Not for Albert Edwards, the best known bear in the City of London. He has seen nothing to dent his Ice Age thesis – the term he coined as early as 1996 to describe the relative decline of equities versus bonds.

He thinks there may still be another Japanese-style ”lost decade” to endure. ”Big structural bear markets take 19 years on average and have four recessions,” he says. ”We’ve had two.”

Edwards is thus sticking to two eye-catching predictions. Sharemarkets will revisit their March 2009 lows. And, despite the hints in recent months of a return of inflation, gilt yields will fall below 2 per cent (from 3.5 per cent today) as deflationary forces reassert themselves. And for good measure, prepare for a hard landing in China and the crash in commodity prices.

Ridiculous? Well, remember that Edwards’s Ice Age call in 1996 has proved to be a winner: even if you include the sharemarket’s dotcom bubble years at the end of the 1990s, equities are still a long way behind bonds since 1996.

Remember that Edwards’s forecasts were rubbished at the time.

His dismissing of the supposed Asian Miracle in the mid-1990s as ”Noddynomics” was resented – until the Asian currency crisis of 1998. To Edwards’s amusement, correspondents to his employer were still trying to get him sacked in 2000. ”Send this old, sclerotic and dangerous man into pension or … take him to prison,” said one. ”He’s obviously ill and not qualified to be chief strategist of Dresdner Kleinwort. I hope his prophecy will destroy his career for the next thousand years.”

In fact, the Ice Age prophecy has been the making of his career. He started out in the Bank of England’s economics department, spent three years in fund management and then had a 19-year stint at Dresdner Kleinwort until 2007. He and his colleagues (at the French bank Societe Generale) have been the top-rated analysts in the ”global strategy” category for seven years, despite being too quick out of the blocks with some predictions.

At times, though, during the great banking bust, Edwards’s views have come close to becoming consensus wisdom. The same cannot be said about his view on China.

”The biggest risk to market valuations and to sentiment generally is a China hard landing,” he says. ”China is a much more potentially volatile economy than people think. The Chinese situation is the one that could come out of nowhere because people are not considering it as a serious possibility.”

But hasn’t China been gloriously unaffected by the turmoil in the West, producing growth of 10 per cent or so with little difficulty? Edwards’s argument is that ”when you have a good crisis, success can become a curse”. Japan sailed through the 1987 crash. Similarly, the US economy escaped with a shallow recession after the bursting of the dotcom bubble; house prices started to rise as the authorities declared a period of stable inflation and ”great moderation” to be under way.

”Then what happens is that the housing and credit bubble goes out of control,” argues Edwards. ”You tap your foot on the brakes and the whole thing starts crashing and you can’t control it on the downside,” he says. ”China is exactly the same. It had a very good crisis in 2007, opened the credit floodgates, got a house price bubble going, and they’re now trying to tap their foot on the brakes.”

In Edwards’s view, China is a ”freak economy”; its investment-to-GDP ratio is off the scale in terms of size and endurance. ”In development history, Korea is the only one that got close. It then collapsed. China is basing a growth model on the most unstable part of GDP. The Chinese authorities have recognised this and are trying to steer the economy over to consumption – which is fine, but it will take a long time.”

The danger is that China has produced such strong growth for such a long time that investors assume the process will last indefinitely.

”There is too much confidence in the lack of volatility. If you get a zero or a small minus for Chinese GDP, in the great scheme of long-term development it’s not a great problem. But it’s a bit like investing in Nasdaq stocks in 2000 – there would be a big adjustment in price. There is an investment edifice built on the idea that China is the new growth engine of the world.”

He points to the OECD’s leading indicator of economic activity, which measures factors such as electricity production, freight activity and money supply. In China, it is slowing rapidly, even though commodity prices are as elevated as they were in early 2008 (prices then plunged). Something has to give – and probably sooner than most people assume. The degree of ”pushback” from clients to his view on China reminds him of the resistance to his bearish calls on the dotcom and east Asian bubbles.

Closer to home, the Ice Age thesis suggests disappointments for the economy are inevitable. Edwards points to Japan, which enjoyed occasional rallies in share prices without conquering its long decline.

