Albert Edwards: 'Investors Demand A Sign Of When To Get Out And That Trigger May Have Just Arrived"

Tyler Durden's picture

With every other bear throwing in the towel left and right these days, we fully expected that the latest letter by SocGen's Albert Edwards would have something about "how much he hates looking at himself in the mirror, but..." and then we would be served with some garbage like the following margin expectations chart.

Luckily none of that happened. Instead we were greeted by the sharp insight and keen intellect that we have grown to expect from AE, and that have disappeared from the repertoire of so many other sellouts and lemming cheerleaders. Ironically, the topic of Edwards' latest piece is precisely the chart above - the explosion in future margins, or rather the complete lack thereof. In fact, what Edwards is seeing is quite the opposite. To wit:

The margin squeeze that is unfolding as unit labour costs climb above company selling price inflation...



... leaves the economy extremely vulnerable to a downturn in the investment cycle. Business output inflation is measuring a wider basket of goods and services than the Fed?s favoured measure of inflation, the core personal consumption expenditure (PCE) deflator, but it does move in a very similar fashion (see chart below). Low pricing power is leaving the US economy more vulnerable than many suppose. In my view, a full-blown profits and investment downturn is most likely to be triggered by Asian and EM devaluations releasing surplus capacity onto the West and crushing pricing power even further. As Ian Harwood, my former boss used to say, ?"Watch the profit cycle closely. We ignore it at our peril?."


This is a useful follow up to our earlier observations on the current status of the leverage cycle, when we noted that while the business cycle may be dead, but if it isn't we are now on the verge, if not have entered a full-blown recession.

We have, on these pages, long believed that corporate profits should be watched closely, not for their direct impact on equity valuations, but their impact on the economic cycle. Most economic models have profits dropping out as a residual, but they are a key driver of the economic cycle. Growth in profits determines the growth of investment, inventories and employment. (Note I emphasise the growth, and not the level, of profits or the rate of profitability).


Over the years I have tended to focus on US pre-tax domestic non-financial profits as a best lead indicator for US-based company business spending. In the chart below I show this profits measure together with real growth in business investment, including inventories. Profits growth typically leads investment spending.



If we can get a handle on the profits cycle we can avoid being caught out by the investment cycle and recessions. Typically it was said that ?recessions were made in Washington? as the Fed jacked up rates to fight inflation. This not only curbed the credit cycle but squeezed corporate profits to the point that it triggered a downswing in the investment cycle and ?caused? a recession.


So in many investors? minds a recession will not occur unless the Fed triggers one with monetary tightening. That is of course nonsense. A credit bubble can burst without any monetary tightening and similarly the profit cycle can turn down due to a variety of factors.

This is a critical observation, one that everyone ignores, and one which as the first two charts above show, means that unless the Fed proceeds to inject funds directly into corporate revenues (there is a reason why revenues will have declined for 3 quarters in a row), one can kiss not only the idiotic hockeystick forecast margin chart goodbye, but that negative margins, and earnings, are just around the horizon.

Edwards' conculsion is simple: if the US economy continues on the current track, an economic decline is inevitable, which in turn will crush confidence in the Fed, and make future monetary policy prohibitively costly:

... a recession seems a distant prospect in the minds of most investors. Yet one key precursor for a recession has now fallen into place. Slowing productivity growth means that unit labour costs are now running well ahead of output price inflation. This means a margin and profits downturn is now about to unfold. That typically is a key precursor of recession.

Finally, for those who are will be quick to acuse Edwards of crying wolf, he has a few words for you too:

That confidence in a long cycle comes partly with a high level of certainty that the monetary authorities remain in control of the economic cycle. The doomsayers who predicted that this recovery was on the verge of faltering have been proved wrong, and like the boy who cried wolf, can be safely ignored by the market. Yet that is exactly what happened in 2006 with the US consumer and housing boom, where the voices of caution had been so wrong, for so long, that their Cassandra-like utterances were ignored. Cassandra?s forecasts may have been ignored, but they proved to be correct. Investors demand a sign of when to get out and that trigger may have just arrived.

