Soc Gen: Meltdown Imminent

When people try to figure out what was the cause of today’s 344 point whackage, one of the items they will point to will be SocGen’s alert today from Albert Edwards:

***Alert****Economic and equity market meltdown imminent****Alert***

Last week saw the publication of Q2 US whole economy profits data. They were shockingly bad. Core measures of profitability are in free-fall and have now reached a tipping point, where corporate activity could easily implode. We have also reached the point where companies give up ‘manipulating’ their profits higher and admit they are actually in free-fall. A combination of economic and reported profits slumping will catalyse the next equity downleg.

I always look askance at such precisely timed alerts — firstly, because timing markets this precisely is extremely difficult, and second, if memory serves, this is not the first such alert from SocGen.

As to the fundamentals of Edwards argument, he is spot on. Note our prior mention of the SocGen team was back in June (“Appalling” Market Fundamentals, Not Inflation, Is The Problem).


Profits Lead Stocks


chart courtesy of Société Générale


Here’s a brief excerpt:

US Q2 whole economy profits were shockingly poor. The headline data (post-tax) were down 6% yoy – bad but not a disaster. But our preferred measure of underlying profits (domestic non-financial economic profits — full explanation later) is down a surprisingly sharp 17½% yoy. The last 4 quarter’s average is down 12% yoy (see chart below). Typically we have now reached the point in the cycle where companies reach the end of the road on earnings manipulation and have to admit to their shareholders how bad things really are, sending reported profits diving.  James Montier’s recent piece “Cooking the Books” suggests that some companies may indeed be doing what the title implies. But analysts currently see no prospect of a non-financial profits slowdown, let alone recession (see table below). Why? Because companies have not yet owned up to the mess they are in and told the analysts to downgrade their numbers!

We are at a very similar point to the end of 2000, just before corporate capitulation sent
reported profits and the economy diving and the equity market collapsed.

Economists typically model corporate profits as a residual, with it dropping out of their
economic models as a function of what is happening to the economy overall. We have always believed though that corporate profits are a key driver of the economic cycle, rather than just the result of it. Historically, recessions are ’caused’ (in an accounting sense) by the corporate sector. As profits decline, after a point companies finally bite the bullet and business investment slumps (see chart below). Historically, the evolution of pre-tax domestic nonfinancial profits proves to be the best explanation for company’s domestic spending activity.


Hat tip: Paul Kedrosky

Global Strategy Weekly
Albert Edwards
4 September 2008

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What's been said:

Discussions found on the web:
  1. Chief Tomahawk commented on Sep 4


    I just returned from Salt Lake, a city with no idea of a traffic jam, and shorted COF yesterday. At least I know where to go to avoid the mobs.

  2. artvandelay22 commented on Sep 4

    Sounds a lot like “Bin Laden Determined to Strike in U.S.” to me.

    Don’t make the same mistake twce.

  3. leftback commented on Sep 4

    Sacre bleu !!
    Perhaps they have another “rogue trader” in their midst..?

    Another great day to be short the banks.
    The gift that keeps on giving..

  4. DL commented on Sep 4

    I don’t know about Monday, but a bounce tomorrow is likely.

  5. doug champion commented on Sep 4

    That chart is scary….look out below…

  6. BG commented on Sep 4

    Don’t worry, be happy!

    Where’s Goldilocks??

  7. John Tamny commented on Sep 4

    Markets Boo McCain’s VP Choice

    Alongside last Friday’s announcement that Alaska Governor Sarah Palin would be John McCain’s running mate, the Dow Jones Industrial Average fell 170 points. Stocks have shown weakness ever since.

    While there are many factors that move markets, a looming electoral contest between a tax-hiking Democrat versus a nominally pro-growth Republican surely weighs heavily on market psyche. It says here that the markets concluded last week that whatever John McCain’s true economic views, on Friday he handed the election to the anti-growth candidate with his selection of Palin.

