Albert Edwards: "Let Me Tell You How This All Ends"
By Tyler Durden
The dollar's recent rapid slide has been accompanied by a constant backdrop of dovish cooing from the Fed. Until this week, SocGen's Albert Edwards notes that both equity and commodity markets had embraced the weak dollar as the elixir to solve all their ills. That relief, however, has now proved fleeting as fear of weak economic activity has reasserted its influence on investors. The weak dollar, Edwards warns, should be seen as merely a shuffling of deckchairs on the Titanic before the global economy sinks below the icy waves.
Risk assets are once again refocusing on the increasingly dismal prospects for global growth rather than the short-term relief of dollar weakness, according to SocGen's inimitable Albert Edwards. The US remains the main concern, although the rapid unravelling of Abenomics in Japan and a likely imminent tightening of monetary policy in China to snuff out yet another housing bubble in the major cities also feature high on investors’ worry list.
But it is in the US that growth concerns remain most intense, with renewed weakness in the manufacturing ISM as we move into Q2 following on from the moribund 0.5% qoq Q1 GDP outturn. Yet there was some optimism around after the GDP release that non-farm businesses inventories have risen at a slower pace ie only $61bn in Q1 2016 against $87bn in Q4 2015 and a much faster $110bn pace in H1 2015. The slower pace of increase means that non-farm inventories have been a drag on GDP for three successive quarters, deducting an annualised 0.22% from Q1 GDP (and 0.12% and 0.8% in the two previous quarters). If you think that means that the inventory problem is solved though, think again. It’s not the level of inventories that are the problem, but the level relative to sales which are at heights normally seen preceding or at the depths of recession (see chart below).
It is disturbing for the growth bulls that the recent slower pace of inventory accumulation has made absolutely no dent on this overhang. We remind readers of our view that it is the business investment cycle (fixed and inventory) which, despite comprising only 15% of GDP, ’causes’ recessions in an accounting sense. The chart below shows that when yoy GDP is negative, the contribution of business investment to that decline is virtually 100%, ie recessions would seldom occur in the absence of the business investment cycle. With the US whole economy now plunging, the continuing inventory overhang is an increasingly precarious sword of Damocles hanging over investors’ heads as profits swoon and liquidation beckons.
In addition to Edwards reality check, Andrew Lapthorne, SG’s quant guru, has been flagging the following chart to clients… Firstly, we all know by now that US companies consistently put the most optimistic spin on earnings to gratify both analysts that follow their companies and investors who want to hear good news. These manipulated earnings are what is reported each quarter and referred to as pro forma earnings. Andrew points out though that …read more
Source: Albert Edwards: "Let Me Tell You How This All Ends"