Crying wolf or not, what Bernanke and his central-planning henchmen are now doing, is simply delaying the inevitable day when realty finally catches up with every cycle, and law of nature that the Fed, courtesy of hundreds of billions of de novo liquidity, has - until this point - successfully deferred. The problem is that perhaps the most important law - that of diminishing returns - is now fianlly breathing down Mr. Chair(wo)man's neck.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
algol_dog's picture

Sounds like more QE coming up ...

VD's picture

Yellen will order Fed to buy iGadgets and tractors in 2014.

kaiserhoff's picture

Popular siren's song in Chicom's bad old days...

   Our village has a tractor.

   I couldn't make this shit up.

kurt's picture

Maybe I can buy de tractor with bigcoins after I clean my shorts?

Richard Chesler's picture

Think I'll keep that DOW 20000 cap anyway...


NoDebt's picture

Last time we had a crash it took the failure of one semi-major investment bank to start the dominoes falling.  I suspect it will take something like that happening again to signal "everyone out of the pool."

Four chan's picture

bitcoin just topped 1000 $ per. fiat is going the wrong way.

HardlyZero's picture

Will Yellen write the new Five-Year Plan, or Kathleen Sebelius ?  Hopefully surviving 2014.

fockewulf190's picture

The roadkill muppets will be piled high once again. 

GetZeeGold's picture



Elvis has left the building....and he's leaving with gold.....which is going to make him pretty hard to track.

new game's picture

he is not the only one getting out of dodge. still searchg for j. galt, oh sorry, just i found him, but can't tell you where. - it is all in your mind:)

mjcOH1's picture

"Yellen will order Fed to buy iGadgets and tractors in 2014."

Maybe the fed will just buy food and burn it....corn or something. Because eventually even iShit is considered discretionary.

philipat's picture

Tractors, iGadgets and food all have some utility and value. Also, buying them does not help the Fed's shareholders, the TBTF Banks. More likely next step for the Fed, therefore: Student loans and car loans, all neatly wrapped and securitised. Rated AAA by the Rating Agencies. What could possibly go wrong?

jeff montanye's picture

why does the screen keep going blank?  this has not happened in years on this site.

johngaltfla's picture

Yellen will buy A+ or higher corporate bonds from the regime's favorite S&P 500 companies to "push" economic growth...


Watch and see then remember this comment.

andrewp111's picture

She will have to buy Munis too. Chicago may need bailin'

y3maxx's picture

Hitler's Rise to Power Explained

Notice any comparison w/ Obama?...

“”by hyperinflating currency to reduce debt, the govt also transfers all middle class wealth to the govt.

Conditions attract a Diktator.””

...Hitler utilized the Great Depression to ascend Power and Control...played on the Citizens’s Fears.

Then seized the Rights of the People from the Weimar Constitution

....Private Property Rights

.... the Right to Assemble,

...the Right to Privacy, in the Mail and the Telephone System

Economic Crisis leads to the Rise of a Diktator.

15:00 minute mark....

When Money Is Corrupted - Hidden Secrets Of Money

jeff montanye's picture

to call obama a monster insults ted bundy.

Colonel Klink's picture

Yeah because Ted Bundy only murdered 30+ innocents.  Obama makes Ted look like a piker.  I'm sure Obama's totals are 30,000+ and rising.

GetZeeGold's picture



When the public turns on the's not gonna be pretty.

RSloane's picture

They already are. CNN and MSNBC lost almost half of all their viewers. CNBC is crawling along with viewership limited to the friends and families of the people who work there.

fonzannoon's picture

Happy thanksgiving RSloane. Hope your arm is getting better.

RSloane's picture

Happy Thanksgiving Fonz! My arm is healing fine without a cast - good enough to have put two turkeys in the oven at 3:00 am. If I had gone to the ER I would still have a cast on and be forced to sit this Thanksgiving out as far as cooking is concerned. I baked quite a bit yesterday, I think kneeding dough was good excercise for it.

Hope your Thanksgiving is a very tasty one and you and yours are healthy and happy.

observer007's picture



will replace Dollar

Chinse are crasy

Realtime quotes:

Ham-bone's picture

thinking of bubbles...2000, 2007 clearly bubbles...'15 not likely to be known as a bubble but an end of something and starting point of something as yet to be defined...