The lesson is that ”to avoid recession you need to stimulate all the way through the deleveraging phase”. That makes Austerity Britain more vulnerable to recession than the US.

The middle classes have been ”totally shafted” by a house-price bubble that created the illusion of prosperity. ”In the US, one in eight are on food stamps. Japan was a cohesive society that shared its pain collectively. That is not how it stacks up in the US, UK, Spain, Greece etc. You have a much more fractious environment to have a lost decade in. The ructions for society will be far worse.”

So Edwards’s answer to the question that obsesses investors at the moment – are we past the worst? – is a resounding no. Or, as his final research piece of 2010 put it: ”I’ve been doing this job long enough to recognise when the markets are entering a new phase of madness that leaves me scratching my head with bemusement.

”The notion that we are back in a sustainable economic recovery is as ludicrous as it was in 2005-07. But investors are back on the dance floor, waltzing their way towards the next, inevitable implosion, [which] yet again they will no doubt claim in retrospect was totally unpredictable!”

Mr Wen said yesterday China would not give in to foreign pressure to raise the value of its currency or withdraw stimulus measures put in place in late 2008 to pull the country out of the crisis.

Mr Wen called for more reforms to the world’s financial system as China ponders policy choices aimed at fighting rising inflation while increasing domestic demand.

The Prime Minister pointedly highlighted how surging commodity prices had been at the centre of disputes with Australia.

“The unemployment rate of the world’s main economy is still high, some countries’ debt crises are still deepening, and the world’s commodity prices and exchange rates are not stable, which are most likely to become the cause of any setback in the economic recovery,” Mr Wen said yesterday in Beijing’s Great Hall of the People.

Mr Wen is now attempting the delicate balancing act of withdrawing the massive stimulus of government funding and state-sponsored bank lending which totalled 12 trillion yuan ($1.92 trillion) last year while trying to fend off inflation and proceed with structural economic reform.

China is also trying to marshall the forces of its steel sector to fend off a massive hike in iron ore prices that could now be as much as 90 per cent.

China’s and Australia’s economies have become more intertwined in recent years: the country is now our largest trading partner with two-way trade surging to $83 billion in the year ending last June 30, and in December it passed Japan as our largest export market.

Any trouble in China’s economy would quickly resonate in Australia.

Mr Wen yesterday blamed the US for deteriorating relations between the two countries.

China has been under increasing pressure to allow its currency, the renminbi, to appreciate, removing the effective peg to the US dollar that has been in place for more than a year since the financial crisis gripped the world.

Two days ago, US President Barack Obama ratcheted up his rhetoric, urging China to appreciate its currency, saying a “market-oriented” exchange rate was “an essential contribution to that global rebalancing effort”.

Mr Wen fired back yesterday, saying the renminbi was not undervalued and a country’s exchange rate policy “should depend on its national economy and economic situation”.

“We are opposed to the practice of engaging in mutual finger-pointing among countries or taking strong measures to force other countries to appreciate their currencies,” Mr Wen said.

By keeping its currency at a level many economists believe is at least 20 per cent below what it would be if the market dictated its rate, most analysts and Western nations believe that the world’s largest trading nation is gaining an unfair advantage.

Pressure over China’s currency, along with a $6.4bn arms sale to Taiwan and a meeting between Mr Obama and the Dalai Lama, have heightened tensions between Washington and Beijing. “The responsibility does not lie with the Chinese side but with the US,” Mr Wen said.

Despite China’s leaders explaining that they understood the country needed to restructure its export and heavy-manufacturing-dependent economy, they have given scant details about how they will step up reforms, particularly for the country’s 800 million rural citizens who are becoming more restive as the income gap between them and the urban middle classes widens.

There is rising concern among many economists about inflation after the country’s consumer price index hit 2.7 per cent in February, as well as the level of local government debt.

Article excerpts smh.com.au

Private capital expenditure fell a seasonally adjusted 8.9% in the first three months of the year, tumbling from the 6 per cent pace of expansion recorded in the December quarter of 2008. A consensus of analysts surveyed by Bloomberg tipped a 6 per cent fall for the first quarter.

The weaker business investment figure will drag on overall economic growth, adding to the likelihood that gross domestic product will post a negative result for the March quarter.

