Albert Edwards Explains Why The "Global Economy Will Be Thrown Into Chaos"

Tyler Durden's picture

SocGen's permarealist, Albert Edwards, has been the one person who for the past decade has firmly held the belief that a "deflationary Ice Age" is upon the world - courtesy of an unmanageable debt load - no matter what central banks do.

There is, of course, one way to short circuit said Ice Age, and it involves paradropping money in an act of terminal fiat desperation (the outcome is always hyperinflation) onto the general population, something which as we reported last Friday is already in the works courtesy of first Adair Turner and the IMF, and soon all other "very serious people". Keep an eye on Japan as this is where said paradropping will be attempted first as Ben Bernanke suggested back in 2003 when he said to "consider for example a tax cut for households and businesses that is explicitly coupled with incremental Bank of Japan purchases of government debt – so that the tax cut is in effect financed by money creation."

But before we get there, here is a snapshot of where, according to Edwards, we are now and why "there" is getting very close.

In his latest note he says, quite simply, that it is now too late to put the "Orc-like monster" of excess debt and declining cash flows back in the bottle, and why "the global economy will be thrown into chaos."

The deeply held wish of central bankers not to de-rail the fragile economic recovery is on display for all to see as they grasp at the slightest excuse for their continued inaction. The UK’s central bank governor, Mark Carney, exceeded all dovish expectations recently in his latest rate flip-floppery. But what is this? The Fed has finally summoned up its courage and looks set to raise rates next month.


It is, however, already too late. Having delayed way beyond the point when it might typically have raised rates in previous cycles, it has allowed an Orc-like monster to incubate, hatch and emerge into the sunlight, snarling and ready to do battle.


Free Fed money has led to an unprecedented corporate credit binge of excess spending, especially on share buybacks. This is even bigger than it was at the time of the 2000 technology and telecom bubble. The rotten fruit of the Fed’s seemingly innocuous inaction will now be clear to onlookers as it is ripped to shreds on the battlefield by the powerful credit monster. The global economy will be thrown into chaos.

Edwards then points out something we stressed earlier this week, namely that while corporate debt has finally been appreciated, it is not the debt itself that is the risk, it is the decline in EBITDA, or cash flows.

Edwards also points out something else: when it comes to real wages, the Fed is already behind the ball:

Another (obvious) reason why higher nominal wage inflation has been slow to appear, despite the tight labour market, is that it didn?t need to. Real wage inflation has been very robust indeed as headline CPI inflation has collapsed to zero in the aftermath of last June?'s oil price slump (see right-hand chart above). So wages have definitely responded as normal to the tight labour market. I was discussing this with our excellent US economist, Aneta Markowska, who is definitely more upbeat than me on the US conjuncture. But one area where we do agree is that if the oil price remains around its current level (a big if), from June 2016 onwards, headline CPI inflation will return close to the underlying core rate, which at the current rate of acceleration in rent inflation is likely to be at or just above 2%. If that is indeed the H2 2016 outturn and the labour market remains tight, we should expect a rapid acceleration in nominal wages. Although I believe things will blow up way before that, certainly by then the Fed is likely to be seen as having gotten itself way behind the tightening curve.


The biggest threat then is for corporate margins, which as shown below have already declined by 60 bps this cycle and fast dropping even lower:

Certainly history suggests that wage inflation cycles are a major influence in the Fed?s thinking on interest rates. But even without much of a rise in wage inflation over the past year, the deeper we go into this cycle the more unit labour costs rise because productivity growth becomes more feeble (the flip-side to the good payroll news). Indeed, productivity rose by only 0.4% yoy in Q3 2015 (versus 1.4% in Q3 last year), which when combined with a 2.4% rise in compensation (the same as last year) means that unit labour costs rose 2% yoy in Q3 this year (versus 1.1% last year). So even without rising wage inflation, profit margins are being squeezed by rising unit labour cost inflation. But what is squeezing margins even tighter is the evaporating pricing power, with corporate output price inflation slowing sharply to 0.8% yoy from 1.8% one year ago (see chart below where the red line rising decisively above the dotted line means that corporate margins are now declining sharply). With company revenues also declining this margin squeeze fatally undermines corporate profits and is central to our conviction that the US economy will be driven back into recession. And in a typical recession, where corporate profits fall sharply, what the corporate sector does not want is too much debt - oh dear, too late!

This brings us to something we pointed out a month ago: when corporate margins have dropped by 60 bps, as they have already this cycle, on 5 out of 6 prior historical occasions, this has resulted in a recession.

This time won't be any different. Or rather, if the Fed does indeed hike just as both the global and US economy are slamming the break on growth (and going into reverse), the result could be far more dire than what was experienced in 2008.

The Orc-like monster is indeed ready to come out and play.

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RaceToTheBottom's picture

Maybe they can outsource the paradropping to Amazon and have them use personal drone delivery devices?

Pool Shark's picture



"Real wage inflation has been very robust indeed..."


I stopped reading after this...


Dr. Engali's picture

Yep me too. The only "wage inflation" has been Obamacare. The workers paychecks haven't been getting any bigger.

El Oregonian's picture


How good was it for you?

Manthong's picture

Economic Orc.

That works for me.

Like a noise made when vomiting.

Might be an onomatopoeia.

Give up. Reality is not scientific nor even mathematical.'s picture
Give up. Reality is not scientific nor even mathematical. (not verified) Dr. Engali Nov 13, 2015 1:04 PM

This Gordian Knot is not so difficult to cut through.

