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Albert Edwards, the longstanding global strategist at SocGen and a 37-year veteran in the battle against optimism, is not only known for his expertise but also for his exceptional writing skills. In his latest Global Strategy Weekly, he captivates readers from the very beginning:
“Have you ever felt like you’re in a car that’s about to crash, with surging US bond yields leaving you powerless to stop it? All you can do is brace yourself and hope for the best.”
This week, Edwards explores whether the increasing uncertainty in the market is causing term premia to rise. Term premia refers to the additional yield that investors demand for holding longer-term bonds. As discussed previously by the Unhedged team, there is a possibility that weakening demand for Treasuries is being overshadowed by increased supply.
Edwards finds generalized fear, uncertainty, and doubt (FUD) to be a more convincing explanation than other possibilities, such as long bonds already pricing in higher long-term interest rates and improved growth prospects. He raises the question of how the real economy and interest rate expectations can be driving markets “in the face of fiscal dysentery.” Edwards draws parallels with the events of 1987 when the equity market’s resilience in the face of rising bond yields eventually gave way to a market crash. He also notes the role of currency turbulence in exacerbating recession concerns during that period. Edwards points out that any signs of a recession now would be devastating for equities, but fortunately, it is not the notoriously risky month of September.
Never before in his career has Edwards witnessed such uncertainty about the current position of the economic cycle. Is a long-awaited recession just around the corner, or are we entering a new economic cycle? Many investors seem to be increasingly convinced that the latter is true. However, Edwards remains cautious and believes that a recession is still imminent, despite his previous predictions being proven wrong so far. He mentions plenty of evidence suggesting an impending recession and encourages readers to consider various indicators, such as the dip in trucker employment shown in a chart from the US Bureau of Labor Statistics, as well as the recent revisions to US GDP and gross domestic income.
Edwards emphasizes the importance of monitoring money supply, a topic he has raised multiple times before. Although economists have become less concerned with money supply in recent decades, Edwards believes it is a mistake to dismiss its significance. He highlights the decline in narrow measures of money supply and the weakness in broader measures, such as the record 1.5% year-on-year decline in eurozone M3 in August.
Edwards circles back to his recent notable finding, “The Maddest Macro Chart He Has Seen In Years.” This chart illustrates the rising borrowing among US non-financial corporations and the collapsing net interest payments. He attributes this trend to companies heavily borrowing at fixed rates during the pandemic and holding the cash at variable rates. While some commentators suggest that this may be a data collection anomaly that will be resolved with methodology revisions, Edwards disagrees. He points out that smaller US companies are facing bankruptcy due to higher rates, while mega-caps appear to be profiting from playing the yield curve. Edwards concludes by once again describing this situation as “mad.”
In summary, Albert Edwards’ latest Global Strategy Weekly captures readers’ attention with a powerful analogy, dives into the rising uncertainty in the market, explores different explanations for the phenomenon, and highlights indicators pointing towards an imminent recession. He calls for caution and urges readers to pay attention to key economic indicators, including money supply. Edwards concludes by revisiting his previous finding on rising corporate borrowing and collapsing net interest payments, emphasizing the diverging impact on smaller companies versus mega-caps.
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