Albert Edwards: ‘Investors Demand A Sign Of When To Get Out And That Trigger May Have Just Arrived”

With every other bear throwing in the towel left and right these days, we fully expected that the latest letter by SocGen’s Albert Edwards would have something about “how much he hates looking at himself in the mirror, but…” and then we would be served with some garbage like the following margin expectations chart.

Luckily none of that happened. Instead we were greeted by the sharp insight and keen intellect that we have grown to expect from AE, and that have disappeared from the repertoire of so many other sellouts and lemming cheerleaders. Ironically, the topic of Edwards’ latest piece is precisely the chart above – the explosion in future margins, or rather the complete lack thereof. In fact, what Edwards is seeing is quite the opposite. To wit:

The margin squeeze that is unfolding as unit labour costs climb above company selling price inflation…

 

 

… leaves the economy extremely vulnerable to a downturn in the investment cycle. Business output inflation is measuring a wider basket of goods and services than the Fed?s favoured measure of inflation, the core personal consumption expenditure (PCE) deflator, but it does move in a very similar fashion (see chart below). Low pricing power is leaving the US economy more vulnerable than many suppose. In my view, a full-blown profits and investment downturn is most likely to be triggered by Asian and EM devaluations releasing surplus capacity onto the West and crushing pricing power even further. As Ian Harwood, my former boss used to say, ?”Watch the profit cycle closely. We ignore it at our peril?.”

 

This is a useful follow up to our earlier observations on the current status of the leverage cycle, when we noted that while the business cycle may be dead, but if it isn’t we are now on the verge, if not have entered a full-blown recession.

We have, on these pages, long believed that corporate profits should be watched closely, not for their direct impact on equity valuations, but their impact on the economic cycle. Most economic models have profits dropping out as a residual, but they are a key driver of the economic cycle. Growth in profits determines the growth of investment, inventories and employment. (Note I emphasise the growth, and not the level, of profits or the rate of profitability).

 

Over the years I have tended to focus on US pre-tax domestic non-financial profits as a best lead indicator for US-based company business spending. In the chart below I show this profits measure together with real growth in business investment, including inventories. Profits growth typically leads investment spending.

 

 

If we can get a handle on the profits cycle we can avoid being caught out by the investment cycle and recessions. Typically it was said that ?recessions were made in Washington? as the Fed jacked up rates to fight inflation. This not only curbed the credit cycle but squeezed corporate profits to the point that it triggered a downswing in the investment cycle and ?caused? a recession.

 

So in many investors? minds a recession will not occur unless the Fed triggers one with monetary tightening. That is of course nonsense. A credit bubble can burst without any monetary tightening and similarly the profit cycle can turn down due to a variety of factors.

This is a critical observation, one that everyone ignores, and one which as the first two charts above show, means that unless the Fed proceeds to inject funds directly into corporate revenues (there is a reason why revenues will have declined for 3 quarters in a row), one can kiss not only the idiotic hockeystick forecast margin chart goodbye, but that negative margins, and earnings, are just around the horizon.

Edwards’ conculsion is simple: if the US economy continues on the current track, an economic decline is inevitable, which in turn will crush confidence in the Fed, and make future monetary policy prohibitively costly:

… a recession seems a distant prospect in the minds of most investors. Yet one key precursor for a recession has now fallen into place. Slowing productivity growth means that unit labour costs are now running well ahead of output price inflation. This means a margin and profits downturn is now about to unfold. That typically is a key precursor of recession.

Finally, for those who are will be quick to acuse Edwards of crying wolf, he has a few words for you too:

That confidence in a long cycle comes partly with a high level of certainty that the monetary authorities remain in control of the economic cycle. The doomsayers who predicted that this recovery was on the verge of faltering have been proved wrong, and like the boy who cried wolf, can be safely ignored by the market. Yet that is exactly what happened in 2006 with the US consumer and housing boom, where the voices of caution had been so wrong, for so long, that their Cassandra-like utterances were ignored. Cassandra?s forecasts may have been ignored, but they proved to be correct. Investors demand a sign of when to get out and that trigger may have just arrived.

