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Albert Edwards: We Should Start Worrying About The Coming Recession

Albert Edwards: We Should Start Worrying About The Coming Recession

One week ago, when looking at the surge in commodity prices, SocGen’s Albert Edwards pointed out the eerie similarities between what was taking place in the energy sector…

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Albert Edwards: We Should Start Worrying About The Coming Recession

One week ago, when looking at the surge in commodity prices, SocGen's Albert Edwards pointed out the eerie similarities between what was taking place in the energy sector today and crude prices in the summer of 2008 - right before Lehman collapsed - and said that "it's starting to fell a bit like July 2008." That prompted him to tell readers to "think hard about the likelihood that higher energy prices and bond yields will trigger a ‘wholly unexpected’ recession. For that is where the biggest risk might lie for investors."

It will hardly come as a surprise that, one week later, with more banks slashing their GDP forecasts (like Goldman) even as they hike their inflation forecasts (also like Goldman), the odds of a stagflationary recession keep rising, and sure enough in his latest note published today, Edwards finds another indicator suggesting that a recession may now be inevitable, and imminent. Pointing to the latest NFIB small business survey, the SocGen strategist first notes what even the Fed now knows, namely that wage pressures are stepping up to a new record high, making what may one have been transitory inflation fully permanent. But it is the chart on the right which is more troubling: it shows companies’ net % balance of those expecting a stronger or weaker economy. As Edwards notes, "this series has now fallen to levels where we should be worrying about recession. Last week we mused that near term recession risk was being underestimated. Maybe that’s what we should be really vigilant about?"

It's not just small business sentiment that is going haywire: pretty much everything in China is as well. According to Edwards, in addition to the impact on foreign investors resulting from the new policy of "common prosperity" and whether Chinese equities and bonds have become "uninvestable", but the tremendous macro uncertainty regarding China’s own energy crisis and collapse in property transactions - which we discussed extensively last Friday - that is a major concern.

The SocGen permabear also refers to two charts from the latest IMF Financial Stability Report, both of which address a point we have frequently made, namely that in the past it was always China's massive credit expansion that pulled the world out of the economic dumps. This time, however, no such thing is happening. To wit, the chart on the left shows how much more restrictive Chinese financial conditions are now relative to the west "in stark contrast to the post-2008 GFC when China was the engine of global recovery" which is shown on the right.

As for what China's current "financial conditions" tightness means for the future, we refer readers that what we discussed at the end of 2020 when we first warned that China's credit impulse was sliding. Edwards, who also is a firm believer in China's credit impulse as the key driver of reflationary (or deflationary) global flows points out that that IMF has also jumped onboard the "credit impulse thesis" and after "highlighting China’s crunch in financial conditions for some months now, it is nice to get confirmation from the IMF!" As for what it means in practical terms, one look at the charts below should concern everyone.

To be sure, in a world where energy prices are hyperinflating, no Edwards note would be complete without some discussion of inflation and sure enough, this time he touches on the latest commodity to see prices surge, fertilizer...

... and even though foodstuffs like soyabeans are well off their recent highs, overall agricultural and industrial commodity indices remain at or close to all-time highs.

Unfortunately, fertilizer prices surging to record highs will only put further upward pressure on already high food prices.

Edwards concludes not with some dire fire and brimstone forecast, as he does on occasion, but by giving the microphone to the IMF. As Edwards notes, “in its twice yearly financial stability report, the IMF called on central banks to be “very, very vigilant” and take early action to tighten monetary policy should price pressures prove persistent … The IMF also highlighted the “challenging trade-off” facing central banks. They want to support the economic recovery from the coronavirus pandemic by keeping interest rates low, but they also need to keep financial risk-taking in check amid “overly stretched” asset valuations."

We wish them the best of luck as they seek to navigate the impossible journey between a world struggling with permanent inflation on one hand (made far worse due to the Fed's chronic inability to observe what was obvious to most a year ago), and a market  - and global economy - that is completely reliant on massive Fed liquidity injections, and where the smallest hiccup to record easy financial conditions could lead to an immediate market crash.

Tyler Durden Thu, 10/14/2021 - 16:40

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Economics

FT-IGM US Macroeconomists Survey for December

The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s some of the results. For GDP, assuming Q4 is as predicted in the November Survey of Professional…

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The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s some of the results.

For GDP, assuming Q4 is as predicted in the November Survey of Professional Forecasters, we have the following picture.

Figure 1: GDP (black), potential GDP (gray), November Survey of Professional Forecasters (red), November SPF subtracting 1.5ppts in Q1, 05ppts in Q2 (blue), FT-IGM December survey (sky blue squares), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.

In the figure above, I’ve used the SPF forecast of 4.6% SAAR in 2021Q4; the Atlanta Fed’s nowcast as of yesterday (12/7) was 8.6% SAAR. A new nowcast comes out tomorrow.

Interestingly, q4/q4 median forecasted growth equals that implied by the Survey of Professional Forecasters November survey (which was taken nearly a month before news of the omicron variant came out).

The q4/q4 forecast distribution for 2022 is skewed, with the 90th percentile at 5% growth, the 10th percentile at 2.5%, and median at 3.5%. I show the corresponding implied levels of GDP (once again assuming 2021Q4 growth equals the SPF ).

Figure 2: GDP (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue squares), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.

On unemployment, the median forecast is for a deceleration in recovery,

Figure 3: Unemployment rate (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue square), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle). NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.

The survey respondents also think that the participation rate will take a long time to return to pre-pandemic levels.

Source: FT-IGM, December 2021 survey.

