Friday, September 4, 2015

The Coming Economic ‘Ice Age’.............

The Coming Economic 'Ice Age'

A huge increase in overall debt, combined with currency devaluation in emerging markets, is likely to lead to a Japan-like period of deflation in the U.S. and weak returns for most stocks, according to Société Générale analysts.

Every day there are headlines about slowing economic growth in China, and the country's currency devaluation last month was a catalyst for painful volatility and declines of stocks worldwide. But these events may point to a longer-term problem that U.S. investors have to consider.

Overall debt in the United States has continued to grow and is now at an all-time high, and debt has also shot up in Europe, Japan and now China. "Combined with adverse demographics, an excessive debt burden erodes disposable income of people who have to finance the debt," according to Société Générale analyst Robbert van Batenburg.

Meanwhile, "devaluation of many currencies in emerging markets particularly has been driving deflationary trends in developed markets," van Batenburg said during an interview on Wednesday.

It makes plenty of sense for exporters of manufactured goods, worried about their own economies, to go through competitive rounds of devaluation in order to boost their exports to developed countries.

The good news for people in developed countries is the continued flow of cheaper goods. But there's a price.

"While investors have already talked about the eurozone looking similar to Japan, a deflationary recession also beckons for the U.S.," Société Générale strategist Albert Edwards said in a report on July 30.

Building on this thesis, analysts from the bank said last week that this economic "ice age" will lead to higher risk and lower returns for stocks. How much lower are stocks going as investors realize this?

"We've had this deflationary environment in Japan three times, in 1994 to 1996, 1999 to 2007 and 2012 to 2014. We have seen an overall market in Japan that has led to bonds outperforming stocks," van Batenburg said.

The aging of the U.S. population will place a further drag on the economy, with an increasing percentage of people "relying on government support and entitlement programs, which in turn will push up overall debt," van Batenburg said. 

The result of all this is a relentless compression of growth and eventually declining earnings expectations.

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