Why another recession may be inevitable

Corporate profits started declining late last year. That's likely to lead to a slump in business investment, one analyst says.

By MSN Money Partner Mar 26, 2014 2:37PM
Image: Unemployed man (© Rubberball/Jupiterimages)By Matt Clinch, CNBC

Albert Edwards, Societe Generale's uber-bearish strategist, has once again taken aim at economists bullish on the U.S. economy, highlighting a contraction in corporate profits that could leave the country exposed to external shocks and an "inevitable" recession.


Edwards said economists used "dodgy" metrics to gauge profit and pointed to the MSCI Operating Profits Indicator -- as the one measure that investors should watch.


This indicator -- which tracks trailing U.S. company profits for the last 12 months -- highlights the rate of corporate growth and is favored by Edwards over any outright profit level, rate of profitability or profit margin level indicator. 


Its recent readings paint a gloomy picture ahead for the U.S. economy, according to Edwards. He said profits started declining in the fourth quarter, according to the MSCI definition, and that this was likely to lead to a slump in business investment.


"U.S. profits have begun to decline on a MSCI trailing basis," he said in research note released on Tuesday. "A decline in profits is inevitably followed by recession shortly thereafter, as investment, the most volatile of all GDP (gross domestic product) components, is cut."


Source: Data Stream


Edwards downplays other economic indicators for being too favorable and said any healthy rise in profits could be put attributed to company-specific write-downs made back in 2012.


He also criticized "pro-forma", or projected, earnings numbers as "artificially inflated" and designed at steering attention away from the "bad stuff". Edwards saw a growing gap between these pro-forma numbers and the MSCI reported profits indicator and said this was an indication that the quality of earnings was deteriorating.


"It will be extremely difficult for the U.S. economy to escape its Great Recession hangover with this poor profits backdrop. Indeed it leaves the economy extremely vulnerable to adverse shocks," Edwards said.


One of these adverse shocks could be a Asian and EM (emerging market) currency devaluation releasing surplus capacity onto the West, and crushing pricing power further, according to Edwards. This topic has formed the backdrop of most of his research notes since August last year. 


It's also not the first time that Edwards has made bearish predictions about the U.S. economy, warning about a downturn in productivity and profits at the end of 2013. 


Back in September 2012, he said the U.S. had already entered a recession and it wouldn't be long before the equity market reacted. He also warned about the "ultimate" death cross for the Standard & Poor's 500 Index ($INX) -- where the 50-month moving average falls below the 200-month moving average. However, since that call, the S&P 500 has risen nearly 40 percent.


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508Comments
Mar 26, 2014 4:04PM
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The recession has never ended for 95% of Americans. In 2000 the average American made just $55,000. Twelve years later the average American made just over $56,000 or a $1,000 raise over 12 years. The cost of living has gone up by 33%. Taxes have gone up. The Average  American is  so much poorer than in 2000.

 

Please do not mention a recovery that 95% of Americans never took part in,

 

The Billionaires are looting our country and by buying off Congress. No one else hs come out of the last recession. The Corporate owned media / Network news doesn't report on the massive looting of our country by evil billioniares like the Koch Brothers and Carl Icahns. These greedy jerks want to own us all like slaves. Well congratulations you have acheived this.

 

Congress and Billionaires that own Congress have destroyed the way of life for Americans. Congress and their Billionaire owners are the face of evil.

 

I do not ever worry about Al; Quida, China and Russia. When you have Congress dismantling every aspect of your standard of living terrorist seem like a joke. Why spend $800 Billion a year on Defense when the greatest destruction done the U.S has been 100% completed by Congress and their evil Billionaires.

Mar 26, 2014 3:57PM
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How can businesses possibly turn a profit when no one has any disposable income to spend?
Mar 26, 2014 4:10PM
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Well... I am shocked!!! Shocked, I say!!!! Just shocked!!! The media and the politicians have been telling us that everything is okay. So what happened since yesterday??

I'm just shocked!!!

