Albert Edwards: "Let Me Tell You How This All Ends"

Tyler Durden's picture

The dollar's recent rapid slide has been accompanied by a constant backdrop of dovish cooing from the Fed. Until this week, SocGen's Albert Edwards notes that both equity and commodity markets had embraced the weak dollar as the elixir to solve all their ills. That relief, however, has now proved fleeting as fear of weak economic activity has reasserted its influence on investors. The weak dollar, Edwards warns, should be seen as merely a shuffling of deckchairs on the Titanic before the global economy sinks below the icy waves.

Risk assets are once again refocusing on the increasingly dismal prospects for global growth rather than the short-term relief of dollar weakness, according to SocGen's inimitable Albert Edwards. The US remains the main concern, although the rapid unravelling of Abenomics in Japan and a likely imminent tightening of monetary policy in China to snuff out yet another housing bubble in the major cities also feature high on investors' worry list.

But it is in the US that growth concerns remain most intense, with renewed weakness in the manufacturing ISM as we move into Q2 following on from the moribund 0.5% qoq Q1 GDP outturn. Yet there was some optimism around after the GDP release that non-farm businesses inventories have risen at a slower pace  ie only $61bn in Q1 2016 against $87bn in Q4 2015 and a much faster $110bn pace in H1 2015. The slower pace of increase means that non-farm inventories have been a drag on GDP for three successive quarters, deducting an annualised 0.22% from Q1 GDP (and 0.12% and 0.8% in the two previous quarters). If you think that means that the inventory problem is solved though, think again. It's not the level of inventories that are the problem, but the level relative to sales which are at heights normally seen preceding or at the depths of recession (see chart below).

It is disturbing for the growth bulls that the recent slower pace of inventory accumulation has made absolutely no dent on this overhang. We remind readers of our view that it is the business investment cycle (fixed and inventory) which, despite comprising only 15% of GDP, 'causes' recessions in an accounting sense. The chart below shows that when yoy GDP is negative, the contribution of business investment to that decline is virtually 100%, ie recessions would seldom occur in the absence of the business investment cycle. With the US whole economy now plunging, the continuing inventory overhang is an increasingly precarious sword of Damocles hanging over investors' heads as profits swoon and liquidation beckons.

In addition to Edwards reality check, Andrew Lapthorne, SG's quant guru, has been flagging the following chart to clients... Firstly, we all know by now that US companies consistently put the most optimistic spin on earnings to gratify both analysts that follow their companies and investors who want to hear good news. These manipulated earnings are what is reported each quarter and referred to as pro forma earnings. Andrew points out though that even moderately 'scrubbed' MSCI trailing operating earnings have been falling away precipitately in the US (this is a moderate scrub as opposed to a heavy scrubbing as defined by the EPS reported on a GAAP basis). This ties up exactly with what the whole economy profits data is also telling us. Most notably the current divergence between trailing operating profits and pro forma measures only normally occurs as a recession begins to unfold. This matters because the stock market eventually stops reacting to the manipulated pro forma earnings and slumps in line with what is really happening under the bonnet (or hood for my US readers).

Let us return to the central banks and the games they are playing with the markets. The chart below shows just how detached US stocks have become from earnings (in this case we have used the MSCI operating metric discussed above). This is an exercise of stretching the PE elastic via loose monetary policy as far as you can in an attempt to boost real economic activity. Ultimately, though, if the earnings don't arrive, the elastic will snap back and hit you square in the face. If you think the US situation looks bad, take a look at the eurozone chart on the right below where earnings remain dead in the water and PE expansion makes up well over 100% of the rise in equity indices. We have previously lauded Mario Draghi's bubble blowing credentials as on par with Alan Greenspan.

But Edwards concludes by setting the scene for what is to come...

Let me tell you how all this ends.


It ends with investors accepting that they can pretend no longer and profits are sliding into recession.


It ends as the equity market spirals into a deep bear market as company management reach the end of the road in the face of the recessionary conditions and 'kitchen sink' years of EPS manipulation.


It ends as corporate bond spreads explode as years of excess debt accumulation lead to widespread corporate bankruptcies, making the recession much deeper.


It ends with social unrest and double digit budget deficits (again).


