Thursday, January 12, 2012

The view from SocGen

JUST back from Societe Generale's annual strategy seminar, held in the west end. As usual it was packed; as usual it was a jolly affair (considering the gloomy message) with Albert Edwards wearing a floral shirt that he may well have acquired in the 1970s.

As always, it was a thought-provoking event, and not confined to Albert's normal pro-bonds, anti-equities message. Indeed, Albert accepts that bonds are a poor medium-to-long term investment but thinks we have another deflationary shock to go first. "2012: The Final Year of Pain and Disappointment" was the title of the event. His general case, which he has manfully maintained for around 15 years, is that we are in an "ice age" in which equities get de-rated and bonds do well, as has been the case in Japan.

The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example). The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable. He cites the views of other forecasters such as the Economic Cycle Research Institute and John Hussman that a recession is on the way, and points to other confirming data such as the recent weakness in commodity prices.

Dylan Grice took a more philosophical view, pointing out the limits of our knowledge. Historians have had 1600 years to work out the reasons for the fall of the Roman empire and still don't agree; economists still debate the causes of the Great Depression. He produced two lovely quotes, the first from Lao Tzu

"Those who have knowledge don't predict. Those who predict don't have knowledge."

And the second from J K Galbraith

"There are two types of forecasters; those who don't know and those who don't know they don't know."

From this standpoint, the confidence of central bankers in their ability to forecast is quite astonishing.