Albert Edwards Asks: ‘Warren, Sanders or Trump What’s The Difference?’

Albert Edwards “just wanted to check in” with everyone on Thursday, because whenever he takes a week off from writing, people start getting anxious. (Maybe they’ve “dropped off the list” or maybe Albert has dropped of the planet, or been kidnapped by vengeful equity bulls or equally irritated bond bears or a cabal of mercenaries hired by central bankers who finally reached a breaking point after years of being castigated by Edwards.)

There’s nothing to worry about, though. Albert is just in transit. He traveled to New York last week (apparently with his colleague Kit Juckes) and that seems to have gone fine, aside from Edwards “pick[ing] up the statutory winter cough from the long-haul flight”.

Thursday’s missive finds the incorrigible Edwards echoing Ray Dalio’s lamentations about a world gone “mad”. Edwards cites sunglasses as proof. To wit:

The world has gone mad. And it’s not just equities rising to record highs… Christie’s US recently sold two pairs of late 1990s tortoiseshell sunglasses for $2,750, massively outstripping their $200-300 estimate. The ‘Not-QE4’ liquidity splurge has sent risk assets bananas, so the economic narrative has become one in which the US economy is “robust”. No it isn’t. And labour’s fightback has a recessionary downside.

There’s a lot to unpack there, but one thing that immediately comes to mind is what Albert would look like sporting a pair of “late 1990s tortoiseshell sunglasses”. Who knows, maybe this year’s bond bonanza has emboldened Albert enough to blow three grand on some “vintage” shades.

As he alludes to in the excerpted passage above, labor is clearly fed up (“Fed” up?) with monetary policy that serves to perpetuate inequality.

There is no denying that QE exacerbated the wealth divide. What there is, though, is a disagreement as to whether that’s a necessary evil (an “unfortunate side effect”, if you will) of a policy response required to avert an outright economic collapse in the wake of the crisis, or an overt attempt to “punish” savers and perpetuate inequality. My own view is that it’s the former – central banks aren’t out to get you. Rather, they are convinced of their abilities to counter downturns and “tame” the cycle by engaging in ever-grander experiments based on a soft science they habitually mistake for a hard one.

In any event, for voters it doesn’t seem to matter whether there was ill intent, and because soup lines and dark ATMs were avoided in 2008, folks don’t have a concrete reference point when it comes to understanding why the policies which have benefited the wealthy may have been necessary.

For Edwards, “QE is totally discredited”. “I believe it had only a marginally positive impact on economic growth (mainly by driving exchange rates down, most notably in the eurozone and Japan), but the damage QE did in terms of wealth inequality compounded years of painful income inequality”, he writes on Thursday, on the way to contending that “the proverbial Joe six-pack isn’t stupid”.

I’d quibble with that. Maybe “Joe” isn’t stupid in the UK, but in the US, well…

Irrespective of whether America’s everyman understands why it is that the benefits of QE don’t accrue linearly, but rather exponentially (because the majority of financial assets are concentrated in the hands of the wealthy), “Joe” does grasp the simple concept that he/she isn’t doing well on a relative basis. That, Albert correctly notes, accounts for the appeal of populism. To wit:

He/she can fully understand how trickle-down has really worked. No wonder the US looks poised to elect another populist: Warren, Sanders or Trump what’s the difference?

One obvious difference is that Trump’s economic policies explicitly rely on “trickle down”, thereby making the perpetual motion machine of inequality creation spin even faster. (When you incentivize buybacks with corporate tax cuts, you drive up the very same equity prices which were already inflated by QE. The promise that the windfall for corporations would be spent to improve the plight of workers proved to be largely nonsense.)

In any case, the appeal of populism and the distinct possibility that voters will be drawn to the left-wing brand in 2020 just as they were drawn to Trump’s brand in 2016 is something we’ve discussed here on innumerable occasions, including on Tuesday evening in “Stocks And The 2020 Election: 5 Charts And Some Questions“, in which we wrote the following in the course of explaining why it is that so many billionaires continue to fret about Warren despite the contention that she supposedly isn’t electable:

2016 proved that Americans are susceptible to a populist narrative that promises to restore prosperity to a “forgotten” middle class which has fallen victim to a system that doesn’t work for them. Donald Trump peddled the same message, but his narrative (that a billionaire with a long history of narcissism and flaunting his wealth) suddenly decided to care about flyover America was always far-fetched.

Warren, though, actually does care. It’s entirely possible that her obvious passion and righteous indignation at the plight of the everyman resonates with some of the same voters Trump duped in 2016, only to sell them down the river with corporate tax cuts and policies that disproportionately benefited the wealthy.

To be clear, those are quotes from our coverage. Albert doesn’t disparage Trump, but he draws the same parallel between Warren, Sanders and the president in terms of their appeal to large swaths of voters who feel increasingly disaffected.

“The good news”, Albert says, is that “labor is fighting back hard to get its rightful share of national income”. He illustrates that with the following chart:

(SocGen)

Of course, that squeezes corporate profit margins, which in turn has the potential to crimp investment. That would ostensibly be exacerbated by a rollback of the tax cuts.

Business investment has obviously been weak, and that, Edwards reminds you, is bad news, even if the US consumer was still showing up in the third quarter (albeit less so than in the second, and apparently hardly at all in September).

“It is the business investment cycle that ‘causes’ recessions, in an accounting sense”, Albert writes, noting that “business investment contributes [just] a fraction of GDP growth in an economic recovery, while in a recession the dotted line totally overlays the red line”.

(SocGen)

As far as Dalio’s most recent musings go, Edwards thinks Ray is probably right. Or at least if you go by the price at auction for tortoiseshell sunglasses.

Read more: Ray Dalio Says ‘The World Has Gone Mad’