Société Generale’s Albert Edwards has spent years building his reputation as one of Wall Street’s closest market beers. And while U.S. stocks avoided bear market territory this week, the longtime economist and market strategist has envisioned a scenario — driven by disappointing earnings from Target and Walmart that battered stocks last week — that suggests That the US economy (and perhaps the global economy) may finally be headed for a recession.
When it comes to those retailers’ earnings, Edwards points out that it wasn’t disappointing sales that were the primary source of the disappointment, but rather a sharp drop in profit margins. This in turn was driven not by rising wages and inflation, but by the cost of handling excessive inventory, which helped to squeeze margins, as retailers cut costs to try to move products that were more expensive. In the warehouses and on the shelves were sitting. long.
This may seem vaguely counterintuitive to readers. After all, isn’t the US economy mired in a supply-chain crisis? How can these supply-chain backlogs happen without the financial media noticing? These are all valid questions and Edwards answers them as follows: He states that trade inventories declined during the third quarter of last year (up to $46 billion), but they were actually in the fourth quarter of last year (212 billion). dollars) and then increased during the first quarter of this year (up to $185 billion) as the business sought to gear up against future supply chain disruptions by controlling inventory.
That’s where things start to get complicated: While inventories continued to grow during the first quarter, the pace at which they grew was slower than the previous quarter. Because of this, the slowdown in inventory buildup actually put pressure on GDP. This is the dynamic that Edwards focuses on during the rest of his analysis.
This is because it is not the directional movement of inventory that matters so much to GDP as the difference in the rate of accumulation from quarter to quarter.
And the slow pace of construction has created a list “elephant” that is haunting the economy and expanding markets. Edwards said that while the inventory-to-sales ratio remains depressed, a closer look shows that the auto sector is creating some distortions here. When this is detected, the danger of excess cargo becomes more apparent.
The result could hamper economic growth in the US and China, which could have serious implications for the global economy.
“If we accept that there is an inventory problem at the retail level in the US, producers will clearly see order cuts… desperately trying to revive it. While I think it is only a matter of time before the Fed surrenders, perhaps it will actually be China that is forced to open up to the liquidity floodgates first.
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And just like that, Edwards has devised a vision for how supply chain constraints can develop into a crushing glut of economies.
Credit: www.marketwatch.com /