'00 day trading and small investors (alongside Wall Street) chased outsized returns in a fairly narrow segment of the economy in a new "transformative technology"...frenzy buying up, believed "this time it was different"...damage was fairly well contained and effected primarily those actively involved

'07 homeowners and homes were turned into ATM's (via inflation, zero lending standards, leverage, and ever lower rates) ultimately effecting the entire economy regardless average persons involvement or risk levels...frenzy buying RE / CRE, buying speculative believing "home prices never go down"...damage was broad and effected most, whom had no active part in the bubble

'14 or '15 or however long til the terminus... it will likely effect everything, everyone, everywhere as all the major currencies (not simply the dollar) will print ever more with the benefits to ever fewer.  So hard to prognosticate when or how but hyper-stagnation, inflation, deflation or in what order...but this time there is no excitement, no belief this time is different (except for those that believe QE can go to infinity or Bitcoin is the new "transformative technology"), simply people with no where else to go but riskier positions...staring @ outsized returns but for all the wrong reasons and with the clear feeling we are being funneled into the cattle car...

Definitey feels like the "exits" are being barred as PM's or other commodity based options are "failing" in the short term.  This doesn't feel like a bubble but more of a financial and economic centrally planned "5yr plan" with hardly any choice but to dance until the needle falls off the record (it would be like (imagining) a "democracy" with "elections" where only two candidates are allowed but they are actually in matter of fact not representing either "party" but the same monied interests...try to imagine, no matter how foreign it may sound, that there really is no choice.  Well done and well played TPTB.  Glad to know there will never be enuf money or power or fame or sex or or guess is the only thing you folks really understand is hate

Mike in GA's picture

Looks like you got paranoia covered for us "folks".

Doña K's picture

Desparate people who lost their money are trying to get rich quickly. Another ponzi which will also end in tears.

20% of the bitcoins are owned by only a few and when they start realizing that their millions may evaporate any minute and head for the exits, its curtains for the rest.

I know there are some believers out there - ipse dixit. They just want bitcoin to be kosher. Pray my friends.

Can someone prove that it is not a ponzi? Can someone prove it's not TPTB behind it?

Just saying....

wallstreetaposteriori's picture

Earnings downturn.... that doesn't matter.  Companies will just issue more debt to buy back shares and manipulate their EPS numbers in their favor so the C suites keep getting those big bonuses.   

Mentaliusanything's picture

Share buybacks are a sure sign that the management has looked at all the options to expand, found none that will produce a ROI that is better than the current interest costs (low).

A business that does not go forward must go into decline. Decreasing the shares on offer does increase the share price but it won't keep the lights on. Voodoo economics like this is the sign that it's time to bug out. seen it time after time. 

new game's picture

buybacks are a indirect transfer of corporate earnings back to the shareholders via options.

when these fuckers sell indtead of hold then look out below...

disabledvet's picture

actually any turn around in hiring should probably be construed of as bearish at this point. now lets talk moonshots here: that peak move in the Spring and Summer of 1929 is truly extraordinary and very similar to the moonshot the Nasdaq had on its way to 5400 (all time) to 5000 (closing.) In other words a 20 percent move in the market average in a single day--up to down. in order to play this game you literally have to be long everything. if you've been short you've been ruined...even buying protection means you've given away all your equity. I see nothing to stand in the way of the Nasdaq pushing to 5000 between now and Christmas...nor the S&P going up 40% here. HPQ didn't do much that was all that special with earnings and took off like a rocket today. I could see GE at 60 by Spring. Solar City and Tesla went parabolic today. these are "loss leaders"...and no i should not see any Tesla's where i live because there is no way to fuel the car up here I thought. Nay...there it was. we'll see if those who throw caution to the wind this holiday season get burned or not.

spine001's picture

I just went through this in Corporate Finance in my MBA. Absollutely true, getting rid of capital is the best indication that a company can not find profitable projects, or in thecnical terms projects with IRR > 0

aVileRat's picture

Since mainbody trading is now 100% leveraged algo or signal trading the whole thing is on cruise control until the December consumer confidence and black friday guidance for holiday retail push (and boxing day inventory liquidations). You could press release that you have cured Cancer and are buying everyone a free wonkabar and the market will pop 4%, then return to the 50d VWAP in a series of slow drips down in correlated pair trades.

