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Albert Edwards On The Resurgence Of 

The "Conspiracy Of Optimism" As

Groupthink Is Back To Record Levels

As regular readers know too well, one topic Zero Hedge enjoys ridiculing with the

disdain it deserves is groupthink of any form. The phenomenon, which is nothing but

transference of laziness by those who manage other people's money with complete

disregard for the consequences of their actions, was among the main reasons for the

Great Financial Crash.  As nobody was willing to engage in any form of critical

thought, and with the market "only" going up, any investment thesis was predicated

solely on what the "other guy" was doing. Of course when it all blew up, it was time

to blame the evil rating agencies. After all, heaven forbid someone actually think about the logic behind the credit ratings of hundreds of billions in synthetic CDOs, or 

worse still, take responsibility for their own stupidity and laziness. We are now

precisely in the same place we were when the market peaked last time around, with

groupthink rampant, with any attempt at opposing thought squashed for fears it will

end the party early, with sellside analyst optimism at all time highs, and with the

administration actively encouraging rampant lies and perpetuation of the myths that

take hold in the market with no factual footing whatsoever. The "conspiracy of 

optimism", as dubbed once by James Montier, has once again fully taken hold. As

SocGen's Albert Edwards points out "despite another post mortem on forecasting

failure, nothing has or will change": this is true... until the next crash. Then the

finger pointing will begin anew, theatrics about the change in the Status Quo will

resume, and once again the Fed will attempt to reflate the latest bubble crash. Only

this time there will be no reflation, as the central planning committee's reign of terror 

will be over, and the fiat monetary system will have ended. Below we present

Edwards' most recent solemn and very troubling thoughts on the latest break out of 

the great groputhink malaise, which will only last as long as the great chairsatan has

some control over events. Luckily, with the amplitude from a stable market

equilibrium shifting ever greater in either direction, and as the Fed's very existence

(remember: the whole point of the central bank is to contain price stability) is

repudiated, the time until the reset is now shorter than ever before in history.

Edwards laments:

I was leafing through a critical report into the IMF’s performance in the run-up to the

financial crisis by the Independent Evaluation Office of the IMF (see IMF

Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance

in 2004-07 – link ).

"Groupthink” mentality effectively sums up the reports criticism in one word. In

Chapter 4 entitled Why Did The IMF Fail To Give Clear Warning?, the series of sub-

headings reads just like my erstwhile colleague, James Montier’s papers with

pronounced cognitive bias being cited as the basis of the view that almost everythingin the garden was rosy.

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But suppose you were a dissenter – well ... “Staff incentives were not well aligned to

foster the candid exchange of ideas that is needed for good surveillancemany staff 

reported concerns about the consequences of expressing views contrary to those of 

supervisors, management, and country authorities.” Or let’s shoot the messenger!

Dissenting voices were ridiculed throughout the mid-2000s as the US and UK 

housing bubbles defied the pessimists’ pronouncements of collapse. For the vast

majority of the analytical community, the fact that the cassandras were proved wrong

gave them more and more confidence that there was, in fact, no bubble to burst at all,

whereas it was clear to many that the crash would end up being all the deeper when it

eventually came.

But what has changed? The new groupthink is that the Chinese economy will not

crash in the same way as the US economy did in 2008. China’s own Great

Moderation has continued for so long, the mainstream will only extrapolate this into

the indefinite future. And in developed markets, despite two gut-wrenching equitybear markets in a decade, QE2 has taken analyst optimism back to all-time highs

(see chart below).

A topic Zero Hedge presented previously is that while companies are now getting

more bearish, the sellside doesn't want the party to end, and its optimism is at an all

time high. The same goes for economists, who following in the footsteps of Goldman's Jan Hatzius stunning reversal in opinion, are now deliriously bullish on

everything.

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None of this is of course surprising: it is a matter of national interest for the banks and

their employees to promptly reflate the bubble at all costs. Otherwise, the great reset

will send them all packing and looking for a job that actually involves doing

something socially useful. As before, Edwards believes the great wind-down on

groupthink will begin with China (despite Stephen Roach's optimistic view that the

entirely export-led country can promptly shift its entire economic system to one

driven by the consumer class : sorry, ain't happening... not without a catastrophic

global economic realignment).

So we await some sort of correction in risk assets. But is this just a technical

correction within a bull market for risk assets or something more?

Personally, I would categorize the entire move up in the equity market since March

2009 as a bear market rally which at some point will fall flat on its face. Investors

seem to have forgotten that in a post-bubble world, recessions become far more

frequent events. Certainly in the UK I don’t have much doubt that fiscal tightening is

taking us back into recession, let alone now the increasing likelihood the Bank of 

England will soon raise interest rates.

But it is China and the commodity markets where I remain most concerned. Many

seem to have forgotten just how vicious the collapse in prices in H2 08 was – i.e. they

have forgotten just how all-persuasive yet wrong the prevailing groupthink was back then.

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And for those who need a natural antidote to Roach's perpetual optimism on China,here is Edwards' punchline:

Far bigger brains than my own seem pretty sure that China is a bubble destined to

disappoint. Most recently I was reading a piece by Edward Chancellor of GMO

entitled Entranced by China’s Bubbling Economy (see Financial Times 7 Feb –  link ).

He points out that bubbles can be identified before they burst by using simple

valuation tools. China has all the characteristics of “a truly great bubble” with

the housing stock set to exceed 350% of GDP this year, the same level of Japan at

the height of its real estate bubble in 1990. Construction accounts for around a

quarter of China’s economic activity which Edward notes is coincidently the same

level that Ireland attained before it’s dramatic explosion. Oops!

Meanwhile, the major external imbalances that reflect the easy money policies that

ruined the US, UK and Eurozone peripheral economies persist. The Chinese trade

deficit with the US reached new highs in 2010 (see chart below). In many ways the

persistence of the huge surpluses in China, Germany and Japan suggests that nothing

much has changed. Economic implosion in the indebted countries has been prevented

by the public sector simply replacing the excess debt of the private sector. The

solution to the private sector debt excesses has been more debt and monetization of 

that debt. The real issues have been simply avoided.

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But at least one consensus trend trade has just bitten the dust. Emerging markets had a

fantastic decade run because they were cheap (see chart below). But as ever, thisoutperformance was extrapolated way into the future. Groupthink failed yet again.

The one traditional refrain on Wall Street has been to "never fight the Fed".. or by

implication the great worldwide central banker cartel, which are now interchangeable

as all the money printers are all in on the Ponzi. Yet with the massive moves in gold

and silver, the market is telling us that ever more are taking the other side of that

trade. Perhaps the only place where "this time it is different" is that the Fed is now

losing. As Bernanke is now openly monetizing every dollar in gross issuance, what

else does he have in his bag of trick? We contend that there is nothing left. And with

QE3, QE4, etc. just a variation on a theme of dollar destruction, the end game is nowhere. Only this time even the Fed knows the outcome is given.

So let the groupthink have its last moment in the sun for a few more week, or months,

or at even years. Those who wish a return to a normal and efficient market system are

already putting in place the structural supports for a systemic "Volkswagen" on the

lazy parade of groupthink Koolaid drinkers, who will "never see it coming." Only this

time, the resulting squeeze, and subsequent reset, will make even the Volkswagen

chart from late 2008 pale in comparison.

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