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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Last week we noted that a lot depends on SocGen’s Albert Edwards not throwing in the towel on bearishness, which really would be a sign of end-of-times that the top was in.
Fortunately his latest note is true to gloomy form, and features his award for the most “bonkers-on-stilts” chart of 2024:
Edwards argued that this huge surge in corporate profits as a percentage of GDP — even after a 20-year secular increase — is partly due to “greedflation” (with corporate pricing outpacing labour costs) but is mostly attributable to America’s “fiscal dysentery”:
. . . It is easy to rationalise the US valuation excess. We all know the arguments because we hear and read them almost every day. In essence, the argument is that US stocks deserve a huge premium because profits are growing much faster in the US than in any another major economy, a trend likely to continue given its dominance in tech related companies. That makes some sense — even to a bear like me!
But one simple driver of the success of US inc is often overlooked. The US government deficit since Covid has remained super expansionary at around 7.5% of GDP in 2023, 2024 and forecast for 2025 (IMF data). This compares to the eurozone and even Japan (for example) with deficits of ‘only’ 3% of GDP. That’s a big gap.
We think many investors widely under-appreciate how crucial US fiscal dysentery is as the propellant of far superior US profits growth which in turn ‘justifies’ far higher equity market valuations. It is much ‘sexier’ to latch onto a story around US corporate exceptionalism in tech. Understanding the true (fiscal) source of US corporate superior profits growth gives us a handle on figuring out just how sustainable the US equity bubble is.
Naturally Edwards thinks the end is high — highlighting how the US unemployment rate this year moved above its 36-month moving average, a reliable indicator of an incoming recession, he reckons.
Be alert: a recessionary crossover occurred in May 2024 but to add to the caution, the 36m mav (dotted line) just started rising too in November, which usually only ever happens deep into a recession. Either this time is different, or the US might just be slip-sliding into a profits crushing recession.
Nature is healing etc.
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