Following on our earlier outro note, here's The Heisenberg Report:
SocGen’s Albert Edwards has seen a lot over four decades in finance. As such, he didn’t think there were any surprises left. Or at least none that would count as surprises to him.
But in a new note, Edwards described both the scope and prevalence of “Greedflation” playing out across the world’s largest economy as unprecedented, and thereby “astonishing.” The situation is so acute that Albert wonders if capitalism might be broken or even “dead.” (Say it ain’t so!)
If you ever get to the point in life when you think you might’ve seen it all, don’t despair. Because somewhere in America, predatory, hyper-capitalism is manifesting in wholly egregious outcomes capable of surprising even the most hardened veterans of the cruel game we euphemistically call “life.”
Tuesday wasn’t the first time Edwards addressed the pandemic-era Greedflation. He talked about it late last month too, but he’s more alarmed than he was just a few weeks ago.
“The latest BEA data shocked me because I had expected margins to have declined sharply, mainly because that is what stock market margins data had suggested. How wrong I was!” Albert exclaimed. The figure below illustrates the point.
Suffice to say margins remain close to all-time highs, and bear no resemblance to cost pressures.
Why is that astounding or “perplexing,” as Edwards put it? Well, because “profit margins normally expand and contract in a predictable manner in line with the economic cycle,” Albert wrote, noting that as cost pressures crescendo near the end of the cycle, margins start to compress even if output prices rise. The oval annotations on the chart show that rising cost pressures and falling margins typically presage recession. “This iron law of the cycle was even true during the inflationary 1970s,” Edwards said.
He walked through various BEA profit series, before ultimately plotting national post-tax profits excluding inventory valuation and capital consumption adjustments with pre-tax domestic, non-financial profits including those adjustments. The former is roughly consistent with S&P profits as you see them, and the latter Albert described as “the best underlying measure of US corporate profitability.”....
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