The U.S. economy is about to be “swept away by a tidal wave of corporate defaults” and when it comes crashing down it will throw the economy into a recession, according to Societe Generale economist Albert Edwards.
As corporate earnings for the first quarter of 2016 are set to be the worst since the Great Recession, Edwards believes that this will lead to a collapse in U.S. corporate credit.
Edwards highlighted figures illustrating how U.S. corporate profits are suffering a “gut wrenching slump” and how historically, “when whole economy profits fall this deeply, recession is virtually inevitable as business spending slumps.”
On the recent recovery of the S&P 500, Edwards said to “ignore this noise.”
“Despite risk assets enjoying a few weeks in the sun, our fail-safe recession indicator has stopped flashing amber and turned to red,” Edwards wrote in a note to clients on Thursday.
A tidal wave is coming to the US economy, according to Albert Edwards, and when it crashes it’s going to throw the economy into recession.
…the profit recession facing American corporations is going to lead to a collapse in corporate credit.
Whole economy profits never normally fall this deeply without a recession unfolding. And with the US corporate sector up to its eyes in debt, the one asset class to be avoided — even more so than the ridiculously overvalued equity market — is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default.
Corporate profits are on the decline for two reasons, Edwards says.
Firstly, they are falling due to margin pressure from rising labor costs.
Secondly, because firms haven’t been able to pass on these increasing wage pressures to consumers through prices. As a result, they have decreased spending and hiring, and the most vulnerable can’t make debt payments.
Chart courtesy of Societe Generale
Edwards points to three reasons why this time around is a recessionary decrease, not a 1986-style aberration:
- “When the oil price slumped in 1986 the economy was steaming ahead at a 4% pace and so withstood the downturn in business investment.”
- “In 1986 Fed Funds were cut from over 8% to less than 6% at a time when the consumer was re-leveraging, i.e. not debt averse as now.”
- “Finally, companies in 1986 were not up to their necks in debt as they currently are, and their solvency now is far more vulnerable to a profits downturn.”
In other words, this time around won’t be a quick, oil-driven recovery and the U.S. is in for a full-blown end to the economic cycle, according to Edwards.
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