Crying wolf or not, what Bernanke and his central-planning henchmen are now doing, is simply delaying the inevitable day when realty finally catches up with every cycle, and law of nature that the Fed, courtesy of hundreds of billions of de novo liquidity, has – until this point – successfully deferred. The problem is that perhaps the most important law – that of diminishing returns – is now fianlly breathing down Mr. Chair(wo)man’s neck.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-M9ngJLC3tk/story01.htm Tyler Durden

Bitcoin Value Tops $1,000, Joe Biden Is Our Man in Asia, Judge Orders Hot Sauce Factory to Stink Less: P.M. Links

  • Just think of all the drugs you can buy!The value of a bitcoin topped
    $1,000
    at Mt. Gox for the first time today.
  • To ease tension between China and other Asian nations over
    disputed ownership of some South China Seas Islands, the United
    States will be sending …
    Joe Biden
    .
  • A judge has ordered a
    Sriracha chili sauce factory
    in California to stop whatever
    operations are causing neighbors to complain about the smell, but
    stopped short of ordering the whole thing shut down.
  • A British couple has lost its fight with the UK Supreme Court
    to
    deny a room to a gay couple
    at their bed and breakfast because
    of their religious objections to sex outside of marriage. They were
    ordered to pay damages.
  • Three have been killed in Sao Paoli, Brazil, after a
    crane collapsed at one of the stadiums
    being built for next
    summer’s World Cup.
  • A Democratic Colorado state senator targeted for recall over
    her vote for the passage of gun control laws has
    announced her resignation
    . If she fought the recall and lost,
    Democrats would have lost control of the state senate. This method
    will allow Democrats to choose her replacement until the next
    election.

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from Hit & Run http://reason.com/blog/2013/11/27/bitcoin-value-tops-1000-joe-biden-is-our
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J.D. Tuccille on Sex, Drugs, and Sociology

J.D. Tuccille reviews Floating City: A Rogue
Sociologist Lost and Found in New York’s Underground Economy
.
The book is a memoir of sociologist Sudhir Venkatesh’s years
spent penetrating New York City’s vast underground economy, with an
emphasis on cocaine and sex. Black markets have always existed to
provide goods and services that people want and that governments
don’t want them to have, says Tuccille. Floating City is a
fascinating glimpse at just how adaptable and real those markets
are.

View this article.

from Hit & Run http://reason.com/blog/2013/11/27/jd-tuccille-on-sex-drugs-and-sociology
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Biden To Visit Asia Amid Heightened Tensions

On December 2, Vice President Joe
Biden will head to Asia. The news of the visit comes amid rising
tensions between China and Japan regarding sovereignty over a group
of small uninhabited islands. The ongoing dispute over the islands,
referred to in China as the Diaoyu Islands and in Japan as the
Senkaku Islands, recently intensified when China announced the
introduction of an air defense zone that covers the islands.
According the
BBC
, the Chinese government has said that any planes within the
zone “must obey its rules or face “emergency defensive
measures.”

Since the introduction of the zone two unarmed American B-52
bombers have flown over the disputed islands. The
Chinese defense ministry
has said that the planes were
monitored.

Commercial Japanese planes
defied
the rules relating to the newly introduced zone,
ignoring Chinese authorities while flying through it.

The BBC has a map outlining the extent of the new Chinese
defense zone, shown below (the Chinese Defense Ministry and
the EIA are credited):

Yes, the islands that are the cause of all the recent fuss are
so small they cannot be seen on the map. Put together, the islands
have an area of less than three square miles. 

More from Reason.com on China here

from Hit & Run http://reason.com/blog/2013/11/27/biden-to-visit-asia-amid-heightened-ten
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Ill. Lawmakers Reach Deal on State Pension Crisis

Expect to be surrounded by union protesters in 10, 9, 8 ...It’s too soon to see if there’s
anything for Illinois taxpayers to be thankful about, but lawmakers
on both sides of the aisle in Democrat-controlled Illinois have
announced a deal to manage the state’s massive unfunded pension
liabilities.
From the Chicago Tribune
:

Top Illinois legislators said today they’ve reached agreement on
a plan to deal with the state’s worst-in-the-nation unfunded public
pension liability and expect to vote on it next week.

