SocGen’s Albert Edwards has seen a lot over four decades in finance. As such, he didn’t think there were any surprises left. Or at least none that would count as surprises to him.
But in a new note, Edwards described both the scope and prevalence of “Greedflation” playing out across the world’s largest economy as unprecedented, and thereby “astonishing.” The situation is so acute that Albert wonders if capitalism might be broken or even “dead.” (Say it ain’t so!)
If you ever get to the point in life when you think you might’ve seen it all, don’t despair. Because somewhere in America, predatory, hyper-capitalism is manifesting in wholly egregious outcomes capable of surprising even the most hardened veterans of the cruel game we euphemistically call “life.”
Tuesday wasn’t the first time Edwards addressed the pandemic-era Greedflation. He talked about it late last month too, but he’s more alarmed than he was just a few weeks ago.
“The latest BEA data shocked me because I had expected margins to have declined sharply, mainly because that is what stock market margins data had suggested. How wrong I was!” Albert exclaimed. The figure below illustrates the point.
Suffice to say margins remain close to all-time highs, and bear no resemblance to cost pressures.
Why is that astounding or “perplexing,” as Edwards put it? Well, because “profit margins normally expand and contract in a predictable manner in line with the economic cycle,” Albert wrote, noting that as cost pressures crescendo near the end of the cycle, margins start to compress even if output prices rise. The oval annotations on the chart show that rising cost pressures and falling margins typically presage recession. “This iron law of the cycle was even true during the inflationary 1970s,” Edwards said.
He walked through various BEA profit series, before ultimately plotting national post-tax profits excluding inventory valuation and capital consumption adjustments with pre-tax domestic, non-financial profits including those adjustments. The former is roughly consistent with S&P profits as you see them, and the latter Albert described as “the best underlying measure of US corporate profitability.”
Although what Edwards calls “stock market margins” (so, profitability for corporate America) have fallen fairly sharply from the peaks seen early last year, US whole economy profit margins are still perched near record highs.
Albert’s assessment of this situation was despairing and seemingly genuine. Although I can’t say for sure without asking him, my sense is that this might be a case where Edwards’s concerns are real, and his critique isn’t tongue-in-cheek.
“[C]orporates in developed economies (especially the US) have used the excuse of rising raw material costs to push prices up well beyond cost pressures, to expand profit margins to unprecedented levels,” he wrote, adding that,
Companies have used first the pandemic and then the war in Ukraine to ‘profiteer.’ At a time when social cohesion is already fraying at the edges, I think the sight of companies generating super-normal profit margins in a crisis can only inflame social unrest. This is a big issue for policymakers that simply cannot be ignored any longer. The end of Greedflation must surely come. Otherwise, we may be looking at the end of capitalism.
I don’t know what to say. Good riddance maybe? If you give an American capitalist an inch, he’ll take a mile. And then he’ll take your soul and your dignity too.
It’s not exactly like Main Street has enjoyed the many miracles of capitalism over the last 40 years. Indeed, the benefits of American-style capitalism are now accruing almost entirely to a literal handful of people, as opposed to the figurative “handful” to whom those benefits traditionally accrued.
That’s a crucial distinction, and one I’m always keen to emphasize in these pages. It’s one thing for a competitive system to result in an unequal distribution of wealth. You could argue that’s a feature, not a bug. It’s another entirely when the number of people for whom the system works is so small that it’s plausible to make a list of those people. That’s existential.
Edwards may be surprised by all of this, but I’m not. A central theme of my monthly letters is the notion that capitalism in America began to break during the period we typically associated with its renaissance. Gordon Gekko’s “greed is good” was more than a movie slogan, it was a harbinger of the social apocalypse in America.
This is only going to get worse. Maybe not in the narrow context of any data series, but certainly in the broader context of the Western world’s struggle to reimagine what, as initially conceived, was a promising secular religion — an “-ism” which, while imperfect, at least helped power society into modernity.
