Albert Edwards has risen to prominence in recent years for making some of the most controversial comments on Wall Street. For example, strategists at French investment bank Société Générale memorably detailed the rise of “greed inflation” during the pandemic—the idea that companies are exploiting COVID-19 and the Russia-Ukraine war to boost profits—he It may even threaten the future of capitalism. He warned earlier this month that the current stock market reminded him of the era before the crash of Oct. 19, 1987 – a day known as “Black Monday” when the Dow Jones Industrial Average plummeted 22.6%.
The veteran market observer is known for his pessimistic personality. Over the past two years, he has been one of the leading voices warning that rapid interest rate hikes by the Federal Reserve would ultimately trigger a U.S. recession. Even as the latest GDP forecast for the third quarter gets hotter this week, Edwards remains cautious.
He believes that America’s small businesses are struggling with rising borrowing costs and persistent inflation, and their problems will eventually surface. After years of headwinds and recession forecasts, rising small business bankruptcies will ultimately be the final nail in the coffin of the U.S. economy. “The vast majority of economists are shying away from their calls for a recession,” he wrote in a report Thursday. “The idea that we are at the beginning of a new economic cycle seems absurd to me.” Edwards elaborated his reasoning, specifically emphasizing the role of the “Seventh Fed Apocalypse Knights,” implicitly linking the interest rate hikes of Jerome Powell and his six Fed Board members with the destruction myths of the Old Testament. Compare.
“You only have to look at smaller public and private companies to see the torture of the Fed raising interest rates,” he wrote.
The Small Business Decline Everyone Is Missing
As Edwards points out, small businesses are critical to the health of the U.S. economy, with businesses with fewer than 100 employees creating 63% All new jobs created between 1995 and 2021. According to statistics, small businesses currently account for approximately 43% of U.S. gross domestic product (GDP) american chamber of commerce. But as the number of small business loans declines and the cost of remaining loans rises, small businesses have a tough time operating, especially compared with their larger competitors. Edwards claimed that small business credit conditions are “at recessionary levels.”
The pressure on smaller companies can be seen in the performance of the U.S. stock market. The small-cap Russell 2000 index has fallen more than 6% so far this year, while the S&P 500, which tracks the 500 largest U.S. companies by market capitalization, has gained about 8% over the same period.
Even among the S&P 500, Big Tech has been the only real winner from rising interest rates this year. “Without the outperformance of the ‘Magnificent 7’ mega-cap stocks, the S&P would actually be in negative territory,” Edwards explained, referring to the popular new name for the largest big tech companies.
“Being stepped on”
Edwards believes the pain for small and medium-sized businesses has yet to translate into rising unemployment, but only because pandemic-era labor shortages have caused many companies to play catch-up in recruiting. After chronic labor shortages, many business leaders are more cautious about laying off workers even as business conditions worsen, fearing they won’t be able to hire enough workers when conditions improve.
But Edwards warned: “Post-pandemic labor shortages (reflected in wage elasticity) should not obscure the fact that small companies are being trampled on – not by the ‘Great Seven’, but by the Great Seven.” The seventh Fed’s “Knights of the Apocalypse” stepped on it. “
He pointed to the rising number of bankruptcies as proof that the seven members of the Federal Reserve are actually leading the economy toward a nightmare situation. According to statistics, from January to the end of September this year, a total of 516 companies in the United States went bankrupt. data From S&P Global. This is a 38% increase over all of 2022.
Edwards also believes that in the era of near-zero interest rates following the financial crisis and COVID-19, many smaller so-called “zombie” companies have used cheap debt to maintain unprofitable business models. He believes that these companies are essentially relying on “extended life support” to survive. “But now sharp rises in interest rates are causing a surge in bankruptcies beyond Freddy Krueger’s worst nightmare.”
Some analysts and economists point to artificial intelligence as a potential savior for the economy and stock market this year, arguing that it can boost productivity and reduce business costs. Edwards himself has previously argued that profit growth from greedy inflation could help delay a recession by allowing businesses to continue hiring. But on Thursday, the strategist warned that the inflationary tailwind of corporate greed has receded and artificial intelligence is unlikely to have the impact that was thought.
“The simple fact is that the one-time stimulus from ‘greed inflation’ is over and AI EPS optimism may remain a pipe dream,” he wrote.
Overall, Edwards believes that the latest positive GDP and unemployment reports, as well as the stock market’s positive performance this year, only “hide the depth of the pain the Fed has inflicted on the economy, which will soon be visible to all.”
Svlook
