Albert Edwards is known to lament “greed”. The veteran strategist at French investment bank Societe Generale argued in a series of research notes this year that companies were using the pandemic and the war in Ukraine as an excuse to boost their profit margins, essentially profiting from the black swan events. He even argued last month that this kind of profit-driven inflation helped delay the onset of what many are calling the most widely predicted U.S. recession in history.
Wall Street economists and billionaire investors have repeatedly warned over the past year that the Federal Reserve’s rapid interest rate hikes are making it nearly impossible to avoid an economic slowdown. But that downturn hasn’t happened yet, and now Edwards has spotted another economic quirk that’s helping many American businesses avoid the worst of the Fed’s wrath and avoid a recession, at least for now.
“It’s not just ‘greed’ that has boosted U.S. profit margins and delayed the recession,” the strategist wrote in a Friday note. “Interest rates just don’t work the way they once did… It’s a crazy, crazy world indeed.”
Edwards explained that historically when interest rates rise, interest payments on corporate debt rise with them. But over the past year, despite steadily rising interest rates, net interest payments have declined. “What is happening?” He asked. “Something very strange has happened…”
Edwards pointed to what he called the “craziest macro chart” he had seen in years as evidence of the breakdown in the relationship between interest rates and corporate interest payments. It shows that corporate net interest payments fell 25% year over year, despite a sharp rise in the federal funds rate.
Edwards went on to explain that during the pandemic, when the Federal Reserve cut interest rates to near zero to stimulate the economy, companies were able to roll over much of their debt, locking in long-term low rates. This allowed companies’ net interest payments to fall, even as the Fed raised rates.
As Yves Bonzon, group chief investment officer at Swiss wealth manager Julius Baer, explained in a May article, some 80% of corporate debt in the S&P 500 has a fixed interest rate, meaning “the S&P 500 is relatively interest rate insensitive.”
Edwards wrote that this insensitivity to rising rates, coupled with greed, has allowed corporate America to earn far more than expected.
“[I]This helps explain the delayed recession,” he wrote. “Companies effectively played the yield curve upside down and became net beneficiaries of higher rates, adding 5% to earnings over the past year instead of deducting 10%+ from earnings as usual.”
This story was originally featured on Fortune.com
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