Why Albert Edwards Thinks "NOW Is The Time To Worry"

When back in February, we pointed out a disturbing and dramatic divergence in the delinquency and charge-off rates between America's thousands of small banks and the 100 or so biggest...

... we wondered if anyone would notice it. After all the implications were profound, and as TCW had previously noted, it "was America's smaller banks – those not in the Top 100 by asset size – that have experienced in just the recent months a surge in charge-off deterioration, which at 7.9% is on par with the last financial crisis!"

Well, just a few days later, the WSJ did, and overnight so did SocGen's Albert Edwards, who unlike the paper of record had a kind introduction to this critical inflection point in the economic data, if only for those banks which cater to the less affluent, more "regional" Americans:

I know some people don’t like the Zero Hedge (ZH) blog, but I certainly do –and not just for the confirmatory bias it gives me regarding own bearish views. ZH often flags up economic data and issues I would otherwise miss, ahead of the pack. Not much surprises me or shocks me nowadays, but I was truly gobsmacked by the surge in charge-offs and  delinquency rates on credit card loans made by smaller US banks (see chart above).

In the aforementioned WSJ article, Robert Hammer, chief executive of credit card industry consultant R.K. Hammer, says, “The small banks’ experience is simply a leading indicator of a downturn to come. In the run-up to the last recession losses accelerated for small banks before they did for big ones.”

And while we thank Albert for the kind words, the reason we once again remind readers of this particular data, is that as Edwards further notes, it is a key part of the puzzle suggesting that a recession - or maybe stagflation - is rapidly headed for the US economy, which is "about to reach a memorable milestone" as the US economic cycle is set to hit 106 months in April, making it the second longest in history, and would be the longest ever if there is no recession by the time Trump begins campaigning for his second term in the summer of 2019.

“Here, Edwards quotes Lance Roberts, who says that "It is certainly not surprising that after one of the longest cyclical bull markets in history individuals are ebullient about the long-term prospects of investing. The ongoing interventions by global central banks have led to T.T.I.D. (This Time Is Different) and T.I.N.A. (There Is No Alternative), which has become a pervasive and Pavlovian investor mindset. But therein lies the real story. The chart below shows every economic expansion going back to 1871 and the subsequent market decline. This chart should make one point very clear – this cycle will end.”

Of course it will, but when?

Commenting on this rhetorical question, Edwards notes that "clients always want to know if they should worry NOW?" His answer to that is "yes they should" as there are "very worrying signs that yet another Fed-inspired credit bubble is beginning to burst", and not just in the surge in small bank delinquencies.

My former colleague Paul Jackson puts some great charts on Twitter and is definitely worth following (his handle is @belgiandentists, or is the term ‘handle’ from CB radio and the Convoy film). Paul showed that it is not just credit card delinquencies that are on the rise – mortgage delinquencies are too (see chart below).

There are many other pre-recession/bubble-bursting signals emerging, one of which has been flagged by William White, former chief economist of the BIS, who warned that the current situation is as dangerous as 2008.

White, now at the OECD, believes successive economic recoveries have been so reliant on debt that interest rates cannot rise to prior cycle levels, and hence there is a downside bias in each successive cycle. In particular, the extreme monetary policy measures taken since 2008 have inflated yet another credit bubble. As the Fed now tries to normalise rates with an eye on the real economy, unemployment and inflation, it will find that the newly inflated credit system is unable to tolerate even moderate rises in rates.

A familiar concern here is that rising rates would destroy the countless number of "zombie companies" which only exist thanks to low interest rates. This was highlighted in a recent report by Moody’s, which "certainly seem concerned that although credit markets have shrugged off sky-high corporate debt levels, the Q1 slowdown in GDP and business sales may begin to re-engage the disturbing relationship below."

Another worry is the recent sharp weakening of the US (and European) economies in recent weeks...

... even as markets enter another confidence-crushing correction.

Once again the Fed has built up the illusion of economic prosperity on a mountain of debt, fuelled by monetary steroids that have inflated asset values way beyond their sustainable level. As markets begin to slide, this wealth is now being eviscerated as quickly as it was created, and it threatens this increasingly anaemic and very aged recovery.

And while his analysis is now slightly out of date - recall we showed earlier today that the US savings rate has actually grown to the highest since last August after hitting near all time lows recently as Americans slowed their spending, Edwards points out that the US Saving Ratio (SR) collapsed at the back end of last year to only 2½% (close to its all-time low), driven in large part by the stock market rally (see chart below - SR inverted).