Provided the December quarter’s minus-0.5 per cent contraction is not revised into a positive figure at next week’s release of GDP data, Australia will notch up two quarters of declines, marking the country’s first recession in about 17 years.

A drop in business investment is also expected to contribute to a rise in unemployment, with analysts expecting the jobless rate to jump to 9 per cent by the end of 2010.

Equipment, plant and machinery spending dropped 10.8 per cent, seasonally adjusted, in the March quarter.

Estimates are gathered in a series of seven quarterly surveys, the first in January and February before the start of the financial year in July, and the seventh immediately after the financial year ends.

The sixth estimate of expenditure for 2008/09 is $99.259 billion, which is 13.2 per cent higher than the sixth estimate for 2007/08.

The second estimate of expenditure for 2009/10 is $76.925 billion, which is 11.7 per cent lower than the second estimate of 2008/09.

The backlog of projects undertaken by business in the past five quarters will probably leave a surfeit of infrastructure, notably in the mining industry.

smh article

“Whether or not the next GDP (gross domestic product) statistic, due in early June, shows another decline, I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession,” said Mr Stevens.

The current recession, triggered by slumping economies struggling with the financial crisis, means “Australians cannot do a great deal to make these improved international conditions come to pass,” he said.

However, a lack of confidence is extending the effect of the drop in investment and lending both at home and abroad, he said.

“What can policy-makers do to help?” Mr Stevens said. “Unfortunately, there is no lever marked ‘confidence’ that policy-makers can take hold of.”

Mr Stevens said the role of the central banks was to foster confidence in the current climate, where “global growth will be, for a while at least, lower on average than we saw for most of the past decade”.

The RBA governor’s speech, made to the Australian Institute of Company Directors, comes the same day the Reserve Board’s April minutes show the central bank underestimated the weakness in the economy evident in March but flagged a recovery by the end of the calendar year.

article excerpts smh.com.au

The Westpac/Melbourne Institute leading index, which signals the likely pace of economic activity three to nine months in the future, shrank by 5.1 per cent in February.

It was the lowest rate of annualised growth since September 1982.

February’s result compared to a downwardly revised fall of 4.8 per cent in January and a February annualised growth rate of 0.7 per cent.

Westpac chief economist Bill Evans said the deterioration of the growth rate of the leading index was “truly remarkable” and  that “for some months the index has been signalling that the Australian economy will enter a recession,”.

“The consistent run of negative reads for the growth is comparable with Australia’s previous recessions which began in 1961, 1974, 1982 and 1990.”

“During that earlier recession the low point for the Australian economy was 1991 when the economy contracted by 1.3 per cent. Westpac is currently forecasting that the Australian economy will contract by one per cent in 2009 which we expect to be the low point of the cycle.”

news.com.au article excerpts

Now their strategy is to stabilise the crisis, and build towards some sort of recovery next year.

“Everybody knows that 2009 is going to be a very tough year. It is going to be (an) extraordinarily tough first quarter,” Canada’s Reserve Bank governor Mark Carney told the World Economic Forum in Davos.

The Davos message of gloom for 2009 has been absorbed by Australian bank chief executives who return home braced for a very rough ride over the rest of the year.

The top bankers fly back to a nation coming to grips with the news that Australia will join the rest of the industrialised world in recession this year.

The Rudd government plans to offer tax cuts for low-income earners despite a $50 billion blackhole in tax revenue caused by the crisis. The government also plans to offer incentives to businesses who keep staff.

The bad news for Australia is the unexpected rise of financial protectionism as banks become part or fully nationalised in the US and Europe. The result is that they are pulling capital out of foreign markets.

That leaves Australia exposed because it has to import capital and its banks have to tap foreign capital markets because of our low savings rate.

The next policy move will be a further budget stimulus in countries including the US and Australia.

The IMF predicts the G20 nations will produce a fiscal stimulus equal to 1.5 per cent of their gross national product.

But that won’t stop the recession this year.

If you are feeling the effects of the global meltdown and don’t know where to turn, call Liquidation Direct for confidential free insolvency advice – 24 hours – on 1300 767 525.

Wayne Swan said yesterday the Government was determined to do all it could to strengthen the economy in the face of the international crisis.

