A renowned market bear who called the dot-com bubble warns Wall Street groupthink is wrongly leading investors to abandon recession forecasts — and says a 'policy disaster' is brewing as the Fed keeps rates high
William Edwards
Investing, Stock Market Crash, Recession, Interest Rates, Federal Reserve
Albert Edwards warns a recession is coming despite Wall Street's current optimism.

The Societe Generale strategist argues the Fed is making a mistake holding interest rates high.

Indicators like rising unemployment and falling small business hiring plans show weakness, he says.

When Albert Edwards was a young student, his teachers didn't find him particularly agreeable, the Societe Generale strategist says.

"A thorough nuisance. I hope he leaves," wrote one of his teachers on a report card, Edwards said in a May 7 client note.

Today, Edwards prides himself on being just as bothersome to a different audience. He styles himself as the sort of gadfly of Wall Street sell-side research, determined to point out the downside risks in a seemingly ever-optimistic industry.

"Long-time readers will know that they get an unadulterated view on these pages. That view may sometimes be wrong, or 'early' as I prefer to call it, but no reader can ever accuse me of falling victim to the optimism bias that the sell-side usually suffers from," Edwards wrote in the note.

For Edwards, after many investors abandoned their recession views last year, we're in a moment where the upbeat outlook that now pervades Wall Street poses a big threat. A recession is still coming, he believes, and investors aren't prepared. Stocks are at all-time highs, as are many market valuation measures, suggesting an appetite for a risk-on approach.

At the heart of his argument for a downturn is that the Fed is making a mistake by leaving interest rates elevated. With the Consumer Price Index, a main measure of inflation, still hovering above 3%, the central bank has been hesitant to cut interest rates.

One sign that Fed policy is causing stress in the economy is the deflation in goods prices, Edwards said.

"I believe the Fed is sowing the seeds of yet another policy disaster," Edwards wrote in a May 16 note.

"In my opinion tighter for longer is bonkers quite simply because it is now driving goods inflation into deep deflation to balance out higher services inflation," he continued. "It ranks with that catastrophic central bank policy error of keeping monetary policy super loose for the 25 years prior to the pandemic in a forlorn attempt to drive inflation back up to the 2% target – in fact, it had been undershooting for secular reasons outside of its control. That policy error led to a series of speculative bubbles that kept bursting in their faces."

Various labor market indicators are also showing growing weakness in the economy, he said. For example, the unemployment rate is slowly rising.

National Federation of Independent Business data shows further labor market weakness is likely to come, as small business hiring plans continue to fall.

"If the small unquoted business sector is in pain, this likely spells the death knell for the economy overall as it is they, not the mega and large cap companies, which create the vast bulk of new jobs in the economy," Edwards said in the May 7 note. "And as the excellent ING Think points out, we need to watch the NFIB small company data closely as it correlates very well with the ups and downs of the key monthly payroll data. ING suggests we'll be seeing sub-100k payrolls very soon indeed. Recession anyone?"

Quits are also falling, perhaps indicating workers have limited opportunities elsewhere. Temporary service jobs are dropping as well. Both stats would suggest a rising unemployment rate going forward.

Edwards' views in context

While Edwards points out some important data to watch as the economy could worsen, his recent notes are the latest in a string of bearish warnings. In the meantime, the labor market has consistently proven resilient despite high interest rates, and stocks have enjoyed an eye-popping rally to new highs.

Some also argue that labor market data points like the rising unemployment rate have to be shown with context. Bob Elliott, the founder of Unlimited Partners and a former member of Bridgewater Associates' investment committee, told Business Insider last week that the labor market is doing fine, and the slight uptrend in the unemployment rate is due to growing labor participation.

But, as Edwards highlights, Wall Street strategists tend to be bullish even heading into major economic downturns and market declines. With most S&P 500 year-end price targets from top strategists above 5,000, this could be another example of the groupthink Edwards warns of.

After all, he's seen it before, having called some of the largest bubbles in history.

"One of the key lessons that came out of the 2008 Global Financial Crisis was that it was a mistake to have ignored the dissenting voices in the mid-2000s who had warned that Alan Greenspan was presiding over the biggest credit bubble in history and that it would blow up spectacularly – they were all ignored, marginalized or ridiculed," Edwards said in the May 7 note.

