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Albert Edwards Explains Why The "Global Economy Will Be Thrown Into Chaos"
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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Maybe they can outsource the paradropping to Amazon and have them use personal drone delivery devices?
"Real wage inflation has been very robust indeed..."
I stopped reading after this...
Yep me too. The only "wage inflation" has been Obamacare. The workers paychecks haven't been getting any bigger.
Oh how ORC-GASMIC!!
How good was it for you?
Are you the towel boy?
Economic Orc.
That works for me.
Like a noise made when vomiting.
Might be an onomatopoeia.
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.
And this.
"despite the tight labour market,"
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.
beinng tight always helps with ORC-GASMIC!!
I stopped when he mentioned the official CPI.
Albert Edwards is an optimist. It will be way worse than that.
+1000
Totally
The end of debt is going to be a very bad time for humans.
...and then after that, a very GOOD time for humans.
yeah, for the 500 million or so that are left...
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!!!
Too bad there are no Stalin era Ruskies left to debate you on that point...
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.
We're so sorry, Uncle Albert...
Cause of the White Wizard (Yellen), and his army of Orchs.
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.
Its called goldman sachs
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.
There's only one real orck. Not orc. Not Orchs. Watch it humans.
Really I only wanted to give you 1/2 for that.
Golf beheading
More like the Wicked Witch of the West and her army of flying monkeys, although that title has been reserved for Hillary...
There are older and fouler things than Orcs in the deep (state) places of the world.
And the Fed will tell us everything is rosy...GO SHOPPING!
Send food to the College protesters.
Send the college protesters to Afghanistan.
to canada - free college up there
I don't think that word 'free' means what you think it means.
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...
"young, virile, muslim bucks"
EASY big boy....keep it down...on the 'down-low'
Good Lord...who let that *homo POTUS* in here again?
Most Muslims I have come to know do not fit this typical Western caricature.
Take a vacation in the no-go zone of London or Detroit some time.
I might as well direct you to a predominantly white trailer park area with high crime statistics, and proclaim it proof that "whites" are a problem group.
Yep, trailer park whites in high crime areas ARE a problem group.
But pointing out that MY shirt is dirty because I am showing you the dirt on yours does not make your shirt clean.
You have to learn to separate emotion from facts.
Or don't. Nature has a way of teaching lessons to those that refuse to follow facts.
Such as the women that still jog the "greenways" of Durham NC.
pods
I think you missed his point. Viking dude was pointing out that other guy making an extreme example to prove an invalid point. Where is the emotion involved? You are just providing a distraction to back up that invalid point. I think the real point is Viking dude at a guess is European and comes into much more contact with Muslims on a daily basis than a typical N American.
STFU. You obviously know nothing.
Struck dumb by your debating skills. I doff my cap, roll on Platonic muse.
I know his point. His point is due to one of emotion (marriage).
There is a very real problem with immigrants in Europe. One that cannot be addressed by bringing up trailer park trash in America.
pods
I spent years of quality time in Afg and Iraq, with some side trips to UAE, and jaunts to Oman, Qtar & Kuwait.
You can't be speaking of the natives.
You must be referring to trendy hipster Muslim converts strolling the streets of Paris in their wannabe shemaugh fashion statement scarves.
For a taste of the real thing, walk among the natives. You'll learn. It'll hurt. Don't bring any women.
Nigga please!
Well if you took the blindfold off and turned around to see who was fucking you up the arse... you may get to know them better. Speaking metaphorically of course....
'free' is the most expensive thing in the world...
no free college here...stay in the US; free phones and smokes
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.
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.
you can be sure that gollum sachs will be trying to steal the precious
We really need to put an Ent to this.
fed wizards will be dragon us through MOAR-door then our problems will be dwarfed by the, er, i got nuttin.
it's hobbitual,
I'll take my bucket of money in the form of gold eagles please.
you barbarian orc
"brake."
Consumer sentiment is UP, UP, UP!!!
50% of americans pay hardly any taxes - they gonna be pissed
They will pay all of their "gains" back because the Income Tax Brackets will not change correspondingly.
This "free" money scam is a way to force that 50% to file a return, which, in some cases..er...many cases, that 50% does not get enough taxable income to be required to file.
Furthermore that 50% will spend that "extra cash" on the inflated prices of essentials. This will cause them to become in arrears to the IRS and ensuring their slavery.
And being so ignorant they will support that their Government is "helping them" while actually making them a Tax Slave as well as a Credit Card Slave and a Student Loan Slave.
