble (I use this reference point for no other reason than these levels seem obscenely high relative to history at that time). Either way, investors should accept we have a long hard slog ahead.
But ultimately, Edwards reckons the great deleveraging will only be over when there is an end to the unprecedented decline in the pace of bank lending.
And that could take a decade of Japan-like pain.