“Spare a thought for Mrs. Edwards, who has put up with me crying with despair for the last decade at the ruinous policies of western central bankers”, SocGen’s Albert Edwards writes on Wednesday, in the latest installment of End Times Weekly. (It’s actually “Global Strategy Weekly”)
For those who take their own rose-colored view of the global economy too seriously, Edwards is an irascible bogeyman, but for the rest of us, his colorful missives are an entertaining romp through the world as Albert sees it – perpetually teetering on the brink of an epic unwind or an epochal shift that only he is truly prepared for.
To be sure, 2019 has been good to Albert’s long-standing “Ice Age” thesis. Bond yields have plunged and the global stock of negative-yielding debt ballooned to a cartoonish $17 trillion, a state of affairs that is literally unfathomable to the layperson. When he’s right, Edwards gives critics a lot more rope than they give him when he’s “early”. But last month, he did take the opportunity to make an example of some folks, although he didn’t name them.
On Wednesday, he zooms in on the latest CEO Confidence report which was, frankly, a disaster. The Conference Board’s measure – which was unchanged at 43 in Q2 – plunged to 34 in Q3. That’s the lowest since the first quarter of 2009 and it’s “not good, not good”, to employ a Trumpism.
“The slump in The Conference Board’s measure of CEO confidence shows a collapse to levels wholly consistent with the depths of a recession”, Edwards says, adding that “it’s not just the trade war that is adversely affecting sentiment – the very poor profits backdrop is also weighing on CEOs, and as we have shown, the profits cycle leads the business investment cycle”.
For what it’s worth, the Conference Board places the blame for plunging CEO confidence squarely with the trade tensions.
“Tariffs and trade issues, coupled with expectations of moderating global growth, are causing a heightened degree of uncertainty. As a result, more CEOs than last year say they have curtailed investment”, Lynn Franco, Senior Director of Economic Indicators at The Conference Board said on October 2. “In a separate poll of CEOs and CFOs (conducted in September), we found that a large majority believe the recent trade disputes will have a lasting impact on their business”.
Edwards goes on to talk a bit about the extent to which both the far-right and the far-left agree on at least one thing – namely the purported desirability of implementing some form of modern monetary theory (the right will never call it that, but let’s face it, when you spend your days demanding on Twitter that the Fed cut rates and restart QE just as your Treasury department is flooding the market with supply to finance deficit-funded stimulus, that might as well be MMT).
To make the point, Albert rehashes the famous exchange between Alexandria Ocasio-Cortez and Jerome Powell and then reminds everyone that Larry Kudlow subsequently praised AOC (or what counts as “praise” in this context).
“It was significant recently that the high-profile Democrat Congresswoman Alexandria Ocasio-Cortez lambasted Fed Chair Powell about the Fed being consistently too hawkish”, Albert writes, noting that “her cross-examination of Powell” included reminding the embattled Fed chair “that the FOMC has long predicted inflation would pick up because of the Fed’s assessment that the natural rate of unemployment had been hit, and yet the Fed had been consistently proved wrong”.
“I’ve been seeing lately that economists are increasingly worried that the idea of a Phillips curve that links unemployment and inflation is no longer describing what is happening in today’s economy, what are your thoughts on that?”, AOC asked of Powell, on July 10.
She clearly knew the answer ahead of time.
After stating the obvious (that the Fed spends “a great deal of time” on the subject) Powell said that “the connection between slack in the economy was very strong if you go back 50 years and it’s gotten weaker and weaker and weaker to the point where it’s a faint heartbeat”.
Watch the exchange: AOC Corners Powell On Phillips Curve Implications For ‘Modern’ Policymaking
For his part, Edwards isn’t convinced the Phillips curve is actually dead.
Maybe “a better guide of the pressure on wages [is] the ratio of employment to the working age population rather than the labour force (i.e., to adjust for the US’s collapsing participation ratio using the production and non-supervisory measure of average hourly earnings)”, he writes, adding that if you take a gander at the chart on the right below, you might be inclined to believe that wage inflation “is actually pretty rapid considering the underlying slack in the labour market once you include the working age population that has dropped out of the labour force”.
After spending some time delving a bit further into the Phillips curve debate, Edwards emphasizes that the stronger dollar is absolutely poised to create a scenario where the US is importing disinflation.
That’s something Deutsche Bank’s Stuart Sparks has discussed at length recently in the course of suggesting that when the market prices in aggressive Fed cuts, it might not be that rates traders see a recession, but rather that the market simply believes the Fed will be forced to cut, recession or no, in order to avoid a scenario where their mandate is imperiled by the deflationary effects of a stubbornly strong dollar.
“One thing certainly suppressing consumer price inflation more recently has been the impact of the strong dollar in importing deflation”, Edwards says, before suggesting “that will change.”
Finally, Albert says that if the tumbling ISM manufacturing gauge presages a recession and core CPI ends up moving sharply lower (see the chart below), “most commentators will be convinced (mistakenly) that the Phillips Curve is dead and buried”.
At that point, Edwards says a cross-party alliance aimed at establishing an MMT regime will be forged.
As he puts it, “As the Fed takes the blame for unnecessarily killing this economic cycle, a bipartisan consensus will usher in monetary madness like we have never seen before”.
We’ll leave you with Albert describing an early date with his wife:
And after three bottles of wine between us, I was… crying with despair especially when Rowan shoved me out of her taxi home! Some 15 years on she is still listening to a variation on the theme – ‘it’s all about to end’. But as I told her, it really is going to end very soon.