It ends with investors losing faith with the Fed as the resumption of QE proves ineffective in reviving the economy.


It ends in deeply negative interest rates, currency and trade wars, helicopter money and ultimately inflation.


In a nutshell, it ends badly.

One final thought: On the front page of the Fitchburg Sentinel from July 31 1920, an exuberant business press headlined: "Ponzi will not reveal business secret."

This was published less than a month before Charles Ponzi's scheme blew up.

As Edwards concludes, actually, isn't this exactly what central banks have done over the last few years to the financial markets?

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38BWD22's picture



Zero Hedge is a little extra bearish this Sunday...

onewayticket2's picture

Reality is a little more bearish today than 7 days ago

John 'borderless world' Kerry and Barack 'Profound changes are coming' Obama

tc06rtw's picture

 …  I like the subhead: Launch Drive for Modest Dressing  (led by Tipper Gore’s grandmother)  to challenge the flappers’ right to wear provocative clothes.

Billy the Poet's picture

I enjoyed Albert Edwards' work on Green Acres but what does he really know about markets?

chunga's picture

I'm going to blame this on millenials and the minimum wage being too high, but only in an accounting sense.

froze25's picture

When the EBT cards (SNAP) no longer work or purchase enough food to keep you from being hungry that is and only is when the shit has hit the fan.

chunga's picture

If uNcle sKam can't pay the SNAP bill that would be pretty social unresty for sure. Gotta figure by then anybody with $$$ in the moneychanger's banks got hosed by bail-ins.

Kissy Ass's picture

Let me tell you how it ends.

2% of the population own 76% of Amerikan wealth, the jew.

They are busy buying gold and storing it in isral while simultaneously using The Amerikan Military to destroy surrounding countries all defined in the Greater isral plan. Why do you thing gold is trading above $1K/oz? Demand.

The new experiment being implemented allows the friendly brown skins (negro, latin) a greater share of US dollar jew confetti and if it works the consumer cycle continues and the 2% of Amerikan population will own 96% of the total Amerikan wealth. If it does not work the jews will regroup in Greater isral and hunt for a new host cuntry.

Can I get a Shalom my BLM nigga!?

S Spade's picture

the wealth distribution is resultant of government meddling, keep voting for crony commies / socialists, and watch the disparity grow greater.

...or blame jews for everything...moore-on

that said, i'll never understand why they continue to vote for democrats


y3maxx's picture

Hurro....I cum frum TChina rast week and i briing wiss rots and rots of dorrars.

Beefour I get heer, i meet Igor in Bangkok for fun no why they carr it Bang....kok?

Beec ause there are rots and rots of girly boys to have fun wiss.

Igor is no interested in girly we reeve for USA right away.

We are happy go rucky Ruskie Tchina mans.

Good ruck to eveyone at Zero Hedge during WW#3



clymer's picture

ha ha, seeing the fitchburg sentinel on ZH is just too surreal. I live about 6 miles away from Fitchburg, you should see that town now; a gateway city for illegals where section 8 housing vastly outnumbers single family residences. A methadone clinic where the junkies that dot the town landscape start lining up for a fix at 6:00 AM. Prostute busts and the occasional dead body turn up on the rail road tracks. Place is a fucking tragic dump. Used to be a nice town (or so I hear - was before my time, back when GE and DEC employed most of the area), but that is what happens when corrupt liberals take over the state house and city halls.

indygo55's picture

I used to live in Ashburnham and as far as I know Fitchbug was always a shit hole. I believe it was built soley to be a shit hole.


DownWithYogaPants's picture

Can I sell you two tickets to Fitchburg?

mickeyman's picture

Clymer, for a moment I thought you were saying "Prostate busts". Sounds pretty painful, dude.

Kissy Ass's picture

jew wealth is a result of the tribe. The tribe FED lends easy money to the tribe banks and the tribe banks lends easy money to the tribe victims of hollyhoax atrocities. The victims band together and use the free money to overwhelm industries with their presence.

The blueprint for ownership of Amerika.

JooSohnYu's picture

In Korea, we are thankful for Jewish people. They give us movies and TV shows and buy our products. You should be thankful they allow you to live and work for them. Plus, dont you think the world gave them enough crap for their entire history. Of course you do. No one gave them their wealth.They work, You should try it.