Where Obamacare failed to have people file...this action will make filing for everyona a certainty....regardless of income.
Hell it'd be more efficient just to do away with the bracketing in the first place and have a flat tax.
But they also intend to destroy the US Dollar.
So in using this insidious method they will get a two fer...Destruction of the US Dollar...Creating a Tax Slave which is constantly in debt to the IRS.
Figure 2 pretty well shows why cycles investing makes sense. Patience is key now. The next one will indeed be brutal if you are not prepared.
I can handle "orc-like monster" as another name for the Great Red Dragon. Both are composed of financial sociopaths as described in the book "Snakes In Suits." Of course, the book "The Sociopath Next Door" shows they're closer than you think. The book "Without Conscience" further details their state-of-mind, and the book "In Sheep's Clothing" shows how they hide. I'm not promoting books; just trying to get folks to wake up to the real enemy and defend themselves. Then things will get better. You just saw a bunch of college kids eject a financial sociopath in Missouri. It ain't over, yet.
Anyone else notice that during recessions from 1973-present, the lineslope of the prefit margin troughs is negative? Also, during that 40 year period, the amplitude of the peak-to-trough cycle is increasing. . .
Es no bueno.
Maybe if we want a better world that is not controlled by evil bankers and the evil forces behind them, then the economy needs to be thrown into chaos.
Then there will be the choice whether we want to submit to a global evil government along with the safety and technology it brings or if we want to be humans in a human environment. Is there a compromise between the two? I do not know... but maybe.
.
Albert Edwards is a hobbit lost in middle earth in search of the ring of Mordor.
"Why oh why did we give that ring to the Squid and to JPM, who control the FED machine ?
Its too late now as Lord Sauron will attack Gondor !"
Quick Albert, its time to call Harry Potter and change the game to Quidditch !
Paradigm Change!
Pippin- I don't to be in a battle, but waiting on the edge of I can't escape is even worse.
Gandalf- it's the big breath before the plunge
Fuck Japan, drop the God damned money in my back yard immediately or I'll loose the dogs on you, de Rothschild, you tribe motherfuckers.
Marihuana been legalized wherever this gentleman lives recently?
Only plausible explanation for this nonsense.
Drop heads of bankers and politicians everywhere, and prosperity will return quickly.
Hey tomorrow Deer Season (rifle) opens here. Can't wait to get out there. One of my ways to stick to the system. This is my favorite process flow: shoot, kill, field dress, carve, grind & bag. For a $55 dear tag I can have venison in steaks, cubed, and ground for the next year. I even process dear for others. Every time I put dear meat through the grinder is a win for the little guy.
I make the Julia Child bourguignone wine stew with the venison my husband brings home.
Delicious. Sure beats a brace of coneys.
Damn, soory didn't mean to call you dear deer.
According to Bank of America Merrill Lynch:
https://app.box.com/s/hbi4jvlre5zr4f0oowkijy91p29b26xj
Coming Soon: When Janet Met Mario
Strategically: BofAML base case = “deflationary expansion”; slow, jerky transition to higher growth/higher rates, led by the US, China soft landing; AA = long US dollar, long volatility, long real estate, long stocks/short bonds, UW EM, commodities; higher conviction requires unambiguous Q3 trough in GDP & profits, XLF>$26 & ADXY>110.
Tactically: “sellers into strength” as our trading rules flip from “buy” to “neutral” & Fed hike approaches…December could be the first time since May’94 (a year of bond crashes, defaults & most intriguingly, a weak US$), that investors experience a Fed rate hike & a European rate cut in the same month (see Chart 1).
QE Jenga
The “tail risks” to “deflationary expansion” are high. Like a game of Jenga, a bull market built by central banks can collapse if further BoJ/ECB QE and Fed hikes engender US dollar spikes & US EPS & EM/commodity swoons, FX-wars & volatility rather than a fullblown recovery. Gold & volatility are the natural hedges to the bearish scenario of “Quantitative Failure.”
The Ultimate Inequality
Alternatively, a world dominated by (ineffectual) QE, technological disruption & inequality could cause excess 2016 valuations in “uber growth” (tech, CA real estate, “unicorns”), a rally in “uber value” & a “pop” in “yield” & “shadow banking” as rates belatedly rise to curb Wall Street excesses. As in 1998/99, we think a bold “über-barbell” would outperform in this environment.
...............
Confidence in Quantitative Success for the economy is nonetheless low. Economic growth remains constrained by the deflationary structural factors of Debt, Disruption, Demographics, Regulation, and buffeted by the cyclical event risks of Credit, China, Commodities.
