Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation, ECRI explains, is simple: recession kills inflation. For all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009. The 'r' word is seldom heard on the lips of the mainstream media - how absurd - but as SocGen's Albert Edwards notes, if anyone is waiting for the ISM to tell them that a recession has started in the US, they are looking at the wrong data. Much more importantly, Edwards explains, we may well be in for a double dose of bad news - both falling revenues and falling margins. History suggests this as good a leading indicator as any other for whether the US economy will endogenously fall back into recession.Via SocGen's Albert Edwards:
One of the axioms of economics I have always had a great deal of faith in is that profit margins mean revert.
But unfortunately at the height of a recovery most commentators forget this as they become intoxicated by the equity market's prior stellar performance and tend to continue to price the market off analysts' forward earnings - which inevitably always forecast further healthy gains ahead. Even the use of trailing earnings for PE calculations tends, in retrospect, to be too optimistic. That is why cyclically adjusted PEs are so important.
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excluding financials, profit margins have failed to break out above their usual range. As night follows day, the market should be pricing in a decline in the margin cycle from here.
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See also our April 2011 post:
Climateer Line of the Day: Jeremy Grantham on Profit Margins Edition
And last month's:
Société Générale's Albert Edwards on Copper: We Are Doomed (and that's the good news)