    Stocks were presumably booing a running-mate choice that will greatly aid Barack Obama’s election in November. Running against a candidate suddenly much less credible thanks to the Palin selection, Obama will now have much less reason to temper the liberal rhetoric that’s put him within striking distance of the White House.

    Indeed, while various conservative columnists have excitedly written of disaffected Hillary Clinton voters that will be won over in concert with a now placated conservative base (the obvious paradox there remains unexplained), the fall in share prices perhaps speaks to the loss of economic libertarians (including this writer) and other conservatives who see McCain’s blatantly political move as evidence revealing how unserious and unprincipled he actually is.

    Put simply, if he’ll suggest with a straight face that someone with a thin political resume about whom he knows very little is the most qualified person to replace him in the event of tragedy, wouldn’t he also talk up tax cuts with similar vigor despite a modern record showing hostility to same? For economic libertarians already skeptical about his pro-growth bona fides, McCain’s selection of an unknown when it comes to policy for the nation’s second highest office is evidence that he’ll say and do anything to get elected; his true views to be determined.

  8. leftback commented on Sep 4


    Not sure if you have seen this.

    An interesting take on the $ rally from the FT. As the global economy weakens, the $ is once again assuming its traditional “safe haven” status. It’s all relative, I guess.

    I am expecting with the weak news in the US that there will be a break in the long $ trade, but sterling in particular is absolutely melting down in front of our eyes. These rapid currency movements do have a history of being extremely destabilizing.

    Anyone seen George Soros lately?

  9. RK commented on Sep 4

    Love the term “whackage”. It reminds one of Steve Martin’s word,
    “kissage” from poem, “In Dillman’s Grove” from “The Man with 2 Brains”.

  10. Greeny commented on Sep 4

    Ouch…no where to hide. Where’s the safe haven for Long Term investors who don’t have the stomach to go short?

  11. CNBC Sucks commented on Sep 4

    What are they saying on CNBC?

    I no longer watch CNBC.

  12. DL commented on Sep 4

    John Tamny @ 4:32:02 PM

    No question that Palin is a big gamble. But which running mate would have pushed McCain over the top?
    I’m not sure that Pawlenty or Romney would have done it for him.

    Certainly I would bet money on Obama winning (if I had to bet). But if Palin proves to be an effective campaigner, McCain still has a chance.

  13. Our man in Helsinki commented on Sep 4

    I’m not as harsh as Barry. Mr. Edwards seems to be an honest man, and he tries to save his customers’ money. That’s something in the business. I read his alert not just as a timing prediction, but as well as an advice to shed stocks now at the latest.

  14. Steve Barry commented on Sep 4

    Well, such a meltdown might help my prediction, made on this blog on 1/2/08, that this would be the worst year in S&P history. You could look it up, as Casey Stengel used to say.

    On a potentially related note, I went to McDonald’s today for a quick burger…I was surprised to see they had removed all the napkin dispensers from the soda area. I was suspicious, so of course I inquired if they would be putting them back…they finally admitted that they took them out so they could control the number of napkins people take. (Take this with a grain of salt and ketchup).

  15. Barry Ritholtz commented on Sep 4

    Our man in Helsinki —

    I really like the SOC GEN research — I just don’t love the “Imminent meltdown” stuff — especially if its been “early” previously

  16. GB commented on Sep 4

    BR – are we anywhere near 10/90 stat to indicate a bottoming?

  17. Stuart commented on Sep 4

    The Euro is in full meltdown mode right now, against the Yen and the dollar. Something’s breaking right now..

  18. Wally commented on Sep 4

    Any one find the SoGen PDF online? Would love to read.

  19. market folly commented on Sep 4

    thanks for the excerpts. been scouring the web trying to find some

  20. Vermont Trader commented on Sep 4

    Might have had something to do with the bid to cover on TSLF being >2.

    Or CIEN warning of slower sales cycles and pushouts.