The FED has always said it had ways to pull the stimulus money back out of the economy when it became necessary.  And it is obvious, since the stimilus has not accomplished that which the FED desired, that now is the time to pull that money back out of the economy, before hyerinflation sets in any further than a bloated housing and stock market.

Those spendthrift CEOs that spent borrowed ZIRP money on stock repurchases may be required to issue new stock to fund the payback on their loans.  Because surely, if it appears these spendthrifts cannot repay their loans as interest rates climb, and the real rubber hits the road, then they certainly can be required to pay back these loans by demand.  Every borrrower has a duty to maintain their ability to repay, or face foreclosure.

See?  The rain has stopped and the sun is brightly shining on the FED today.

Osmium's picture

And this.  

"despite the tight labour market,"

lasvegaspersona's picture

you guys just need a C-Suite job....kiiler wages I hear...Big Pharma especially....just don't hog it all...politicians will want a piece as well.

More Ammo's picture

beinng tight always helps with ORC-GASMIC!!

lordkoos's picture

I stopped when he mentioned the official CPI.

DeadFred's picture

Albert Edwards is an optimist. It will be way worse than that.

ATM's picture

The end of debt is going to be a very bad time for humans.

SWRichmond's picture

...and then after that, a very GOOD time for humans.

sleigher's picture

yeah, for the 500 million or so that are left...

froze25's picture

No way man, the prepping/gun culture has been on the rise for sometime now.  There is enough knowledge out there for the ones that have mastered it to share and lead the others they are friends with through this.  The Free Shit Army and its leftist supporters/enablers on the other hand will go into complete and utter chaos.  They (the FSA) are the most dangerous element of this as they will be a angry mob.  When people go hunger they get violent.  AMMO!!!

Keyser's picture

Too bad there are no Stalin era Ruskies left to debate you on that point... 

PlayMoney's picture

When 50 to 100 trillion of debt gets wiped out, deflation is gonna slap many a folk upside the head. Before the Fed prints us into that last oblivian. 

kralizec's picture

We're so sorry, Uncle Albert...

Kirk2NCC1701's picture

Cause of the White Wizard  (Yellen), and his army of Orchs.

chunga's picture

One does not simply walk into the Fed. Its black gates are guarded by more than just Orcs. There is evil there that does not sleep.

PlayMoney's picture

Its called goldman sachs

jiggerjuice's picture

Haha you know, a couple months back, I was at the Swedish consulate in Cleveland getting my Swedish tax id#, step 1 to get my citizenship/passport. So the guy took my family's documents and was notarizing them, said you and the wife and kids can come back in 30 minutes... We wandered out of the building, next door looked like a non-descript building, it said "money museum" and my wife was like "oh hey let's go in there and check it out!" I'm just staring at the ground, we strolled inside, the kids rushed through the security metal detectors... The cops in front were like, ummm... if you want to get in here we need your id's. I looked around me and thought, hmmm... pretty secure for a money museum. Wife says we don't have our id's, cops say we can't get in, we get the kids to come back, wander back outside, OHHH it was the Cleveland Federal Reserve building. 

So yeah, if you are 3 and 5 years old, you can rush through the security gates and not get shot. One DOES simply walk into the Fed, especially if you aren't paying attention. 

o r c k's picture

There's only one real orck. Not orc. Not Orchs. Watch it humans.

PavlovPup's picture

Really I only wanted to give you 1/2 for that.

Keyser's picture

More like the Wicked Witch of the West and her army of flying monkeys, although that title has been reserved for Hillary... 

gaoptimize's picture

There are older and fouler things than Orcs in the deep (state) places of the world.

Bill of Rights's picture

And the Fed will tell us everything is rosy...GO SHOPPING!

ToSoft4Truth's picture

Send food to the College protesters.

Dr. Engali's picture

Send the college protesters to Afghanistan.

unplugged's picture

to canada - free college up there

Dr. Engali's picture

I don't think that word 'free' means what you think it means.

Keyser's picture

They should drop a few of those young, virile, muslim bucks from the ME onto the campus of Mizzou, then they will know what a violation of "safe space" really is... 

Bananamerican's picture

"young, virile, muslim bucks"

EASY big boy....keep it down...on the 'down-low'

Skiprrrdog's picture

Good Lord...who let that *homo POTUS* in here again?

Skiprrrdog's picture

'free' is the most expensive thing in the world...

unrulian's picture

no free college here...stay in the US; free phones and smokes

buzzsaw99's picture

the stock market wags the fed these days

edit: in other words the orcs tell the hobbitses what to do. sorry for not sticking with the theme.

back to basics's picture

Yup, and this is what happens when they wouldn't even allow an 1% correction for the last six year. They are where they are, fucked beyond belief.

EDIT: this is not an ORC, this monster the like of which we've never seen before will be given its own name soon.

buzzsaw99's picture

you can be sure that gollum sachs will be trying to steal the precious

Mr. Universe's picture

We really need to put an Ent to this.

buzzsaw99's picture

fed wizards will be dragon us through MOAR-door then our problems will be dwarfed by the, er, i got nuttin.

Dr. Engali's picture

I'll take my bucket of money in the form of gold eagles please.

One Solution's picture

Consumer sentiment is UP, UP, UP!!!

unplugged's picture

50% of americans pay hardly any taxes - they gonna be pissed