Details of the measure were unclear today and its prospects of
passing remained  uncertain. But both Democratic and
Republican leaders said they agreed on a proposal, the first such
sign of progress in more than two years of discussions spurred by a
continued downgrading of the state’s credit rating.

The debate has centered on how to reduce costs while balancing
the legal protections to public employee retiree benefits laid out
in the state constitution. The public employee unions have
repeatedly threatened to challenge in court any pension proposal
that lacked their support, and they were quick to criticize today’s
announcement.

Though the Tribune doesn’t have full access of the
deal’s contents, here’s what they were told:

[Senate Republican leader Christine] Radogno said the proposal
would save about $160 billion and the goal is to fully fund the
pension system over the next 30 years.

The proposal would raise retirement ages, create an optional
401(k)-styled plan and scale back the cost-of-living increases.

Increasing the retirement age, now set at various levels based
on the type of work, would impact the youngest workers the most.
Younger workers could see up to five years added to their
retirement ages, Radogno said.

The cost-of-living adjustments would be altered “to be sure that
the lower-paid, longest-serving employees have the biggest
protection,” said Radogno.  It would be largely patterned
after a provision she pushed and was included in a bill that
Speaker Michael Madigan passed in the House.

Union officials, despite not knowing what’s in the full plan
yet, put out a statement that the proposal was unfair and
unconstitutional. Democratic Gov. Pat Quinn supports the plan.

There will be a special one-day session on Dec. 3 to vote on the
proposal. The Tribune notes that the date of the vote
comes the day after the filing deadline for the March 2014 primary.
Suggested, but not stated outright: Democrats will know if they’re
going to face union-funded primary challengers before they
vote.

from Hit & Run http://reason.com/blog/2013/11/27/ill-lawmakers-reach-deal-on-state-pensio
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PTC cop report: Move along, nothing to see here

Consultants: No major problems in PTC Police Department; no complaints from female officers; pay is an issue

A consulting firm’s detailed evaluation of the Peachtree City Police Department revealed that while statistics show the department is very effective in its law enforcement duties, low morale is an issue among some employees.

The report, conducted by Matrix Consulting Group at the behest of City Manager Jim Pennington, is based on an anonymous survey of 40 of the department’s 72 employees along with a detailed analysis of statistical data and staffing levels.

read more

via The Citizen http://www.thecitizen.com/articles/11-27-2013/ptc-cop-report-move-along-nothing-see-here

Record Dow, Nasdaq, S&P, Russell, Bitcoin And US Debt

Volumes – expectedly – were extremely light and so, we all know what that means: a dash for trash meltup. NASDAQ keeps powering ahead as the S&P and Dow recover from yesterday afternoon's cliff dive. Trannies now up 13.3% off the debt-ceiling lows 5 weeks ago… sure, why not. "Most shorted" names outperformed once again but it seems investors, while not wanting to sell, are happy to bid for protection as VIX diverges. Credit markets also diverged bearishly today. Stocks disconnected (a la yesterday) from JPY carry briefly but rapidly caught up in the low volume churn. Bonds leaked higher in yield (unch on the week now); the USD pushed higher after Europe's close (back to unch on the week); but inventories and USD strength weighed on oil prices and precious metals limped modestly lower.