Until that day in second week of December and the second week of January it's all in to generate the Xmas rally. If that means throwing oil, Canada, Brics, AUD, gold, or EU policy independence out the window then so be it. Market has to be at as stupid a multiple as possible so that when the January hit comes, a dip does not blow through retail 'returns' and the 20% paper drop to a retail P&L sheet still shows them 'green' for the last 12 months.

On another note, HP cleared the stupidly low bar today. Herp Derp.


Rainman's picture

As good a theory as any. Government shutdown iminent, thus fall from a higher branch. Rinse and repeat with credible quarterly causations.

disabledvet's picture

what was that "sometimes you've got lie" line again? just because a correction is healthy doesn't mean you don't get a moon shot instead. this is not the "how is one to know?" Fed either. this Fed did attempt to Taper this summer. You didn't hear me complain either even though it definitely made me feel like i was missing out on something.

XAU XAG's picture

Though I agree it's total madness.


The markets going up could just be a sighn of inflation and no where else to go.

With auction prices for collectables going sky high you are seeing the same thing................but no one is bitching about high collectable prices are they.

Real wealth are going for collectables, pension funds and other funds going for stocks as is the middle class with thier 401's.

The lower class has no money and are out of the race.



That will all change sometime in the future


In this game of musical chairs it pays to sit on the chair as the music is playing...........but look out below when the music stops and you are on the wrong chair (it's legs brake)


Gold and silver had a good run and is taking a breather......stocks are having a good run................a breather will arrive ............just don't no when.


Happy Thanks giving to all of you "the other side of the Pond"

And many thanks to ZH and those that post educational economical post's for us all to take in!


And last but not least...........those that post funny comments that force you to clean your screen and keyboard!



Charlie Chaplin




Crash Overide's picture

Isn't there a point in the game where the money creation just stops working because everyone finally sees the fraud?

At this point doesn't diminishing returns + more QE = faster diminishing returns until it goes "boom" and blows up in everyone's faces?


Gobble gobble, enjoy your turkey...

Trimmed Hedge's picture

The new flight to safety is Bigcoins™...

graftvshost's picture


pull 'em right out of your ass! Or hoard 'em in there for safekeeping.

lotsoffun's picture

you can have mine for a pittance.  i swear, there is a secret mapped buried somewhere in the united states and you don't even need a computer

to find the map.  just start digging.  and when you find the map, it will show you the way to my stash.  but you better get there quick, because

most of the stash flushs into a major river.  so - there is a limited amount of the stuff that will ever be available.  and it's better than gold.

you can exchange it for anything - college degrees, sex and drugs, why, even farmers want it, so they'll exchange crops for my buttcoins.

and the best part is - it's backed by nothing!!!  except - that we all agree it's worth a lot.  right guys?  this is so cool, it's just like when we

were sleeping in zuccoti park together.  (or sorry about that, i didn't tell you, but the clinics are free).  we are going to bring down

the fiat system with this sh*t!! 

but i have to remind you - don't be the first one to break the chain.  don't lose confidence.  this stuff really is worth more than

you or anyone can ever imagine, just feel yourself lucky to be able to get in, because so many others are stupid or greedy and just

don't understand.

good-night kids.  happy thanksgiving.


mc225's picture

it would be great to see manifold competing currencies; everyone trading in whatever they want; each person with the opportunity to float their own currency.

Son of Captain Nemo's picture

If this can be defined as a "trigger" for the markets knowing what we already know about the way the U.S. uses it's military in order to get what it wants.


Son of Captain Nemo's picture

Anyone want to volunteer that the great lead story in the news the other day on the deal we struck with Iran and it's partner(s) probably didn't work out exactly according to script?!!!

NOTaREALmerican's picture

When Alan Greenspan talks, people listen.

kaiserhoff's picture

The economy is stalling.  Cut interest rates.

  Er, how, what, where???

Uber Vandal's picture

If interest rates were cut to say -100%, wouldn't that clear up everything then?

Poof, All gone.

This line is for cash customers only.

optimator's picture

Have bank deposits return a negative interest rate.  that'll get their money into the market where we'll take it as we usually do.  Only other place in their bedding, but we are getting that through inflation.  No place for them to hide it from us.    Never mention gold to them.

max2205's picture

I say next year is a double...just to clean out the shorts

Rainman's picture

Negative margins, bitchez .