US Economy

US recovery is heading towards its death: SocGen's Edwards

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Societe Generale's resident uber-bear, Albert Edwards, says the very long economic recovery underway in the U.S. is gearing up to suffer a "very traditional death" as consumption will likely crumble under rapidly stepped-up inflation and tighter monetary conditions next year.

In Edwards' own words, "Even if the Fed refuses to tighten, monetary conditions will tighten dramatically anyway as bond yields and the dollar surge, exacerbating the profits recession."

"The surge in headline inflation from zero to 2.5 percent-3 percent in Q1 next year is likely to crush consumption," he continued, adding, "The expected expansion of the fiscal deficit under Trump will not prevent this happening in 2017 as it will come too late – in 2018/19."

Edwards breaks down the recent spike in nominal bond yields by pointing out it has been driven by spiraling inflation expectations with real yields staying relatively steady. An anomaly in the current situation, he says, is that this has occurred without an accompanying surge in oil prices.

However, what has risen more quickly than acknowledged by the U.S. Federal Reserve or the broader market, in his view, is real wage inflation, partially disguised by the weakness of nominal wage inflation given subdued consumer price index (CPI) inflation.

But as we move into an era of higher CPI inflation, Edwards warns that it is such real wage inflation that will slip to zero before long.

According to Edwards, "We might quibble about how much nominal wage inflation might accelerate in a weak economic and corporate profits environment, but accelerate it will."

Why this is so important, he notes, is that it is likely to propel the Fed into action.

Speaking about the U.S. central bank, he says "to those who retort that the increasingly weak economy in H1 2017 means they should not tighten, I would probably agree. But that doesn't mean the Fed won't be forced into it by surging wage inflation."

The knock-on effect for bonds will come through in the form of a continued rise in yields over the next six months with the trend upwards now having become a momentum trade with investors "looking for a narrative to support the direction of travel".

For a technical perspective, Edwards turns to fellow Société Géneralé analyst Stephanie Aymes who believes if 10-year yields break above 2.28 percent, they could go all the way to 3.00 to 3.38 percent.

However, this, he says, will represent merely a short-lived move.

According to Edwards, "Any further sell-off in Treasuries would be a brief interlude before the next recession takes us to a panic-ridden Fed moving to helicopter money, negative Fed Funds, and US 10 year Treasury yields converging with Japan and Germany at around minus 1 percent."

Federal Reserve Chair Janet Yellen
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While Edwards' bearish thoughts and predictions are widely read by colleagues and rivals at fellow banking organizations, they do not always come true.

In September 2012, he announced the U.S. was in recession and Wall Street would soon react, and warned of an"ultimate" death cross for the S&P 500—where the 50-day moving average falls below the 200-day trend line. Instead the S&P 500 continued to rally, and has gained around 40 percent since Edwards' pronouncement.

In November 2013 and in March 2014 he also released notes that predicted imminent U.S recessions and spoke of declining U.S. profits.

Matt Clinch contributed to this article.

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