Friday, December 18, 2015

Société Générale's Albert Edwards: Janet, It's Too Late Baby Now, It's Too Late

For some reason I have Albert singing to Janet Yellen in my head.
This has been going on since we posted "Société Générale's Albert Edwards On Flirting and Rejection" back in August. Today it's a  Carole King medley.

From ZeroHedge via Before Its News:
In the aftermath of the Fed’s first rate hike, SocGen’s famous skeptic and “Ice Age” deflationista, Albert Edwards, who formerly called Alan Greenspan an “economic war criminal”, unloads on Yellen and says that not only is the Fed’s hike too late, but that the “Yellen Fed will soon be treated with the same contempt the Greenspan Fed was in the aftermath of the 2008 financial crisis.”

Cutting right to the chase, Edwards thinks the “Yellen Fed will go down in infamy as deliberately stoking up yet another massive financial bubble. But unlike the start of the last tightening cycle in 2004, this time the corporate bond market is already severely stressed and it may take just a tiny pin-prick to burst open the putrid excess.“

To prove his point, Edwards shows the following chart which demonstrates the rampant bank credit growth unleashed by ZIRP, most of which has gone to fund stock buybacks as we showed in the past…
… and says that “in the wake of the 2001 recession, an extended period of corporate de-leveraging to unwind the excess of the tech bubble led the Fed to maintain loose monetary policy for far too long. By the time it eventually began to tighten, in June 2004, household debt growth rampant and eventually blew up the economy. This time around it will be no different, credit growth has already reached peak historical rates. In short Janet ?- It?s too late!”

He then attempts to answer what is perhaps the most important question: where in the business cycle is the US economy, for which he uses several charts, chief among which is the following which “nicely sums up the failure of the Fed?s strategy: the household savings ratio has stubbornly remained above 5% despite the Fed pumping household net wealth (which includes housing wealth) back up to all time highs (see chart below). The Fed would have hoped for a far larger decline in the ratio to boost GDP (savings ratio below is inverted).
He then shows a chart we have used on numerous occasions, perhaps the only chart which matters, this time in an iteration created by SocGen’s Andrew Lapthorne, which “compares the quoted sector net debt (net of cash) explosion to profits. This is 100% attributable to the Fed’s excessively loose monetary policy.  Bernanke et al still blame excess global, and especially Chinese, savings for fueling the 2004-8 boom and bust cycle, claiming there was nothing they could have done to stop it. Let’s see who Yellen blames this time around!”
Edwards then focuses on a chart which we first showed one month ago, which very clearly shows that virtually every raised through debt has been used, over the past two decades to buyback socks.
But it’s not just the use of debt-funds. The problem is that as debt built up, it did not create incremental cash flow, and as Edwards observes, key metrics such as EV/EBITDA show stock market valuations back to all time highs “and well in excess of PE measures.” The take home: “it is very difficult to find any cheap stocks.”
Edwards then goes on a tangent to explain the recent cardiac arrest of the junk bond market: 
For those of us who have been warning for some time of the ever expanding bubble of US corporate debt, the recent problems in the corporate bond markets come as no surprise. There is a limit to how much degradation of corporate balance sheets bond investors are  prepared to tolerate. Hence the rapid widening out of junk bond spreads in the second half of last year was ultimately the result of the Fed’s free money policies. Widening spreads were not just as many claimed merely due to problems within the energy sector. Spreads were also widening noticeably even if the energy sector was excluded. 
Edwards, therefore, thinks the bond market is saying two things: “the party’s over and bond investors who always tend to be more sober types, realize this and have headed for the exits whereas equity investors are so intoxicated they haven’t realized that the music has stopped. 
Equity investors are still gyrating around the dance floor – just as in 1999 and 2007.
And the second thing the bond market is telling, is that “there is excess leverage in the US corporate sector, it doesn’t help that both corporate profits and revenues are now falling.” 
The most visible way to see this, is by looking at nominal business sales and inventories which have been contracting all year as we have shown previously, however with sales sliding far worse than GDP-building inventories. And while Edwards amusingly notes that while the weakness was initially attributed to “cold weather”, the “chilly data has not gone away, as a combination of rising unit labor costs and weak pricing power have led to a typical late cycle decline in profit margins.” And what is scariest for US GDP is that as we predicted over the summer, with sales continuing to decline, the fragile US recovery now runs the risk of an end-cycle inventory liquidation....MORE
Our last few Albert posts:

Société Générale's Albert Edwards: Emerging Market Currencies Will Fall As US, Euro Economies Collapse

Société Générale's Albert Edwards: We Are Doomed

Société Générale's Albert Edwards Not His Usual Jolly Self 
Music For Albert Edwards. On A Cold Day. In February

Société Générale's Albert Edwards Descends Into A Nightmare World of Dream Demons and Market Depravity

Société Générale's Albert Edwards Is Not Dead

Nor is he restin'. Beautiful plumage though.
Société Générale's Albert Edwards Is Worried
Société Générale's Albert Edwards Is Bearish (and possibly suffering from a mental disorder)

Albert appears to have begun speaking in clichés which is one of the hallmarks of the mental disorder jargonaphasia, more below. Here's Mr. Edwards at CNBC, see how many clichés you can find: