SocGen’s Albert Edwards thinks we might be setting the bar a little too low when it comes to what counts as a good outcome these days.
“When investors tell me this is nowhere near as bad as 2008, I can’t help but sigh,” he wrote Wednesday, of the all-too-common refrain heard around markets since SVB imploded two months ago. “If a 1930s-style Great Depression being narrowly averted is your baseline, of course things are likely to be better than that man-made — actually Fed-made — catastrophe,” he added.
We have a natural tendency to assume the next crisis will resemble the last calamity, and to trade accordingly, which is (one reason) why virtually no one’s very good at trading. This isn’t 2008. Even if it were as bad as the financial crisis, it still wouldn’t be 2008, and you wouldn’t likely get very far using the 2008 playbook. To be successful, you have to be imaginative.
That’s an argument against the idea that the oncoming CRE maturity wall, and associated stress, will be the end of the financial universe, as some observers are fond of suggesting whenever they’re granted an audience. If the next “big one” is CRE-related in the US, it’ll be the most well-telegraphed major crisis I can personally remember.
Anyway, speaking of CRE, banks aren’t inclined to do a lot of lending in the space according to the latest installment of the Fed’s senior loan officer survey, and speaking of that survey, there’s a narrative out there that says it wasn’t as scary as it could’ve been. That, in part, is what Edwards was referring to on Wednesday when he suggested benchmarking positive developments against 2008 might not be the best way to contextualize our current circumstances.
Albert emphasized the same thing I did while documenting the Fed’s big SLOOS reveal on Monday — namely that demand for credit is deteriorating such that history would suggest the world’s largest economy is already in a recession. Here’s the chart again:
“Demand for credit from companies has slumped even more dramatically than banks’ lending policies have tightened,” Edwards remarked. “Historically, this signals recession.”
This all bodes ill for capex at a time when business spending was already set to slow+. Recall that corporates ran down cash balances at the swiftest pace on record in 2022 to avoid a higher cost of debt.
As Goldman’s Ben Snider and David Kostin noted late in March, “Falling cash balances will eventually force companies to sacrifice either their profit margins or their spending activity.”
The figure above makes a very simple point: Tighter lending standards (so, conditions attached to the supply of credit) are a leading indicator for business spending. The drop in demand for C&I loans revealed by the Fed on Monday offered additional supporting evidence for the contention that investment is poised to slow materially.
But, like the CRE apocalypse narrative, this is well-worn territory by now. Everyone with even a passing interest in markets can recite some version of a slowdown story predicated on the idea that tighter lending standards will exacerbate the drag from 500bps of Fed hikes on the way to choking off both capex and consumption.
For Edwards, the bigger risk (so, thinking a bit outside the box) may be that US tech shares are still overdue for a reckoning, and perhaps even more so considering the run they’ve had in 2023.
“Regular readers will know that I think US IT and internet stocks will be the Achilles’ heel of the US equity market” during the next downturn, Albert said.
Of course, America’s tech titans delivered consensus-beating results during the recently-concluded reporting season.
Nevertheless, Edwards warned “the coming recession can still pull the rug away from a huge segment of the market.” Then, in a throwback, he conjured the vortex. “Maybe US tech will prove to be the Vortex of Debility, not the banks.”