No, the sky is not falling…yet. But according to Societe Generale’s most famous perma-bear, Albert Edwards, you might not have to wait long. In the September 24th edition of SG’s Global Strategy Weekly, Edwards says that a closer look at Chinese economic data shows that China has already “hard landed”, the rest of the world just hasn’t figured it out yet.
Always looking at the bright side, Albert Edwards (together with his colleague “Bob the Bear” Janjua (Nomura)) also suggests that another recession is imminent, and that interest rates are likely to hit -4% or -5%.
He notes: “The next US recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed. Bob and I thought this time we would see deeply negative interest rates in the US (and Europe).”
Albert Edwards on China hard landing
Edwards highlights that the Chinese slowdown was cited as a key reason why the Fed stayed their hand and did not raise interest rates. Societe Generale’s China economist Wei Yao goes so far as to say that the industrial and construction sectors in China have already “hard landed”. He notes that “the acceleration in financial sector GDP alone explains 1% of the 7% real GDP growth in China in H1 15, but that should unwind following the recent stock market turbulence (see charts)!”
The charts contrast the almost zero nominal GDP growth of China’s secondary sector (construction and manufacturing) with the more positive tertiary (services) sector. In both real terms and adjusting for accurate measurement with the GDP deflator, SG’s Wei anticipates that real GDP data will get worse before it stabilizes
Albert Edwards says: “My own view is that things will get much much worse. But the key message is that when it comes to things that matter to the rest of the world, China has already hard landed!”
Edwards says recession approaching
According to Edwards, the Fed’s reluctance to tighten as they have historically as the credit cycle accelerates means “it might be getting too late for this cycle.”
He also highlights Andrew Lapthorne‘s observation that consensus analyst forward earnings projections have turned negative yoy in the U.S., which has only happened in recessions historically.
A number of analysts have argued that the slippage in overall U.S. profits is directly related to the decline in the oil price hammering energy companies. However, SG’s head of credit strategy Guy Spear observes that spreads have been moving up quickly ex-energy. Edwards notes that rising spreads are not isolated to the energy sector just like they weren’t isolated in the sub-prime sector eight years ago.
He argues this is more evidence a recession is coming: “Clearly the heavy issuance of debt we have seen in recent years to buy back equity is beginning to prompt an investor revolt – typical towards the end of an economic cycle.”