Is SocGen going to be right again about a global collapse?

French investment bank Societe Generale whose warnings about global financial instability were generally ignored until the crisis last autumn has published a ‘Worse-case debt scenario’ explaining how its clients should be ready for a ‘global economic collapse’ over the next two years.

Its thesis is that global debt levels are far too high and that the outlook is for de-leveraging which will exert strong downward pressure on global economies. Oil prices will dip below $50, property prices tumble and equities revisit March lows.

With an underlying debt burden among major economies that is now higher than after the Second World War this is a powerful argument. Ageing populations make economic growth harder to achieve, while inflating away debt will impoverish the older citizens.

Debt crisis

Even with US savings back at seven per cent it will take nine years to get US debt back to the levels of the 1980s, says the bank report, adding that the similarity with Japan in the 1990s is compelling but the policy options available are not the same.

SocGen tells its clients to short cyclical equities like financials and technology, and emerging markets whose leverage to US growth is greater than Wall Street. Controversially the bank also argues in favor of buying sovereign bonds which did very well in Japan in the 90s.

Others see a bond crisis as the final stage of a true global financial crisis and have historical precedent on their side. No major financial crisis has ever ended without a bond crisis, and Japan’s crisis could come very soon indeed.

The winning asset class would be precious metals in a global economic collapse, according to SocGen, as the dollar would devalue further and gold be seen as a safe haven asset class.

Timing the downturn

The usual problem with bearish scenarios is not that they turn out wrong but that the timing is off, sometimes by years even decades. They may also not be quite as bad as advertised as investors do tend to switch between asset classes over time, and not all are caught napping.

SocGen is issuing a wake-up call, and many of its points are identical to the warnings that this website has been sounding, first before last autumn’s crash, and since mid-August about the stock market rally.

You can only be bearish for so long before becoming boring but that is often just before you are proven right. Holding gold, short ETFs and cash still seems the best defense against an inevitable market correction, or a global collapse a la SocGen.