Republican frontrunner Donald Trump says a "major recession" is coming.
Albert Edwards, the Société Générale strategist who forecasts the S&P 500 will plunge 75 percent from last year’s record high, also says a shrinking economy can’t be avoided because companies are cutting back on spending as their profits get squeezed by higher labor costs.
“Newly released U.S. whole economy profits data show a gut-wrenching slump,” he said in an April 7 report to clients of the Paris-based bank
. “Whole economy profits never normally fall this deeply without a recession unfolding.”
National income accounts data provide a picture of the profitability
for the whole economy, including companies that aren’t publicly traded. Edwards is most alarmed at how quickly profits are shrinking in the U.S.
“Whole economy profits tend to be a leading indicator of the business investment cycle,” he said. “Historically, all recessions are effectively caused by slumps in business investment driven by a profits downturn.”
Stay Away from Corporate Bonds
Even more worrisome is his prediction of widespread defaults among corporations that binged on debt as the Federal Reserve in 2008 cut borrowing costs to record lows. The central bank slashed interest rates to help the U.S. economy recover from the worst contraction since the Great Depression. Making payments on that debt is more difficult for companies with shrinking profits.
“If I had to pick one asset class to avoid it would be U.S. corporate bonds, for which sky-high default rates will shock investors,” Edwards said. “The economy will surely be swept away by a tidal wave of corporate default.”
Edwards’ prediction of a recession follows one by Trump.
The presidential candidate this week told the Washington Post
that high unemployment and an expensive stock market have set the stage for an economic decline.
"I think we're sitting on an economic bubble. A financial bubble," Trump said.
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