 

NASDAQ is playing catch-up to the Trannies…

 

The "most shorted" names continue to push higher on momentum from yesterday's major squeeze after the attempt to sell on Monday…

 

Another day of divergence and convergence with JPY carry trades – this time sellers banged higher by the carry arbs…

 

VIX has been relatively well bid for the last week as managers appear loathe to sell but desirous of protection (VIX is notably rich relative to realized vol)…

 

Credit markets diverged notably on the day…

 

Oil slumped and commodities in general slid lower…

 

The USD rallied back to unch on the week led by notably JPY (and AUD) weakness…

 

 

Finally, putting everything into perspective, US Federal debt joined the party, obviously, and just printed at a fresh all time high of just over $17.2 trillion

 

Charts: Bloomberg

Bonus Charts: Give Thanks…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jnuBtfQswww/story01.htm Tyler Durden

Record Dow, Nasdaq, S&P, Russell, Bitcoin And US Debt

Volumes – expectedly – were extremely light and so, we all know what that means: a dash for trash meltup. NASDAQ keeps powering ahead as the S&P and Dow recover from yesterday afternoon's cliff dive. Trannies now up 13.3% off the debt-ceiling lows 5 weeks ago… sure, why not. "Most shorted" names outperformed once again but it seems investors, while not wanting to sell, are happy to bid for protection as VIX diverges. Credit markets also diverged bearishly today. Stocks disconnected (a la yesterday) from JPY carry briefly but rapidly caught up in the low volume churn. Bonds leaked higher in yield (unch on the week now); the USD pushed higher after Europe's close (back to unch on the week); but inventories and USD strength weighed on oil prices and precious metals limped modestly lower.

 

NASDAQ is playing catch-up to the Trannies…

 

The "most shorted" names continue to push higher on momentum from yesterday's major squeeze after the attempt to sell on Monday…

 

Another day of divergence and convergence with JPY carry trades – this time sellers banged higher by the carry arbs…

 

VIX has been relatively well bid for the last week as managers appear loathe to sell but desirous of protection (VIX is notably rich relative to realized vol)…

 

Credit markets diverged notably on the day…

 

Oil slumped and commodities in general slid lower…

 

The USD rallied back to unch on the week led by notably JPY (and AUD) weakness…

 

 

Finally, putting everything into perspective, US Federal debt joined the party, obviously, and just printed at a fresh all time high of just over $17.2 trillion

 

Charts: Bloomberg

Bonus Charts: Give Thanks…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jnuBtfQswww/story01.htm Tyler Durden

David Stockman Fears "Panic" When The "Lunatic" Fed "Loses Control"

“It’s only a question of time before the central banks lose control,” David Stockman warns a shocked CNBC anchor, “and a panic sets in when people realize that these values are massively overstated.”

The outspoken author of The Great Deformation rages “the Fed is exporting its lunatic policies worldwide,” as central banks around the world have followed the Fed’s lead, “for either good reasons of defending their own currency and their trade and their exchange rate, or because they’re replicating the Fed’s erroneous policies.”

If one cares to look, Stockman adds, “there are bubbles everywhere,” citing Russell 2000 valuations of 75x LTM earnings as an example, “that makes no sense. It’s up 43% in the last year, but earnings of the Russell 2000 companies have not increased at all.” This is dangerous, he strongly cautions, “I haven’t seen too many bubbles in history” that haven’t ended violently.


“I’m not drinking the Kool-Aid…”

“Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere.” 

 



    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/i7F8GkWCJU4/story01.htm Tyler Durden

David Stockman Fears “Panic” When The “Lunatic” Fed “Loses Control”

“It’s only a question of time before the central banks lose control,” David Stockman warns a shocked CNBC anchor, “and a panic sets in when people realize that these values are massively overstated.”

The outspoken author of The Great Deformation rages “the Fed is exporting its lunatic policies worldwide,” as central banks around the world have followed the Fed’s lead, “for either good reasons of defending their own currency and their trade and their exchange rate, or because they’re replicating the Fed’s erroneous policies.”

If one cares to look, Stockman adds, “there are bubbles everywhere,” citing Russell 2000 valuations of 75x LTM earnings as an example, “that makes no sense. It’s up 43% in the last year, but earnings of the Russell 2000 companies have not increased at all.” This is dangerous, he strongly cautions, “I haven’t seen too many bubbles in history” that haven’t ended violently.


“I’m not drinking the Kool-Aid…”

“Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere.” 

 



    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/i7F8GkWCJU4/story01.htm Tyler Durden