Edwards: Wider Market Risks Of Japan's Economic Collapse?

The respectful Albert Edwards, the global strategist at Societe Generale, has been an ueber-bear for years. The key message today:

The rapidity of the collapse in the Japanese economy has shocked the investment community. The economic pain has been magnified by the Yen becoming the strongest major currency in the world. The Yen is seriously misaligned with economic reality. I believe the phase of Yen strength has now ended and it will begin a pronounced slide. It matters to the rest of the world that Japan will get considerably more competitive. It will also hasten a Chinese devaluation.

Investor familiarity with weak economic data has reached new heights of vulgarity. We have reached the point now where utterly horrific US housing starts data hardly get noticed. The 16.8% mom decline in January starts announced yesterday comes after a 14.4% mom decline in December and a 14.6% mom decline in November. This took starts to a record low of 466,000 units, massively lower than the 530,000 economists had expected. Starts are now down 56% yoy, the fastest rate of meltdown since the US housing peak at the end of 2005. That an intensification of the US housing catastrophe merits so little shock value any longer is a sign of just how bad things have become!

Japan’s 3.3% decline in Q4 GDP did, however, shake the markets. News of the collapse even reached mainstream news bulletins in the UK. Japan is now clearly set to fall into depression (defined as a peak to trough decline in GDP of 10%). The jury is still out on the US and the UK but I feel very confident that both these Ponzi-based economies will suffer the same fate, as will the Eurozone, increasingly weighed down by problems to the east.

Amid the global economic carnage and avalanche of government stimulus measures, it is easy to miss a key event that might have far reaching economic and market implications. I believe that, unnoticed, just such an event has occurred. The Yen has just begun to unwind its long period of strength since mid-2007, associated with an unwinding of the carry trade and risk aversion. Since mid-2007 the Yen became unusually detached from the economic cycle (see chart below). This is now ending. A weak Yen has major global implications.

Serious ...