Bearish British economist Albert Edwards warns that if you think times are tough now, they are about to get worse, as China’s “classic credit bubble” bursts, the euro zone comes unglued and the U.S. slides back into recession.

But according to him (via The Globe and Mail), nothing should worry market players or policy makers more than China, says Mr. Edwards, who has 20 per cent of his personal assets in gold, “not to get rich … just to make sure I don’t get poor.”

Here are some of his remarks on China:

“China will end in a very hard landing, which will surprise investors,” Mr. Edwards says flatly. The slowdown will hammer commodities, drive equities below levels reached at the market nadir in the first quarter of 2009, and could pose serious geopolitical risks.

“When you stand back and look at it from the macro level, it is so clear,” Mr. Edwards says later between sips of beer. “It’s the classic behavioural finance thing: It’s overconfidence in a good growth story. It produces the wrong valuations, the wrong credit structures. Of course, these things can carry on for longer than you assume.”

What he finds particularly puzzling about the Chinese story is how so many investors steeped in free-market ideology could have so much faith in the couple of dozen policy makers at the helm of the [chinese] nation’s economy. The primary goal of China’s leaders is to preserve their lucrative perks and the unchallenged power of the ruling Communists and who have already made some serious blunders. 

… “they really look as if they are starting to lose control. The next stage will be when they pull the levers, but nothing happens economically.” A decision to restart the pump-priming could trigger a short-term market rally. But once it becomes clear that the policies aren’t having much of an impact, confidence will fly out the window, much as it did in the U.S. in 2008.

“Unfortunately, the world has seemed so reliant on China as a growth engine, I think this will accentuate the disappointment even more when it hard lands.”

Once the bubble bursts, “Canada might be a lightly done muffin, but Australia will be absolutely toast.”

Source: The Globe and Mail

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