    Anyhow… I wait to reload and do it all over again.

    Did you see that the daily, weekly and monthly SPX charts all turned down in the last 2 days.

    The trendfollowers are getting destroyed. That is part of a bear market…

  21. Ian in NZ commented on Sep 4

    ..”domestic non-financial economic profits — full explanation later”…

    Please define this in detail ?

  22. ben commented on Sep 4

    yeah interesting call quite a contrast from the post Dougie Kass gave on today. He’s been as bearish as anyone for the last 18 months.

  23. Pat G. commented on Sep 4

    Sold some metal today. Coming around to believing in the “dark side” philosophy; that most economies are weak and getting worse.

  24. VennData commented on Sep 4

    The guys at PIMCO are also distressed and calling for a “meltdown unless…”

    The “meltdown unless” is directed at a Bush administration that seems to be handling the economy like Bush handled Putin: they’ve looked into its soul, and believe.

    But an economy has not soul and Gross and McCulley don’t believe. They want action.

    Let’s hope the sturm und drang happens on Bush’s watch, so that he gets the blame – as he should – and we can start mending the “Bush Bust” asap.

  25. jj commented on Sep 4

    500 BILLION FOR IRAQ-US BORDER WIDE OPEN TO CHEAP LABOR. . .no US NUCLEAR ENERGY/oil refining/desalination plants. . anytime folks!!!


    IN A LARGELY AGNOSTIC-non church going-AMERICA!!!!(and nothing shameful about THAT, either).


  26. Francois commented on Sep 4

    “he handed the election to the anti-growth candidate with his selection of Palin.”

    Huh huh!

    Splendid but empty rhetoric that is no match for the facts.

    Let’s take just one simple item, shall we?

    1) 70% of American economy is consumer-driven. The more consumers the merrier, right?

    2) Obama wants to provides tax cuts for ordinary folks while repealing the Bush tax cuts that did give very meagerly to the above mentioned folks.

    From 1 + 2 we get a policy that would give more breathing room to consume to a majority of Americans who happened to have cut back pretty substantially on their spending.

    And that is labeled anti-growth?

    Oh! I guess the author meant anti-growth of the assets and portfolios of those who already have more than everybody else.

    Well, that would be so sad, wouldn’t it?

  27. Bill King commented on Sep 4

    Thursday lowlights include:

    • Three important technical levels were breached on the SPUs – 1261, 1250 and 1233.

    • The DJIA has declined 20% from its October peak.

    • The DJTA has tumbled with rails, the erstwhile leader, leading the way. This is an ominous economic portend, especially with oil in decline.

    • Tech stocks’ decline accelerated as the most over-weighted sector punishes its holders.

    • Volume was light, which is a negative. You need a sharp increase in volume, which indicates the presence of buyers, before a bottom can form.

    • Lehman is planning to create a ‘bad bank’ with $8B of equity to warehouse $32B of real estate & mortgages. The plan is being called “Spinco”. (spin and company?)

    • The DoJ is investigating JP Morgan over conspiring to overcharge municipalities on derivatives.

    • The Fed said commercial banks averaged $18.98 billion in daily borrowing over the past week. The previous week, the daily average was $18.47 billion.

    • The most disturbing: China’s Central Bank Is Short of Capital It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac. Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

    Now we know why China has been selling agencies and Bill Gross is pleading for a bailout!

    • Another important factor: Banks reel as ECB redraws funding rules Bank stocks in Europe and the UK fell sharply and the risk of owning their debt leapt on Thursday after the European

    Central Bank declared a crackdown on abuses of its bank liquidity operations. – FT

    [removing a
    morsel of the credit lifeline provokes terror]

  28. tom a taxpayer commented on Sep 5

    Bill King, Thanks for the link to the FT article on ECB crackdown on abuses of its bank liquidity operations. It’s amazing how the bankers squeal when they face adult supervision.

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