US Economy Headed for Recession

With credit card delinquencies rising sharply at smaller banks, Societe Generale's uber-bearish strategist Albert Edwards has predicted that the US economy is headed for recession.

"Markets are now sniffing out a rising stench," Edwards claimed in his latest research note, CNBC reported.

Edwards said a flattening of the US yield curve—where the difference between short-dated and longer-dated US Treasury yields narrow—was revealing investor fears about the economic recovery, despite punchy data related to consumer and business optimism. "The optimists have had their day. This data merely reflects the illusion of prosperity," Edwards argued.

Societe Generale's lead global strategy analyst holds a history of outlandish negative calls and in this latest note he has claimed the authority of the US Federal Reserve is now at risk.

"They say a fish rots from the head down. Unlike the 2008 financial crisis, this time I expect it is the Fed that will be held responsible for yet another debt crisis. Do not expect their independence to survive," Edwards added.

Edwards cited data which showed that credit card charge-off rates at small US banks had peaked to 7.9%. This is a level not seen since the end of the global financial crisis. Charge-off rates represent the level of debt that a creditor has decided it has no chance of collecting.

A similar but separate analysis measuring credit card delinquency also revealed an alarming spike at small banks.

While Edwards has often been seen as an outlier to wider market thinking, more voices have speculated that US householders are seeing their finances stretched.

"All the data we've seen over the last few weeks has basically been that the consumer is maxed out, we've seen that in credit card loans as well, so I think the consumer is done spending the money," said Steen Jakobsen, economist at Danish investment house Saxo Bank last Tuesday.

And a report from Chet Malhotra, from asset management firm TCW, has also suggested late fees, cash advance and over-limit fees in the US are on the rise. "This jump may be a result of a maxing out process of the consumer," he said.

Whether rising credit card stress among small bank customers is a sign of a growing problem that could slow growth or stifle equity markets remains unclear.