World Economy

US Recession Seems Inevitable

US Recession Seems InevitableUS Recession Seems Inevitable

An economic collapse in the US is not a myth. One more permabear analyst affirms that a US recession is “virtually inevitable,” echoing Donald Trump’s pessimistic view on the US economy.

Albert Edwards of Societe Generale says his recession indicator is now “flashing red” rather than amber after the slump in US whole economy profits data, a characteristic of an impending recession.

“Historically, when whole economy profits fall this deeply, recession is virtually inevitable as business spending slumps,” he said in a note to clients, Profit Confidential reported.

Edwards urged investors to avoid US corporate bonds, in particular. “And if I had to pick one asset class to avoid it would be US corporate bonds, for which sky high default rates will shock investors. The economy will surely be swept away by a tidal wave of corporate default,” he said.

A Bloomberg report earlier this week warned that when the next corporate default wave comes, it could hurt investors more than they expect.

Moody’s Investors Service says default rates currently stand at about 4% and could soar to as high as 14.9% by the end of the year under the most pessimistic scenario. Its best-case projection is a 5.05% rate.

Edwards believes this recession could be particularly bad because of the way the Federal Reserve has handled interest rates in recent years. He contended interest rates have pumped up the S&P 500, and US stock prices are now the driving force behind monetary policy.

“As more and more excuses are wheeled out to justify its inaction, we all surely know by now that the Fed’s articulated ‘data-dependent’ rate hikes are primarily focused solely on the level of the S&P, i.e., when it slumps they will quickly back off rate hikes and use any excuse necessary—including dismissing surging core CPI inflation,” Edwards explained.

The S&P 500 has nearly tripled since it hit a bottom in early 2009 on the heels of the financial crisis. The gauge closed at 2,041.91 on Thursday.

Last month, the Fed kept interest rates unchanged at 0.25%–0.50% after introducing a 0.25% hike in December, the first rate hike since 2006. Policymakers have also said they will approach interest rate hikes with caution, given the uncertainty in global economic growth. They have lowered interest rate hike projections to two hikes in 2016, instead of the four hikes they had forecast in December.

Edwards’ warning of an economic collapse comes a few days after Republican presidential frontrunner Donald Trump predicted the country is on course for a “very massive recession.”