Mar 26, 2014 3:56PM
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the only people that did not know the recovery was a joke are the dump a##s in washington
Mar 26, 2014 3:14PM
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Oh well, the media talked a good recovery.
Mar 26, 2014 4:15PM
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Come on now I thought the stimulus program, with all the shovel ready jobs, the quantative easement with the no inflationary consequences, a improved health insurance system, and gutting the defense department while expanding the socialist welfare programs, would have fixed this forever.  The same ones claiming that the recovery has happened were the same ones saying how good Obamacare would be and how well the socialism works as a stepping stone to a full communist state.  The problem is those that are not educated enough to know when they are being lied to, or so dependent on the centralized welfare state to care.
Mar 26, 2014 4:21PM
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What?  No green shoots?  No summer of recovery?  No millions of jobs created by the annointed one?  How can this be???  Fear not, every one of us will save $2,500 / year on our health insurance now that Obamacare has kicked in.  Now what will I do what all that money???
Mar 26, 2014 4:05PM
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How about we get over this one before talking about another one?
Mar 26, 2014 4:42PM
Mar 26, 2014 4:01PM
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With five years with the genius at the helm what could go wrong except everything. LOL
Mar 26, 2014 7:59PM
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Of course another recession will happen...... its just part of the business cycle. 

However,  before Obamanomics there was usually  several years of SIGNIFICANT economic  expansion between recessions. 

OBAMA SO LOVED THE POOR, HE CREATED MILLIONS MORE. 
Mar 26, 2014 4:46PM
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There was an recovery? Did I miss something?
Mar 26, 2014 4:37PM
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OH -- I thought we were Out of the Recession ?!

YOU Know you can Fool Some of the People Some of the Time BUT You Cant Fool ALL of the People All of the Time !?

Maybe there's "HOPE" ?

Pity -- ONLY DC had a Recovery !

Mar 26, 2014 4:41PM
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Only a couple more years & Obama will be gone & hopefully then we will have someone in the WH that understands bussiness. Then the recovery will start. Obama has done what he can to hold back the recovery. No recovery, more give aways of tax dollars & more votes for Dems. What a way to run a country.
Mar 26, 2014 7:39PM
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Bush left Office the following was true

Gas was $ 1.87/gallon
8 million MORE people were in the workforce
1 Lb of ground chuck was $1.99,  Now $3.99
Loaf of bread  $.99 now $ 2.29
Health care premiums over 70% MORE after ODUMBO said they would be $2500 cheaper
Our national Debt was 9 TRILLION $ now approaching $ 18 TRILLION
And when BUSH left office we at least had a presdent that told the TRUTH
Mar 26, 2014 4:49PM
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We will always be on the verge of a recession until people realize that the government causes fiscal problems, it does not fix anything.  Economic growth is the only cure for poverty and government kills that under the quise of fairness - Making everyone equal, equally poor.  Sad thing is most liberals would be happy to have less so long as it meant the job creators had even less.   
Mar 26, 2014 3:53PM
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Fine with me and who cares? It has been bull and will continue to be. Nothing new, here.  Jerk here and the jerks in offices.  Rather comical!  Go welfare and go socialism and elect Hillary, idiots.
Mar 26, 2014 3:27PM
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Let's not let news of no good jobs and further failing of the economy take away from what we really need to focus on.......... Climate Change brothers and sisters.... the new weapon of mass destruction.
Mar 26, 2014 4:03PM
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This is the crucial part of the article:

Back in September 2012, he said the U.S. had and it wouldn't be long before the equity market reacted. He also warned about the for the Standard & Poor's 500 Index () -- where the 50-month moving average falls below the 200-month moving average. However, since that call, the S&P 500 has risen nearly 40 percent.

 

Wait, did we go into recession in Q4 2012?

No.

 

Will there be another recession at some point?

Almost assuredly yes.

 

Would I trust this guy to make the call on when it's going to happen?

Ha!

Mar 26, 2014 8:54PM
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I long for the days of Bush when Unemployment was well below 5 % and anyone ( except the welfare freeloaders) that wanted a job could get one, when employers were crawling over one another for hires, when I could fill my Hondas tank for $15, now its $45, when you could buy the same amount of groceries for less then 1/2 what its is now.
ODUMBO has done a bang up job destroying the middle class
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