Albert Edwards, Societe Generale's uber-bearish strategist, has once again taken aim at economists bullish on the U.S. economy, highlighting a contraction in corporate profits that could leave the country exposed to external shocks and an "inevitable" recession.
Edwards said economists used "dodgy" metrics to gauge profit and pointed to the MSCI Operating Profits Indicator - as the one measure that investors should watch.
This indicator – which tracks trailing U.S. company profits for the last 12 months - highlights the rate of corporate growth and is favored by Edwards over any outright profit level, rate of profitability or profit margin level indicator.
It's recent readings paint a gloomy picture ahead for the U.S. economy, according to Edwards. He said profits started declining in the fourth quarter, according to the MSCI definition, and that this was likely to lead to a slump in business investment.
"U.S. profits have begun to decline on a MSCI trailing basis," he said in research note released on Tuesday. "A decline in profits is inevitably followed by recession shortly thereafter, as investment, the most volatile of all GDP (gross domestic product) components, is cut."
Edwards downplays other economic indicators for being too favorable and said any healthy rise in profits could be put attributed to company-specific write-downs made back in 2012.
He also criticized "pro-forma", or projected, earnings numbers as "artificially inflated" and designed at steering attention away from the "bad stuff". Edwards saw a growing gap between these pro-forma numbers and the MSCI reported profits indicator and said this was an indication that the quality of earnings was deteriorating.
"It will be extremely difficult for the U.S. economy to escape its Great Recession hangover with this poor profits backdrop. Indeed it leaves the economy extremely vulnerable to adverse shocks," Edwards said.
One of these adverse shocks could be a Asian and EM (emerging market) currency devaluation releasing surplus capacity onto the West, and crushing pricing power further, according to Edwards. This topic has formed the backdrop of most of his research notes since August last year.
It's also not the first time that Edwards has made bearish predictions about the U.S. economy, warning about a downturn in productivity and profits at the end of 2013.
Back in September 2012, he said the U.S. had already entered a recession and it wouldn't be long before the equity market reacted. He also warned about the "ultimate" death cross for the —where the 50-month moving average falls below the 200-month moving average. However, since that call, the S&P 500 has risen nearly 40 percent.