What’s Albert Edwards Worried About?

The title is a bit of a red herring.

If the question is “What’s Albert Edwards worried about?”, the answer is “Everything”. Or almost everything, anyway.

Currently, the only thing SocGen’s incorrigible (yet always affable) bear isn’t worried about is the prospect that central banks might wake up one day and embark on an overzealous campaign to address “risks to financial stability,” as “several participants” put it in the September FOMC minutes, while fretting about the side effects of the Fed’s monthly bond-buying spree.

“To the extent central bankers will ever recognize asset over-valuation, they will see it as an inconsequential outcome of QE which supports the economy,” Albert wrote, in a Thursday note. “Their mantra is ‘See no evil, hear no evil, and speak in platitudes’.”

Fair enough, but those platitudes are starting to sound cautious of late. Especially in Albert’s neck of the woods. The BOE’s messaging skews hawkish, and although it does seem as though markets are well prepared for the Fed taper, the flow does matter (figure below).

As Harley Bassman wrote over the summer, “clever quants will say that a statistically significant mathematical correlation doesn’t exist between money creation and financial asset prices, but who are you going to believe, them or your lying eyes?”

In any event, Edwards’s latest was essentially a short compendium of potential macro pitfalls, not least of which is the sharp increase in food prices.

“Although some key foodstuffs are well off their recent highs, overall agricultural and industrial commodity indices remain at or close to all-time highs,” he wrote, noting that “fertilizer prices surging to records will only put further upward pressure on already high food prices.”

The rampant run-up in commodities and, most recently, the frenzied acceleration in energy prices, is well-documented in these pages. Bloomberg’s Dani Burger summed it up on Thursday, amid a furious rally in zinc. “Every day it’s another obscure commodity going parabolic,” she exclaimed, on social media.

It’s a smelter problem, by the way. “The latest big catalyst came on Wednesday when Nyrstar — one of the biggest zinc producers– said it will cut output by up to 50% due to rising power prices and costs associated with carbon emissions,” Bloomberg wrote.

In his Thursday missive, Edwards went on to warn about China’s credit impulse. Again. This is another storyline I’ve tried to cover ad nauseam.

The global cycle is very much tethered to the ebb and flow of the Chinese credit impulse. Which is rolling over.

“This is yet to have a major impact on western growth – but it soon will!,” Albert yelled.

He attached another recession warning, echoing last week’s dour prognosis. After suggesting market participants should be “ultra-vigilant” about wage pressures, Edwards noted that the “better” minus “worse” spread in the latest NFIB survey “has now fallen to levels where we should be worrying about recession.”

As usual, Albert closed with a flourish. “Last week we mused that near term recession risk was being underestimated,” he said. “Maybe that’s what we should be really vigilant about?”