My back of the envelope calculations (OK, I used a calculator) suggest that without the fall in the SR through 2017,  the 2.3% GDP growth recorded for 2017 would have been only 1.5%, the same as 2016. The risk is now, with the tide going out on the equity market that the SR jumps higher, growth flounders, and the iceberg of debt rips open the hull of this supposedly unsinkable economic ship. If you want to blame someone, blame the Fed. And I am sure that is exactly what President Trump will do when he loses patience and moves to remove their independent status.

Finally, speaking of the Fed, it is worth remembering that just as the Fed unleashed the (soon to be) second longest expansion in history with the help of trillions in liquidity injections and asset purchases, so it will be the Fed that will launch the next recession depression.

The Fed generally tightens rates until something breaks. David Rosenberg points out that since 1950 there have been 13 Fed tightening cycles, and 10 of them ended in recession (while the others have often ended in emerging market blow-ups, like the 1994 Mexican peso crisis). Surging delinquency and charge-off rates for smaller banks  suggest the breaking point for the economy may come sooner than the Fed and bulls expect.

Which brings us to Edwards' conclusion which is a welcome one for those who say the time to end the Fed is here, as the SocGen analyst believes that it will be Fed that is ended after the next crash:

This data merely reflects the illusion of prosperity. The markets are now sniffing out a rising stench from decaying debt. They say a fish rots from the head down. Unlike the 2008 financial crisis, this time I expect it is the Fed that will be held responsible for yet another debt crisis. Do not expect their independence to survive.

One can only hope.

Comments

HRClinton P.K.Snosage Thu, 03/29/2018 - 12:54 Permalink

This bit caught my eye:

"A familiar concern here is that rising rates would destroy the countless number of 'zombie companies' which only exist thanks to low interest rates."

What came to mind was the companies whose biz model isn't just predicated on cheap money, but on cheap labor. Forever!

Isn't it interesting that, even in libertarian circles, it's not ok for finance costs to remain low, but it's perfectly ok for labor costs (real wages) to remain low?

I smell a latent case of the Stockholm Syndrome among "libertarians" and Cuckservatives.

In reply to by P.K.Snosage

The_Dead_Bear Thu, 03/29/2018 - 11:59 Permalink

 

Please, somebody tell this fucker to stop repeating the same shit over and over and over and over again ! 

How many times has this a$$hole found out that now was the time ? 

I am tired of those morons...

 

davatankool Thu, 03/29/2018 - 12:06 Permalink

As long as USD going up, yield going down, bitcoin crashing, tech stocks down, we can assure that stocks will continue to go down. there will be some dead cat bounces, but it wont change the trend. in fact today's 300pts is expected in technical term. 

aliens is here Thu, 03/29/2018 - 12:25 Permalink

Ok, don't get me wrong I know we are heading to trouble but everyday people like this guy and Gartman prediction doom and gloom. In reality they don't know anymore than me and you on ZH. Fools.

Bond Wizzerd Thu, 03/29/2018 - 13:14 Permalink

Give this guy $100mm to manage and pay him 50% of his alpha in lieu of a salary. Then, start a pool to predict the day he is forced to start living under an overpass and runs out of money for food. That would be a reality show worth watching!

Quantify Thu, 03/29/2018 - 13:33 Permalink

What, worry? China building islands out of reefs, U.S. Europe and Russia expelling dozens of personnel from each others consulates, several proxy wars waging across the Middle East and Africa, 30 million illegals living in the U.S. with various states and cities declaring them sanctuary status, Debt at record levels and climbing by the billions per day, importing cults that hate western values both in Europe and the U.S. Marxism and violence being funded by billionaires, Human overpopulation at record levels. Why worry?

ThanksIwillHav… Thu, 03/29/2018 - 14:19 Permalink

Not until Income and Credit turnover.  Plus the Excess Reserves of ~ $2.2T can provide a floor.  And who knows what CBs will do.   Tale of Two Cities?   Pitchforks coming?

Lord Peter Pipsqueak Thu, 03/29/2018 - 14:20 Permalink

This is the same Albert Edwards who predicted if the stockmarket crashed following the Feds rate increasing cycle, they would chicken out and introduce QE4, but given the amount of debt now in the system, they would have to print so much money "you will hear the presses on Mars".