Central banks are easing because global growth is weak. Global profits are down 4% since February. Even the US has struggled: payroll growth has decelerated and the latest US GDP growth rate was a pitiful 1.5% in Q3. And the level of US inventories is unambiguously recessionary (see Chart 3).
What changes this narrative? What signals Q3 was the trough for macro expectations? What causes a market sell-off in bonds in November? Strong October data & market validation of a higher rates/higher growth scenario in coming quarters:
• China PMI>50.5
• US ISM>52
• US payroll>225K
• US banks rally: XLF>$26 would confirm stronger “domestic demand” expectations.
• US dollar stable: if the Fed can hike without boosting dollar this is positive; DXY must not breach 100; a rally in ADXY (Asia FX index) above 110 crucial as this would erase the apocalyptic view of China growth prospects
before the markets are taken down this time, the connected players will have made rock solid balance sheets for themselves, with ready cash. with their leaked foreknowledge, they will be ready. they can wait til the last minute to buy gold too. it is a repetitive series of wealth transfers planned in advance. this time, comng soon, it will solidify the feudal lords for the 21st century.
"Certainly history suggests that wage inflation.........."
Let's get one thing clear, History as a model to predict a future economic event has been highly corrupted. The past was once a great model to predict what present circumstances might hold going forward. But today the Central Banks have thrown history out the window, they have created New Realities, and taken firm control over what were once free markets. In this present circumstance of manipulation and central bank intervention on a grand scale, I dare to say that the past is a rotten model to predict what will happen next. Central Bank power and totally corrupted markets mean past behavior of markets is no longer as vaild a tool as they once were.
The new reality means a brave new world exists, and we can never know what insane scheme central banks and the IMF will put forward. Markets do not work, because they are manipulated. We can only guess, not predict based on history, what will happen. It is not capitalism anymore, it is a perverted form of finance communism, the central bankers decide, not free people in a free market. The laws of capitalism are null and void, the past is just history, not a model for future predictions.
That is easy.
The end of growth due to resource depletion.
http://www.zerohedge.com/news/2013-04-25/albert-edwards-bleak-crystal-ba...
Albert Edwards calling for S&P @ 450 and gold @ $10,000 two and a half years ago.
www.youtube.com/watch?v=PWVhiIisH30
Here's a metaphor for Fiat (Red) vs. The Gold Standard, complete with a little MIC member in the background^
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?
How can he even say something like this? For majority of Americans the real cost of living has been going up, way up: rent, food cost, utility expense, insurance(health,property and auto)--that's the nut there is no money left after that.
Since people are largely rational to a point the only way you'd get them all to agree to abysmal monetary policies is by treating them to waking up to a horror show chaos filled nightmare after a weekend of binge drinking.
It's as if you asked a teen after getting blasted and as they are puking to make the greatest decision of their lives and sign a contract in between heaving episodes.
We have to sign up for the NWO order to know what's in it. Trust us we know best.
Yeah, that's going to end well I'm sure.
We have become largely a society that either does not care or does not know how to nurture the future for our children. As a result they are destined to a life in the basement, college debt and employment prospects that lead to nowhere.
The result is that any society that does not nurture its youth is destined to shrivel. And shrivel we will.
Last night I thought:
The battle for Europe is over. The battle for middle earth has begun.
Up votes for all well crafted Tolkien Puns.
Down votes for LOTR movie Puns.
We'll see if Peter Schiff is right.If they're bluffing up to the bitter end in December?If they bump up rates they'll collapse the stock market and put the economy into recession.Seems like the Japan syndrome might take hold.
SocGen's Albert Edwards is living in fantasy land "tight labour market" LOlz
Further more Edwards suggests that there is some curve the FED could be right or wrong about WRONG! https://youtu.be/4TAixFYnDh4
>>>
...an Orc-like monster to incubate, hatch and emerge into the sunlight...
<<<
It is important to realise that Orc's did not like (and, indeed, are weakened by) sunlight.
Only Saruman's Orc/human hybrids (Uruk-hai) were happy with sunlight.
Watson
I hate when smart people pretend to believe official statistics, especially when the go on to create arguments based upon them.
The real inflation rate has been 8% to 12% for years.
The real inflation rate now is about 8%.
The world economy is toast... far worse than "will be thrown into chaos". He should say, "the world fake markets will be thrown into chaos too".
The issue in regards to climate change is not global warming but a global economic meltdown at the hands of the powers that be of the flawed and flailing western money & banking system. . .embraced by the politicians/demagogues perpetuating crony capitalism.