Albert Edwards Returns From Yosemite, Disagrees With Other Notable Bear When It Comes To Forest Fires
I'm often lumped (I think undeservedly) into the "permabear" category and while that's not generally somewhere I'm comfortable being, I've accepted that some folks are going to summarily assign the "doomsayer" label to me no matter what I write, so what I try to do is soften that image by giving readers little glimpses into my actual life.
That window into the man behind the pseudonym comes courtesy of vignettes and other story telling devices I use to let readers know that anonymity notwithst
Walter could u please clarify something for me? You quote Edwards as saying that corporate America is drowning in a sea of debt. But it seems like due to the trump corporate tax cuts etc. people were saying corporations were doing stock buybacks, etc because they already had so much cash to begin with. Thanks in advance for any insight you can lend.
There are plenty of companies out there at the moment who have actually borrowed large amounts of money and used it for buybacks rather than productive purposes. The (extra) tax cut money is just being thrown in the same direction. On the other hand, not all companies are the same; there are many other “zombie” (nonprofitable) companies that have been kept alive by their ability to borrow money at near-zero interest rates. As rates rise, the zombies will not be able to roll their debt and will default, while strong companies will see their profits eaten away by rising interest on the piles of debt they’ve accumulated. And it’s pretty easy to confirm the veracity of his claim about the record corporate debt pile with a google search.
Much better take than over @ ZH, even though the points are the same. Better writing counts.
Another great piece H. Thanks for posting it. I think your paragraph way below sums up the macroeconomic “convergence” side of things very well.
Insofar as the US economy , things look pretty good, except there’s this one nagging undeniable incongruent facet of the economy that keeps popping out. I’m glad you referenced wage inflation in the article, because given that there’s virtually no relative slack in the labor market, the fact that wages are still contained simply doesn’t add up. It just doesn’t make sense. “Something’s not right in Denmark” as the old saying goes.
Whenever fundamental statistics don’t add up it either means:
a. there’s an error in the statistics reporting, aggregation or compilation (unlikely),
b. there’s someone who is conspiratorially suppressing the correct statistics to perpetuate the Goldilocks narrative (unlikely, although this would make a great movie), or
c. there’s a fundamental “bottleneck” somewhere in the macroeconomy that’s preventing wages from escalating as they would be expected to (possible, but it doesn’t tell us why)….
What I’ve learned is that whenever anything is bottled up in a complex system such as the macroeconomy, it tends to do what natural physics tells us it will do, namely yield to the pressure (low unemployment) and rapidly surge forward (burst) at some point. Perhaps Rosenberg’s noted “quit rate” will breach a threshold at which point corporations will rush to “normalize” wages relative to supply to retain talent
This bottled up wage inflation is one of the few primary risks that seems to be important enough to destabilize the strong US economy, namely because of
a. the “suprise” element of the event, ie a surge in wage inflation would be a “shock” to a market that’s become historically complacent,
b. because of the “velocity” of the event itself and its ramifications on fundamental inflation, and
c. Because of QE induced over-leverage in consumer, corporate and fiscal markets that are far too ill equipped to handle a required rapid counter-surge in interest rates…..Albert’s observation of “….for a total of 640bp of tightening at a time when the US corporate sector is drowning in a sea of debt.”
Given the Fed’s penchant for messaging a dovish stance to appease risk markets throughout the last decade, this would be a forceful twist of the Fed’s arm, so to speak. It’s a scenario whereupon the Fed finds its back against the proverbial wall with no other alternative than to do the unthinkable……
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“That, despite the fact that wage inflation is likely to show up at some point or another in the U.S. if for no other reason than that Donald Trump has piled fiscal stimulus atop an economy operating at (or at least near) full employment.
For his part, Edwards cites a recent piece by David Rosenberg who flags the “quit rate” in America, but whatever you want to point to, the bottom line is that the Fed is likely to be hyper-sensitive to nascent signs of wage inflation right now due to the potential for expansionary fiscal policy to overheat the economy. Here’s Albert again reiterating what a whole lot of folks have been warning about lately, namely that every time the Fed tightens, something snaps somewhere:…..”