The Government is in the process of spending $10.4 billion, with payments to pensioners, families and carers, and increasing the first-home buyers grant however, it is coming under pressure from the IMF to do more,†as both the domestic and international oulooks have darkened since October.

The recession in the US is becoming increasingly severe, with 550,000 people losing their jobs last month, pushing the unemployment rate to a 16-year high of 7.2 per cent.

The employment outlook in Australia is also getting worse. The ANZ’s monthly survey of job advertisements shows a 9.7 per cent fall in December alone, with the number of jobs on offer falling by 27.2 per cent since July.

The ANZ said the pace of decline was consistent with a recession over the next nine months and suggested rising unemployment that would last for several years.

He said the collapse of job advertisements meant the Government’s budget position was weakening faster than it forecast in its budget update last November, which tipped the unemployment rate to rise to 5 per cent.

A tax cut of $3.4 billion is locked in from July 1 and it is possible the Government may bring forward a further $4.5 billion in tax cuts presently planned for the middle of next year.

The tax cuts planned both this year and next involve lifting the threshold at which the 30c-in-the-dollar tax rate cuts in, from $34,000 to $37,000, and lifting the threshold for the low-income tax offset from $14,000 to $16,000. People earning less than this will pay no tax, while people earning up to $67,500 will have some entitlement to the low-income tax offset.

article excerpts news.com

The number of job advertisements in major metropolitan newspapers and on the internet fell by 9.7% in December.

Job advertisements were 29.9 per cent lower than 12 months earlier.

The number of job ads in newspapers slipped 13.9 per cent in the month.

Job ads in newspapers have fallen 51.8 per cent in the 12 months to December, the weakest annual rate of growth since the survey began in 1975 and worse than at any time during the 1982 and 1991 recessions.

A 50 per cent decline in newspaper job advertising in a year is historically consistent with economic recession.

A nationwide survey of 1200 companies revealed more than 50% were preparing for a drop in sales, while 59 per cent expected lesser profits.

The last time the Dun & Bradstreet National Business Expectations Survey recorded such a bad reading was during the second quarter of 1990, when Australia was in recession.

Some executives have indicated they will need to slash staff numbers and capital investment to survive the downturn. In fact 20%†of Australian business owners expect to have fewer staff in the March quarter than they did a year ago.

79%†plan to raise prices during the March quarter to protect their bottom line.†This†is the highest level ever recorded by the survey.

30% of firms have also noticed a slowdown in consumer spending, which is unlikely to be helped by higher prices.

10 per cent of firms will be putting capital investment plans on the back burner until the outlook improves.

The nation’s depreciating currency has also caused major problems for Australian businesses -† 72% claim to have been negatively affected by the dollars†fall from the 25-year high of US98.49c struck in July.

The credit squeeze has also†affected local businesses, with 40% indicating they have been negatively affected by changing credit market conditions.

Despite recent cuts, 36%† believe interest rates will have the greatest impact on their business.

44% of firms recorded fewer sales and 55%†generated lower profits.

Liquidation Direct is in the front line of the squeeze and is noticing a huge upswing in businesses in distress.

Liquidation Direct operates a 24 hours insolvency help line that is answered by a Registered Liquidator. If you are suffering hardship in your business and need advice as to how you might deal with an impending insolvency, call Liquidation Direct on 1300 767 525 for free and confidential insolvency advice.

article excerpts news.com

The bookmaker has Australia a $1.12 favourite to fall into recession in the next 12 months, and $5.50 if it is avoided.

Centrebet’ says the effects of the production meltdown in industries like car manufacturing had yet to hit Australia’s economy.

The global financial downturn has not even gone close to bottoming out through Australia’s economy and it will be a miracle if Australia avoids recession.

Both JP Morgan and Citigroup both predict Australia will suffer a technical recession in early 2009 but other economists predict the economy will be flat, avoiding recession through measures like the federal government’s stimulus package and cuts in interest rates.

Centrebet has also released its latest market for the Reserve Bank’s next interest rates decision, with a 75 basis point rate cut the favourite at $2.35 ahead of a 50 basis point cut at $2.40, and 100 basis point drop at $3.50.

article excerpts news.com