A few days ago, SocGen’s head of US equity strategy, Manish Kabra, officially upgraded US consumer stocks citing lower mortgage rates, the prospect of cheaper oil in 2025 and low household leverage.
On Wednesday, the bank’s one-man “alternative strategy ‘team'” unofficially downgraded US consumers citing “a very loud warning claxon” emanating from a sub-3% saving rate.
As most readers have already surmised, the man I’m referring to is Albert Edwards, the only strategist on the planet who still vaguely entertains the idea that the S&P might one day revisit the “cycle” lows, where that doesn’t mean the October 2022 lows, but rather the March 2009 lows, at 666.
In his latest, Edwards emphasized that contrary to the fatalistic sighs of critics who gave up on his missives forever ago, he does know what he’s talking about. Occasionally. “The saving rate is one of the few things I confidently claim to know something about, having started my career 40 years ago by working on the personal sector at the Bank of England,” Albert wrote, adding that, “If boring people about the intricacies of the SR were an Olympic event, I would have been on that podium winning a gold medal.”
To the extent Albert did bore anyone all those years ago with deep-dives into household balance sheet trends, he more than made up for it over a very long career defined by a penchant for hyperbole and crash calls the likes of are, without exaggeration, unrivaled by any sell-side analyst who’s ever put pen to paper, let alone one who’s survived in the job for as long as Edwards has.
Anyway, Albert’s overarching point on Wednesday was that a very low saving rate is a canary, and that once it starts to rise, a recession’s not far behind. Recall that the saving rate dropped below 3% in the last PCE update. That, Edwards remarked, is “something only previously seen on a sustained basis in the giddy days of misguided euphoria in 2005-07 prior to the 2008 GFC.”
The good news is, the private sector’s not running the kind of deficit it was just prior to the crisis (see the chart on right-hand side, above).
But when you’re Albert, the good news never (ever) outweighs the bad. “Any rise in the SR will slow GDP growth sharply,” he warned.
The figure below shows you the relationship between GDP and the private sector financial balance as a share of GDP.
Big increases in the private sector financial balance are coincident with recessions. That’s intuitive: Households and corporates retrench as the environment becomes more challenging.
But it goes beyond that. The retrenchment is itself a source of left-tail risk. As Edwards put it, “rising financial balances have on their own often been the cause of those recessions.”
So… SPX 666?
Why stop there? The Dow Jones hit a low of 42 during the Great Depression. History repeats itself. Q. E. D.
Ah, remember the good old days a couple years ago when we were all trying to estimate how large the pool of “excess savings” was?
If SPX hits 666 in the next 2 years, it won’t be b/c of the savings rate.
Given the market structure and a collection of related issues H describes frequently, Oct 2022 low of ~3500 may not be far away in terms of distance or time. But that’s the problem w/ prediction isolated well by ODTEs; the farther out the prediction, the less reliable. How many market participants are looking at a market they presume operates as a long-term investing machine w/o realizing it functions much more often like a collective of nanosecond ‘decisions’ puking up the illusion of “spontaneous order.”
What worries me about a career as unique as Albert’s is the English saying about a broken clock. One of these days he shall himself be surprised and that should worry everyone.
The curves look coincident, neither leads the other, so hard to say that one causes the other.
Tell Albert he can rest assured that his concerns will be revised away soon enough.
I’m seeing the US personal savings rate at 4.8% in August?!
The BEA revised the income series the day after Albert published this. The result of the revisions was to push the saving rate two full percentage points higher for July, which is a polite way of saying what I say all the time: This — macro — is silly. This is all a complete waste of time. It’s a soft science on scientific days and hopeless guesswork on all the others. One day the saving rate is 2.9%, the next day it’s 4.9%. Why do we bother? We could be exercising, watching a sunset, reading or — I don’t know — hugging puppies or something. Anything but obsessing over macro aggregates which plainly have no meaning.
This is exactly how I feel far too often given it is my job to follow these data. That feeling really intensifies around the first Friday of every month.