The Alarmist's picture

Albert Edwards... Isn't that that guy in Green Acres?  I really liked Eva Gabor in that ... kind of made me think of Melania Trump.

S Spade's picture

roger that, we've been living a lie since barack began occupying the white house, actually since FDRs "social" security and LBJs not so great socialist society.

welfare and ebt cards have kept those who formerly would be standing in soup lines in the shadows, 10s of millions of people, fat, dumb, and sometimes happy watching their flat screens in rent subsidized homes.  i don't expect they'll be chaning habits any time soon, as this country spirals ever deeper into the debt hole.

ersatz007's picture

Yes and I guess this has nothing to do with the MIC, Corporate lobbyists, endless wars, and banker fraud. This all poor people's fault.

Rabbi Chaim Cohen's picture

I love hearing from these high level "cogs in the machine" as their spent, tattered normalcy bias finally sloughs off completely and they wake up one day saying holy-smokes! the whole system is rotten and unsustainable!

The problem is that they stop short of a full frontal analysis, because the real END is just too dark to fathom:

"It ends in deeply negative interest rates, currency and trade wars, helicopter money and ultimately inflation."

I'd hardly say it "ends" with many of these things. I agree that many of these things will probably come to pass, some already have! Inflation? Hello?!!! And, how about the aforementioned social unrest? Depending on circumstances and scope, it has the potential to change things in a far more dramatic fashion than the author seems to imagine...

novanglus's picture

And Arnold!
That was one charming muthaf**** pig!

Billy the Poet's picture

You know someone ate the season one Arnold.

BidnessMan's picture

Mr. Haney always had the market figured out.

hxc's picture

Nice avatar ya fucking prick. Great way to make ZH look like a bunch of Nazi retards to outsiders... perhaps you forgot that Nazi Germany was a totalitarian socialist regime? The NSDAP just represented the other side of the coin of the NWO cryptofascists we have today (that you obviously pretend to oppose with your juvenile fucking avatar)... and no, i'm not some antiwhite cuckservative, i'm an angry alcoholic austrian anarchist of over ten years that hates your degenerate ilk.

hxc's picture

I am most probably more genetically German than you are. And not a jew. Typical nazi dumbass.

Sturm und Drang's picture

Good gawd. Seriously? It's a fucking avatar, which I used well before you got here, on a blog. And from that you ascertain I'm lacking in Aryan pureness whilst simultaneously being a raving Nazi?

Tell ya what. You should try the Russian six-step program. If you're lucky, you can finish it one.

Kissy Ass's picture

Ah a Speilburg comment thread. How nice.

Can't go a day on ZH without examining the evils of Hitler and the poor jew victims.

Pinch's picture

Can't go a day on ZH without examining the evils of Hitler and the poor jew victims.

ZH, the Internet's toilet

RafterManFMJ's picture

Sorry HXC but your target has a full year of zerohedge Senority on you. You lose; good day sir!

shovelhead's picture

Don't worry.

Cirrhosis should claim him shortly.

hxc's picture

Yeah, well hopefully fat cancer gets your loser ass first.

Salzburg1756's picture

A photo of The Great One looks good anywhere.

general ambivalent's picture

Austrian anarchist? That sounds like national capitalism to me...

sunny's picture

?? ZH--a "little extra bearish".  Isn't that sorta like being a little more pregnant or a little less virgin??

Crisismode's picture




Zero Hedge is the Immaculate Conception.


A_DAB_will_do's picture

Hey, I resemble that remark.

38BWD22's picture



Then we're all friggin' dead?

TonyRUs's picture

The ZH's work is done. It can close up shop.

Kassandra's picture

What if it never ends??
Just goes on and on and on and on...

Squid-puppets a-go-go's picture

only so much underlying capital can be destroyed - especially when rates are negative

Tall Tom's picture







That does indeed happen. It just goes on and on...for eternity.


It is called Hell.


And people claim that Hell is not real...while they are experencing it...That is mind boggling. Denial is powerful.

maxamus's picture

ZH has been 100% wrong for 7 years now.