On inflation, the median is higher than the November SPF mean estimate for 2022 of 2.3% (and Goldman Sachs’ current estimate).

Source: FT-IGM, December 2021 survey.

The entire survey results are here.

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Over 170 companies delisted from major U.S. stock exchanges in 12 months

  Over the years, United States-based exchanges have remained an attractive destination for most companies aiming to go public. With businesses jostling to join the trading platforms, the exchanges have also delisted a significant number of companies….

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Over the years, United States-based exchanges have remained an attractive destination for most companies aiming to go public. With businesses jostling to join the trading platforms, the exchanges have also delisted a significant number of companies.

According to data acquired by Finbold, a total of 179 companies have been delisted from the major United States exchanges between 2020 and 2021. In 2021, the number of companies on Nasdaq and the New York Stock Exchange (NYSE) stands at 6,000, dropping 2.89% from last year’s figure of 6,179. In 2019, the listed companies stood at 5,454.

NYSE recorded the highest delisting with companies on the platform, dropping 15.28% year-over-year from 2,873 to 2,434. Elsewhere, Nasdaq listed companies grew 7.86% from 3,306 to 3,566. Data on the number of listed companies on NASDAQ and NYSE is provided by The World Federation of Exchanges.

The delisting of the companies is potentially guided by basic factors such as violating listing regulations and failing to meet minimum financial standards like the inability to maintain a minimum share price, financial ratios, and sales levels. Additionally, some companies might opt for voluntary delisting motivated by the desire to trade on other exchanges.

Furthermore, the delisting on U.S. major exchanges might be due to the emergence of new alternative markets, especially in Asia. China and Hong Kong markets have become more appealing, with regulators making local listings more attractive. Over the years, exchanges in the region have strived to emerge as key players amid dominance by U.S. equity markets. As per a previous report, the U.S. controls 56% of the global stock market value.

A significant portion of the delisted companies also stems from the regulatory perspective pitting U.S. agencies and their Chinese counterparts. For instance, China Mobile Ltd, China Unicom, and China Telecom Corp announced their delisting from NYSE, citing investment restrictions dating from 2020.

Worth noting is that the delisting of firms was initiated due to strict measures put in place by the Trump administration. The current administration has left the regulations in place while proposing additional regulations. For instance, a recent regulation update by the Securities Exchange Commission requiring US-listed Chinese companies to disclose their ownership structure has led to the exit of cab-hailing company Didi from the NYSE.

Impact of pandemic on the listing of companies

The delisting also comes in the wake of the Covid-19 pandemic that resulted in economic turmoil. With the shutdown of the economy, most companies entered into bankruptcies as the stock market crashed to historical lows.

Lower stock prices translate to less wealth for businesses, pension funds, and individual investors, and listed companies could not get the much-needed funding for their normal operations.

At the same time, the focus on more companies going public over the last year can be highlighted by firms on the Nasdaq exchange. Worth noting is that in 2020, there was tremendous growth in special purpose acquisition companies (SPACs), mainly driven by the impact of the coronavirus pandemic. With the uncertainty of raising money through the traditional means, SPACs found a perfect role to inject more funds into capital-starving companies to go public.

From the data, foreign companies listing in the United States have grown steadily, with the business aiming to leverage the benefits of operating in the country. Notably, listing on U.S. exchanges guarantees companies liquidity and high potential to raise capital. Furthermore, listing on either NYSE or Nasdaq comes with the needed credibility to attract more investors. The companies are generally viewed as a home for established, respected, and successful global companies.

In general, over the past year, factors like the pandemic have altered the face of stock exchanges to some point threatening the continued dominance of major U.S. exchanges. Tensions between the US and China are contributing to the crisis which will eventually impact the number of listed companies.

 

Courtesy of Finbold.

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Economics

Stock futures open flat as Omicron concerns ease

Dow futures edged up 0.02%, while contracts on the Nasdaq Composite inched up 0.10%…
The post Stock futures open flat as Omicron concerns ease first appeared on Trading and Investment News.

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Dow futures edged up 0.02%, while contracts on the Nasdaq Composite inched up 0.10%

Stock futures opened relatively flat on Wednesday evening, though sustaining gains posted by a three-day recovery rally that was led by cooled investor concerns around the Omicron variant of the coronavirus.

Dow futures edged up 0.02%, while contracts on the tech-focused Nasdaq Composite inched up 0.10%. All major indexes closed up, with the S&P 500 adding 14.46 points to end the session at 4,701.21, just 0.5% short of the trading session on Nov. 24, a day before the latest COVID-19 variant was announced by the World Health Organization (WHO).

The moves were supported by eased virus fears after Pfizer Inc. and BioNTech reported that early lab studies show a third dose of their coronavirus vaccine mitigates the Omicron variant.

The vaccine makers had indicated the initial two doses may not be enough to protect against infection from Omicron. Shares of Pfizer (PFE) traded 0.62% lower on Wednesday, closing at $51.40.

With virus concerns diminishing, investors are pivoting their attention back to economic data, awaiting Consumer Price Index (CPI) figures on Friday to assess the extent inflationary pressures will persist.

If the Omicron variant was to lead to a resurgence in goods spending at the expense of services or to further complicate supply disruptions, there could be a clear inflationary impact, too, HSBC economist James Pomeroy wrote earlier this week in a research note to clients.

He stated: The inflation news in the past few weeks has been decidedly mixed — with upside surprises in both the U.S. and eurozone being offset by the possibility of some of the supply chain issues starting to alleviate, while energy prices have fallen sharply in recent days.

The post Stock futures open flat as Omicron concerns ease first appeared on Trading and Investment News.

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