Investors are “divorced from cyclical reality.”
That’s according to SocGen’s Albert Edwards, who, if past is precedent, should be going to Jamaica on vacation at some point over the next several weeks.
Albert, writing on Thursday, offered a possible explanation for the disparity between market participants’ views, as manifested in equity prices, and the cycle: Corporate greed.
If you’re looking to explain a distortion or disconnect in America (any distortion or disconnect), generic corporate greed is a good place to start. But in this case, Edwards is referring specifically to “Greedflation,” the pandemic-era phenomenon whereby the C-suite was able to maintain margins despite surging wage bills and input costs — by raising prices to consumers.
In some cases, those price increases continued despite moderating input costs and despite a slowdown in wage inflation as pandemic distortions faded, which is to say corporates knew consumers wouldn’t question higher prices in an environment of broadly higher inflation, so they seized the opportunity. Profitability benefited commensurately.
“I think Greedflation is the key reason why investors remain so optimistic despite expecting an economic slowdown,” Edwards said. “In short, investors are extrapolating what was an unprecedented expansion of margins in 2023 in the face of rising unit costs.”
Note that not all price increases were an example of corporate greed. In many cases, companies raised prices because they “had” to, with the scare quotes to denote that, in theory anyway, they could’ve simply accepted lower margins to shield consumers. But only in theory. In reality, that’s never how it works in American-style, shareholder capitalism.
Of course, you can raise prices as much as you want, but if consumers don’t have the money, it won’t matter. Fortunately, cash cushions were ample, a legacy of the pandemic fiscal policy response. That wasn’t lost on the C-suite. As noted above, management knew consumers wouldn’t question price hikes, but they also knew consumers were in a position to pay up.
All of that served to delay the onset of recession. The figure below, from Edwards, is familiar.
The chart header speaks for the visual (as chart headers are wont to do). The deceleration in profit growth didn’t morph into a proper slump, which likely prevented a sharper drop in business investment.
“The Greedflation-driven surge in margins helped stop the profits slowdown turning into a deep downturn,” Albert went on. “That derailed a recessionary slump in business investment last year.”
Finally, I’d be remiss not to note what looked, to me anyway, like a contradiction in Albert’s analysis of the macro-policy conjuncture in the US. I’m quite sure he won’t mind my pointing it out.
While editorializing around recent data releases, he flagged the veritable plunge on the ISM services employment component from December. If that subindex “is a true reflection of reality, we are surely in recession already,” he warned. In the very next breath, Edwards noted that the household survey in the US jobs report “shows only 30,000 jobs have been generated per month over the last six months.” That series, he said, “has been leading the slowdown in payrolls for some considerable time now.”
Recall that the rather glaring disparity between the two employment surveys was the subject of much debate and discussion late last week. Edwards also called attention to the drop in temporary workers, which he described as “a good indicator of the start of recessions.”
Then, a few paragraphs later, Edwards cited an expected surge in apartment supply as a likely precursor to lower shelter inflation in 2024, and said that although that’ll probably “drag core CPI lower,” the Fed “do[esn’t] need to wait.”
Why? Why shouldn’t the Fed wait on additional evidence that inflation is on its way back to target? Well, because as Albert observed (and as he illustrated with the chart above) core PCE “is already below 2% on a six-month comparison.”
And yet, having laid out not only the case for a continued decline in core inflation, but also the case for an outright recession, Edwards, apparently unable to help himself, attributed the Fed’s dovish pivot to a desire on the Committee to undercut Donald Trump’s reelection bid and/or bolster Joe Biden, which he called a “Sad!” example of politiczation.
Maybe — and I’m just tossing this out there — the Fed’s dovish pivot was attributable to precisely the same macro factors that Edwards mentioned. Maybe Jerome Powell has simply come to the same conclusion as Albert about inflation and the economy based on the data.
Perhaps Albert’s consuming too much online agitprop. Or maybe he doesn’t realize what he’s consuming actually is agitprop. Or, less likely, he’s forgotten that the Fed was never apolitical, something Trump not only understood, but in fact openly sought to leverage and otherwise exploit.
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