A U.S. recession is on the cards soon as a credit bubble is bursting, Societe Generale strategist and perma-bear Albert Edwards said in a colorfully worded note last week.
“The markets are now sniffing out a rising stench from decaying debt. They say a fish rots from the head down,” he said in a note subtitled, “Are your nostrils finally filling with the sickly aroma of recession?”
While U.S. economic data such as consumer and business optimism are at “extreme highs” and U.S. manufacturing ISM is charging ahead, that’s just the “illusion of prosperity,” he said.
March data released last week showed that U.S. consumer confidence declined as a fewer expected better business conditions and job availability over the next year.
“The extreme monetary policy measures taken since 2008 have inflated yet another credit bubble. As the Fed now tries to normalise rates with an eye on the real economy, unemployment and inflation, it will find that the newly inflated credit system is unable to tolerate even moderate rises in rates,” Edwards added. “There are very worrying signs that yet another Fed-inspired credit bubble is beginning to burst.”
Credit bubble beginning to burst?
He pointed to a surge in charge-offs and delinquency rates on credit card loans at smaller U.S. banks, or those that aren’t in the Top 100 by assets. That figure has risen to 7.9 percent, he noted, citing data from asset management firm TCW, which noted that the larger banks’ rate was less than half that at around 3.6 percent as of the end of 2017’s third quarter.
For the fourth quarter, small banks’ charge offs on credit cards were at 7.2 percent, up from 4.5 percent a year earlier, and compared with 3.5 percent at the largest banks.
“Not much surprises me or shocks me nowadays, but I was truly gobsmacked by the surge,” he said, noting that mortgage delinquencies are also rising. “Surging delinquency and charge-off rates for smaller banks suggest the breaking point for the economy may come sooner than the Fed and bulls expect.”
While Edwards noted that trade friction between the U.S. and the European Union — even more so than China and Japan — remains a major threat to global markets in the near term, he said he was more concerned about the “surprisingly” quick weakening in U.S. and European economic data.
He noted that the U.S. savings rate collapsed last year to only 2.5 percent, near an all-time low, which which he credited with boosting U.S. gross domestic product growth to 2.3 percent last year, from what he estimated would only have been 1.5 percent.
“The risk is now, with the tide going out on the equity market that the savings rate jumps higher, growth flounders, and the iceberg of debt rips open the hull of this supposedly unsinkable economic ship,” Edwards said.