Albert Edwards: Overseas Profits Mask Domestic Declines

June 1, 2017

Stocks have risen to record highs on investor hopes for President Donald Trump’s push for tax cuts, less regulation and billion-dollar spending on roads, bridges and airports. The growth in corporate profits is also cited as a driver of market gains, but one strategist says investors need to be wary of those reports.

Albert Edwards, global strategist at French bank Societe Generale, says earnings reports for U.S. companies show that their overseas profits have grown but are still falling domestically. The decline may even point toward recession.

“A 24 percent year-over-year surge in net U.S. overseas profits and a 12 percent year-over-year rise in financial sector profits have disguised the fact that domestic non-financial economic profits are really struggling badly and are still down 6 percent year-over-year,” Edwards says in a June 1 report obtained by Newsmax Finance. The data he cites are from National Income and Product Accounts produced by the Commerce Department.

The S&P 500 has jumped 13 percent to record highs since Trump won the presidency on November 8. The market’s moves have mirrored investor perceptions of the Trump agenda, such as the likelihood that tax cuts and healthcare reform will ever get to his desk for approval.

The market fell about 2 percent on May 17, the worst in eight months, after the former head of the FBI alleged in a memo that Trump was trying to interfere with an investigation into his campaign’s ties to Russia. The rebound to record highs has depended heavily on a handful of technology-related stocks such as Facebook,, Apple, Netflix and Google. The so-called ‘FAANG’ stocks now make up 11 percent of the S&P 500’s total market value.

Edwards says U.S. companies are suffering from a rise in labor costs that may damp domestic business investment and result in a recession.

“Clearly the surge in U.S. unit labor costs … is continuing to drive the relentless decline in domestic non-financial economic profits into 2017,” he says. “This does not offer a sound footing for a recovery for U.S. domestic business investment – indeed quite the reverse.”

Business investment is a key part of calculating gross domestic product, or the total value of goods produced and services provided in a country.

“Although only 15 percent of GDP, business investment is the most volatile component of GDP and history suggests that in industrialized economies recessions are ‘caused,’ in an accounting sense, by swings in the business investment cycle,” he says.

The Federal Reserve is in the process of raising interest rates as the U.S. economy shows signs of strengthening, but that may backfire, Edwards says.

“It is worth bearing in mind, as the Fed continues to hike rates, that 10 of the 13 post-war tightening cycles have ended in recession,” he says. “Those are not good odds and I’m not sure why we should expect anything this time around?”

Edwards is sticking to the “Ice Age” thesis he introduced in 1996. The forecast advised investors to put money into bonds and be cautious with stocks as deflationary pressures like those seen in Japan spread throughout the world.

As another recession unfolds in the U.S., the Fed will have to buy more government debt, and drive yields on 10-year Treasurys to less than zero percent, similar to the monetary policies of Japan and the European Union, Edwards says.