When taken to extremes, religions can be extraordinarily dangerous. Indeed, many (but not all) of history’s most dubious episodes were directly traceable to religious zeal. In the 21st century, our misplaced faith in the religion of capitalism (which worships profits) is threatening to destroy us.
12 thoughts on “A ‘Shocked’ Albert Edwards Asks: ‘Is Capitalism Dead?’”
While I would agree that policymakers need to stop ignoring this, it doesn’t mean that will happen. The current state of the polity is so rife with bad actors and incompetent nincompoops that is almost unreasonable to assume anything at all will inspire them to actually show up for the people who elected them in ways that they actually need them to. I think that corporate America is well aware of this fact, in that they pushed campaign donations in the pockets of the very morons we see making sound bites for Fox News in congress. They know they can profiteer because they have eliminated any threat of being punished for doing so. Gilded Age 2.0 definitely seems to be the direction we’re headed. The next recession is taking forever to begin because corporate is vacuuming up all the Trillions in stimulus it can before the bottom falls out. Then what happens to the club you mentioned earlier? What kind of club that has global reach but only a handful of genuine members continues being anything other than member’s only?
Unclear why Edwards is shocked by this (morally aghast, I can see). Simply charting EBIT margin for S&P500 gives you a chart almost identical to his PRE-tax dom non-fin chart.
EBIT margin is still nearly +100 bp higher than the pre-pandemic peak (2019), although it is down some -40bp from the early 2022 peak.
If one expect today’s high margins to structurally persist, then arguably current valuation makes more sense.
I do not think the S&P500 have fundamentally transformed their businesses to permanently higher-margin models – even if some CEOs claim so (example being TGT management Before The Fall).
Instead, I think these margins merely reflect operating leverage + high revenue growth, the latter a product of stimulus + inflation. Stimulus is only a echo, and inflation has flipped to disinflation (for the S&P500 which is primarily exposed to goods over services). Corporates have not much reduced their operating leverage.
Are customers going to get a renewed gush of spending power? Not unless you’re LMT or RTX.
I expect Edwards will be de-shocked later this year.
Granted, in certain industries there may be some persistent margin improvement via industry consolidation. Big banks, for instance. That’s not going to support the whole S&P500.
Thanks to our Dear Leader for posting and commenting on this piece.
We can already see the resentment play out – it’s no longer solely the bailiwick leftwing populists. Exhibit #1 is Ron DeSantis but GOP reps in Congress have also been getting more and more restless.
Remember – rightwing populism is not necessarily business friendly. Ask our friends in the UK.
Agreed: the article foreshadows that while greed eroded our institutions and Democracy, it’s the zeal of the MAGA cult (worse than worshipping capitalism!) that would literally topple “The Great Experiment”
I’m also aghast, but after decades of consolidation across most industries, who is surprised that there is so little competitive pricing pressure? America needs a New Deal for the 21st century, and I’m not talking about 120-month repayment terms on auto loans or 50-year mortgages.
Albert Edwards asks a fair and appropriate question that shines an awful light on the reality of an uncomfortable parallel. How can such a volume of financial and political power in the hands of so few not be comparable to Xi Jinping’s China and the CCP?
All governing systems tried to date always arrive at the same destination. Some get there faster than others. The result inflames the “scarcity” mentality innate in humans and that leads to very bad outcomes. Just ask the animal kingdom.
Time will confirm however I do (simplistically) believe that higher margins will attract more competition, which will eventually drive prices and margins lower.
Some of that competition is non US domiciled, which coupled with the stronger USD giving offshore (US) producers additional pricing advantages.
It will unfortunately take longer this cycle for a number of reasons, one of which includes the cost of capital being more costly and difficult to access.
My 3c worth!
I miss torsten slok’s inequality slide decks. What happened to him?
He’s at Apollo now
I agree with Albert Edwards and much spilled ink here in preceding letters that corporate Greedflation is unconscionable, but his exclusion of European CEO’s from the blame game is noteworthy. Only recently the CEO of Nestle commented on the Nestle’s improvements in supply chain challenges in the same breath as his promise to hike prices nevertheless. Capitalism running amok knows no natural home.