He added: "In my particular case, the derision for my dire warnings in 2006 was water off a duck's back. For I had already trod a lonely road in sticking my neck out and identifying both the mid-1990s Asian miracle and the late 1990s Tech New-Era as gigantic credit bubbles that would ultimately burst. But there is nothing more difficult than a conversation with a true believer and suggesting their investment idyll is just a gigantic bubble waiting to burst."
Albert Edwards warns a recession is coming despite Wall Street's current optimism.
The Societe Generale strategist argues the Fed is making a mistake holding interest rates high.
Indicators like rising unemployment and falling small business hiring plans show weakness, he says.
When Albert Edwards was a young student, his teachers didn't find him particularly agreeable, the Societe Generale strategist says. "A thorough nuisance. I hope he leaves," wrote one of his teachers on a report card, Edwards said in a May 7 client note. Today, Edwards prides himself on being just as bothersome to a different audience. He styles himself as the sort of gadfly of Wall Street sell-side research, determined to point out the downside risks in a seemingly ever-optimistic industry. "Long-time readers will know that they get an unadulterated view on these pages. That view may sometimes be wrong, or 'early' as I prefer to call it, but no reader can ever accuse me of falling victim to the optimism bias that the sell-side usually suffers from," Edwards wrote in the note. For Edwards, after many investors abandoned their recession views last year, we're in a moment where the upbeat outlook that now pervades Wall Street poses a big threat. A recession is still coming, he believes, and investors aren't prepared. Stocks are at all-time highs, as are many market valuation measures, suggesting an appetite for a risk-on approach. At the heart of his argument for a downturn is that the Fed is making a mistake by leaving interest rates elevated. With the Consumer Price Index, a main measure of inflation, still hovering above 3%, the central bank has been hesitant to cut interest rates. One sign that Fed policy is causing stress in the economy is the deflation in goods prices, Edwards said. "I believe the Fed is sowing the seeds of yet another policy disaster," Edwards wrote in a May 16 note. "In my opinion tighter for longer is bonkers quite simply because it is now driving goods inflation into deep deflation to balance out higher services inflation," he continued. "It ranks with that catastrophic central bank policy error of keeping monetary policy super loose for the 25 years prior to the pandemic in a forlorn attempt to drive inflation back up to the 2% target – in fact, it had been undershooting for secular reasons outside of its control. That policy error led to a series of speculative bubbles that kept bursting in their faces." Various labor market indicators are also showing growing weakness in the economy, he said. For example, the unemployment rate is slowly rising. National Federation of Independent Business data shows further labor market weakness is likely to come, as small business hiring plans continue to fall. "If the small unquoted business sector is in pain, this likely spells the death knell for the economy overall as it is they, not the mega and large cap companies, which create the vast bulk of new jobs in the economy," Edwards said in the May 7 note. "And as the excellent ING Think points out, we need to watch the NFIB small company data closely as it correlates very well with the ups and downs of the key monthly payroll data. ING suggests we'll be seeing sub-100k payrolls very soon indeed. Recession anyone?" Quits are also falling, perhaps indicating workers have limited opportunities elsewhere. Temporary service jobs are dropping as well. Both stats would suggest a rising unemployment rate going forward. While Edwards points out some important data to watch as the economy could worsen, his recent notes are the latest in a string of bearish warnings. In the meantime, the labor market has consistently proven resilient despite high interest rates, and stocks have enjoyed an eye-popping rally to new highs. Some also argue that labor market data points like the rising unemployment rate have to be shown with context. Bob Elliott, the founder of Unlimited Partners and a former member of Bridgewater Associates' investment committee, told Business Insider last week that the labor market is doing fine, and the slight uptrend in the unemployment rate is due to growing labor participation. But, as Edwards highlights, Wall Street strategists tend to be bullish even heading into major economic downturns and market declines. With most S&P 500 year-end price targets from top strategists above 5,000, this could be another example of the groupthink Edwards warns of. After all, he's seen it before, having called some of the largest bubbles in history. "One of the key lessons that came out of the 2008 Global Financial Crisis was that it was a mistake to have ignored the dissenting voices in the mid-2000s who had warned that Alan Greenspan was presiding over the biggest credit bubble in history and that it would blow up spectacularly – they were all ignored, marginalized or ridiculed," Edwards said in the May 7 note. He added: "In my particular case, the derision for my dire warnings in 2006 was water off a duck's back. For I had already trod a lonely road in sticking my neck out and identifying both the mid-1990s Asian miracle and the late 1990s Tech New-Era as gigantic credit bubbles that would ultimately burst. But there is nothing more difficult than a conversation with a true believer and suggesting their investment idyll is just a gigantic bubble waiting to burst."
 Edwards' views in context