Indlæg fra Albert Edwards, Societé Generale, kendt for at være Perma Bear:
“The U.S. will follow everyone else with a very rapid economic slowdown,” Edwards said.
The economist Larry Summers has asked rhetorically, with 3% growth last year, “How could there be a recession?” Edwards answered by pointing out that 75% of recessions have had 3% or greater growth in the previous year.
The IMF is predicting “barely a slowdown at all,” he said, “but commodities – particularly base metals – are telling us it could be a lot more severe.” Edwards added that metrics such as CEO confidence and the manufacturing ISM are poor, and that the ECRI also suggests a very sharp slowdown.
Ten of the last 13 Fed tightening cycles have ended in recession, Edwards said. Ahead of a downturn, as the Fed tightens, the yield curve steepens. “That is the phase we are in now,” he said. “Just because the jobs market is buoyant, as it was preceding the last two recessions, doesn’t mean there won’t be a recession.” Typically payrolls accelerate ahead of recessions, he said. “Strong payrolls don’t necessarily mean a recession is not coming.”
In terms of the bond market, there was a lot of panic when the 10-year broke out of the upper bound of its long-term downtrend, he said. There were extreme speculative shorts, he said, which led him to believe yields could snap back sharply. The same happened in June 2006, and six months later the economy was in deep recession.
“Little did we think that Fed Chair Powell would encourage the whip-around in interest rates that we’ve seen,” he said. Other Fed speakers have since echoed the dovish posture, helping prop up equity valuations.
His key prediction was that over the next 12- to 18-month period, U.S. bonds yields will decline and converge with those in Germany and Switzerland. Those yields will end up in negative territory, according to Edwards.
Italy
Don’t accept the explanation that the weak data in Europe is due to a tightening of emission standards, Edwards said. There is a deeper, structural problem.
The core of that problem is weak productivity and Italy is “in a league of its own” on that basis, he said. One possible explanation is that Italy suffers from poor student performance in its schools, and that has led to high unemployment. Edwards cited survey data which showed that, among all Eurozone countries, Italy was the only one where unemployment was cited as one of the top two concerns of its citizens.
“But the real problem is Italy is locked in the Eurozone,” Edwards said. Every single year its effective exchange rate goes up because its labor costs are rising. That happened in the last decade, he said, and France is not far behind Italy.
“The Eurozone will split up,” he said
The core problem in Italy is youth unemployment, now at 32%, which he said was astounding given the ECB’s QE.
Italy is unique, he said, in that a majority of those under 45 years old want to leave the EU. That is the opposite of public opinion in the UK, Germany, France and Holland. Italy is swinging towards leaving the EU, he said, even before next recession when unemployment “will go above 50%”, he predicted.
China
Every year since 1990, people have been calling for a Chinese “hard landing,” Edwards said. “Now they are calling for an adjustment from an investment to a consumption bias in China’s economy.”
It is going slowly, he said, and China is still hugely reliant on consumption, especially compared to other emerging markets at this stage of their development.
Policymakers are not going to open the floodgates to credit in response to the slowdown, according to Edwards. One can see this in the data, which shows that reserves have leveled off, he said, so China is actually engaging in monetary tightening. This is “grinding away in the background,” he said.
Most of the economic data is very, very weak. Industrial profits are at the lowest level in two years, down 20% year-over-year.
“The current unraveling in China is much harder than people suppose,” Edwards said.
The PMI data shows that export orders slumped sharply in the last three months, and there is “a lot more weakness to come.”
Unemployment is the problem in China, he said. “Everything else is peripheral. This is where the social unrest comes from.” The slide below illustrates this problem.