Given that there is one Donald J Trump in the Whitehouse, that daily is under such attack, that should it rain, it is going to be his fault(or the Russians), how does any sane person think the Fed is going to get the blame for the next crash? They will be seen as the saviours, and painted as such by the globalist media(just as Bernanke was for "saving" the financial system in 2008).

Trump is THE fall guy, whether its tariffs, war with Iran or N.Korea or something else, it will be his fault, the Fed will never be blamed.

Kickaha Thu, 03/29/2018 - 15:00 Permalink

Cycles?  In olden times, banks used to come to a point where demand for loans caused interest rates to rise up to the point where fewer and fewer profitable projects could be funded, and failed projects resulted in defaulted loans, and lending got naturally cut back due to application of greedy self-interest, and momentum tipped, and we fell into recession or depression.

None of the process means squat in 2018 where the government won't allow interest rates to rise.  We don't have economic cycles anymore, just bubbles, and speculation regarding the day the government, or some presently unknown unknown, pops them.  In a financialized world, there are no business cycles, just financial ones, periods of massive creation of paper wealth, followed by a precipitous destruction of same.

 

taketheredpill Thu, 03/29/2018 - 15:03 Permalink

5 Reasons to run away from HY

 

     1)      Much less investor protection with over 60% of recent debt issued “Cov-Lite".  In 2007 the previous peak was 25%.

     2)      A lot of the borrowed funds have gone to Share buybacks rather than Capex.  Since there will be less hard assets left over when Bond holders end up owning the firm,  the recovery rates will fall.

     3)      In 2008 you could look at previous 5 years of growth and assume the US economy will recover to a 4% GDP growth rate, and factor that into how much you’re willing to pay for the firm (based on asset value and expected profitability). In 2016, who is predicting growth to reach 4%?

     4)      Regulatory changes design to make US banks safer have restricted how much corporate bond inventory they can hold on their books.  There is no more “buyer of last resort”.  With “stink bids” gone much higher risk of market going “no bid”.

     5)      In 2007 High Yield Bond ETFs were created.  They currently hold many Billions because they are very liquid so you can always sell them in a hurry.  Unfortunately the underlying asset-class is very illiquid.  This disconnect has raised alarm bells at the Fed and Bank of England because of fears that “phantom liquidity” (liquidity that is there when you don’t need it and gone when you do) could increase volatility in a sector sell-off.

 

If you ignore Fundamentals (Leverage) when you Buy, then why would you ever Sell?

 

 

Pendolino Thu, 03/29/2018 - 18:03 Permalink

Ah shit, you mean the last 15 years I've been worrying about now being the time to worry was all wrong? What a complete waste of worry. Anyway, better get on with some real, proper worrying now...

SH_Resurrected Thu, 03/29/2018 - 18:22 Permalink

"...some people don’t like the Zero Hedge (ZH) blog, but I certainly do –and not just for the confirmatory bias it gives me..."

Why would anyone continue reading this article, assuming that the article will provide an objective assertion, after reading the quoted statement above?

Captain Nemo d… Thu, 03/29/2018 - 18:41 Permalink

Worry now that something bad will happen sometime in the future. That's an interesting twist but I doubt anyone can "be worried in the future" at any time. Everyone worries "now" even if it be about the future.

turkey george palmer Thu, 03/29/2018 - 20:35 Permalink

Well stagflation sounds too last century.

There is inflation but the Chinese seem to be able to match the inflation with debt so that's nice.  We just export the price increases and they hide it under a rock or something.

Stagnation sounds a little tame. Like a pond of water in August sitting there with a green layer of algae or something.

We are not going to stagnate this time. This time everything is so connected and debt ridden that a crisis can't be contained or resolved by merging losers with other banks. Everything will be second to cash.  Funds can vaporize stocks can fall bonds can crash. Wealth as it is known now will be going down in flames because defaults will occur and bankruptcy everywhere. You are probably not aware of what it's like to go to job and family services to apply for food stamps.

It's like a movie set about dystopian hell.

You are not likely to have much luck getting an appointment as the numbers of applicants will swell beyond the capacity. Maybe you can apply online but an office visit will be necessary. I can't imagine the young millennials coping with the hopelessness. What experience do they have to prepare for it.

 This marshmallow land existence is at the edge of a great collapse and things are going to go very very badly.

Better start walking and for fucks sake get some hiking gear like a water filter and a msr whispetlite stove