U.S. Economic Collapse Coming
Albert Edwards of Société Générale says his recession indicator is now “flashing red” rather than amber after the slump in U.S. whole economy profits data, a characteristic of an impending recession. (Source: “SocGen’s Edwards: US recession ‘virtually inevitable’,” Investment Week, April 7, 2016.)
“Historically, when whole economy profits fall this deeply, recession is virtually inevitable as business spending slumps,” he said in a note to clients. (Source: Ibid.)
Edwards urged investors to avoid U.S. corporate bonds, in particular.
“And if I had to pick one asset class to avoid it would be U.S. corporate bonds, for which sky high default rates will shock investors. The economy will surely be swept away by a tidal wave of corporate default,” he said. (Source: Ibid.)
A Bloomberg report earlier this week warned that when the next corporate default wave comes, it could hurt investors more than they expect. (Source: “The Coming Default Wave Is Shaping Up to Be Among Most Painful,” Bloomberg, April 5, 2016.)
Moody’s Investors Service says default rates currently stand at about four percent and could soar to as high as 14.9% by the end of the year under the most pessimistic scenario. Its best-case projection is a 5.05% rate. (Source: Ibid.)
Edwards believes this recession could be particularly bad because of the way the Federal Reserve has handled interest rates in recent years. He contended interest rates have pumped up the S&P 500, and U.S. stock prices are now the driving force behind monetary policy. (“SocGen: Recession Is ‘Virtually Inevitable’,” Benzinga, April 7, 2016.)
“As more and more excuses are wheeled out to justify its inaction, we all surely know by now that the Fed’s articulated ‘data-dependent’ rate hikes are primarily focused solely on the level of the S&P, i.e., when it slumps they will quickly back off rate hikes and use any excuse necessary—including dismissing surging core CPI inflation,” Edwards explained. (Source: Ibid.)
The S&P 500 has nearly tripled since it hit a bottom in early 2009 on the heels of the financial crisis. The gauge closed at 2,041.91 on Thursday.
Last month, the Fed kept interest rates unchanged at 0.25%–0.50% after introducing a 0.25% hike in December, the first rate hike since 2006. Policymakers have also said they will approach interest rate hikes with caution, given the uncertainty in global economic growth. They have lowered interest rate hike projections to two hikes in 2016, instead of the four hikes they had forecast in December.
Edwards’ warning of an economic collapse comes a few days after Republican presidential frontrunner Donald Trump predicted the country is on course for a “very massive recession.” (Source: “The bizarre optimism in Donald Trump’s theory of the economy,” The Washington Post, April 2, 2016.)
In an interview with The Washington Post on Saturday, Trump warned of the combination of high unemployment and an overvalued stock market.
“I think we’re sitting on an economic bubble. Afinancial bubble,” the billionaire businessman said, adding that “it’s a terrible time right now” to invest in the stock market. (Source: Ibid.)
Trump said the official jobless figure is “statistically devised to make politicians—and in particular presidents—look good.” (Source: Ibid.)
In the past, Edwards has made bearish predictions about the U.S. economy that did not come true. In September 2012, he announced the U.S. was in recession and Wall Street would soon react, and he warned of an “ultimate” death cross for the S&P 500. Instead, the S&P 500 continued to rally, and has gained around 40% since Edwards’ pronouncement. (Source: “Trump right? SocGen bear sees ‘imminent’ recession,” CNBC, April 7, 2016.)
In November 2013 and March 2014, Edwards also released notes that forecast imminent U.S. recessions and spoke of declining U.S. profits. (Source: Ibid.)