One of the more controversial ideas I wrote about last year was the decoupling of Europe and the USA.   My thinking was that austerity was setting Europe apart from the USA who has not been imposing such austerity and that this divergence was leading to a decoupling of the economies.  The more recent PMI reports show this trend becoming more pronounced.  Our friends over at Sober Look have more details:

The equity market went vertical this morning on the back of the US ISM Manufacturing PMI coming in stronger than expected (54.8 vs 53 expected).

…What’s striking about this rise in the manufacturing PMI is the divergence between the US and the Eurozone manufacturing trends (chart below). This does not mean the US has decoupled from the Eurozone’s crisis (because manufacturing is still a relatively small component of the US output). But it does provide further support to the forecasts that the US will manage to avoid another recession, at least in 2012.

Manufacturing PMI – US vs. Eurozone (Bloomberg)

Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Martin

    Stocks versus Flows…Not surprising given that while the Fed has been financing “stocks” (mortgages), the ECB is financing “flows” (deficits). We do not know when European deficits will end, until a clear reduction of the deficits is seen, therefore the ECB liabilities of the ECB will have to depreciate.



  • Andrea Malagoli

    I am always cautious about “decoupling” stories. I think the US economy is being pumped and overstated a lot. I believe in mean reversion.

  • B Ferro

    I love coming to sites like this and reading comments like that…

    There’s never anything bullish floating around places like this and that means one thing, we continue to surprise to the upside.

    So many non-believers….

  • BJM

    Was just discussing with someone today how history doesn’t repeat but it rhymes, and that though there is a massive cloud of doubt hanging over the market right now (which would generally be bullish), this current overvaluation cycle is caused not by animal spirits/bullish behavior (such as in the tech bubble and margin-induced 1929 bubble) but rather the almost complete removal of any logical alternative to equities. Investors are forced kicking and screaming into equities, thus forcing them above and beyond their true underlying value.

    If in fact you are right that we are now in a secular bull, IMO that would be one of the most brilliant calls of all time – looking good so far!

  • Andrea Malagoli

    Economics is not a “religion”. It is about looking at facts and statistics in great detail.

    I am a non-believer who saw the 2008 market downturn coming, and saved a lot of money in the process.

    It also depends if one looks at things as an investor or as a trader. As a trader, these rallies are great opportunities. As an investor, one needs to look at the long term and really understand what de-leveraging cycles are about.

    Everyone seems to think that economic growth is universally a good thing independently where it comes from. In this case, from humongous increases in liquidity and government debts. Everyone seems to think that this will be of little consequence in the future. History tells a different story.

  • Andrea Malagoli

    “Investors are forced kicking and screaming into equities, thus forcing them above and beyond their true underlying value”

    This is the definition of a “secular market bubble” …

  • jaymaster

    Our Q1 European sales are flat, but Americas and Asia are growing nicely (20-30% yoy).

    There is something “real” going on here.

  • BJM

    Buying hand over fist in excitement in order to not miss out on the next leg up, IMO, is entirely different than “my money market fund yields 0%, 10y treasurys yield 2%, Warren Buffett says bonds are bad, I’m not rich enough to invest in a hedge fund, I don’t understand commodities, so my only alternative is to buy equities”.

  • VII


    Is Howard Marks an investor or trader?
    Is Seth Klarman an investor or trader?
    Is Berkshire Hathaway filled with traders or Investors?

    They are not seeing this well written secular deleveraging cycle your talking about. In fact to offset this the Fed has filled the gap. You complain about it and sound very bitter that this market is not aligning with your view.

    Your making this into something bigger than it is. You keep citing the future and what is to come. I get it. But what if your wrong?

    To be candid…I feel like I’m in the movie Airplane…and you keep screaming..were going to crash…were going to crash…History says were going to crash…the fed this and the fed that…it’s at that point the actor either throws water on your face and yells …calm down. Go back to your seat.

    Who is “everyone”. My job is to make money. To carry no opinion about the Fed or this or that. Debating the future and the Fed is silly. It is just noise. Noise to distract you from making money. I’ve got things to buy…maybe i invest in them maybe I trade them…who cares?

  • B Ferro

    Great point…

    My father runs a manufacturing business. He’s a quiet, cenetered guy, never prone to hyperbole or excess in his words…

    This is what he said to me a few weeks ago when I asked how business was; it’s the first time I’ve ever heard a comment like this from him that was so explicit, regardless of whether business was good, great or not…


    There is something very real going on…

  • jaymaster

    I’m in manufacturing too. Electronic components. We sell world wide to 15,000 different customers across a wide range of industries. It’s not just a single sector kind of thing going on here.

    Our daily sales numbers are one of my most trusted economic indicators.

  • B Ferro

    Great anecdotal data point…

    If two straight summers of financial contagion in Europe causing Great Depression V2.0 couldn’t halt the global growth story, what will?

    That’s the question the bears have to answer…

    If businesses like yours not only weathered this storm but continued to put up big growth through it, what then is the catalyst to end the cyclical expansion globally??

  • VII

    “Investors are forced kicking and screaming into equities, thus forcing them above and beyond their true underlying value”

    This is the definition of a “secular market bubble”

    Andrea…that’s just NOT true. Individuals continue to pull all their money out of Equity funds. Further…do you know what the FEd has done for savers?

    Savers invested in 10yr tsy and long bond are up 30%-70% last year? They’ve made a killing from the fed just by owning fixed income which is an appropriate investment for savers needing income. The Fed has given them capital gains and growth they would have never had. It’s been the greatest bull market in the 10 yr. Savers should be sending the Fed money. Like 2-20.

    Also..speaking of secular deleverging you know what their buying. GUNS. RGR is up 319% since April 2007. Forget Apples chart take a look at RGR. Now that is parabolic! Their buying’s iphones and Guns. How does that fit into the secular deleverging cylce Rogoff and Reinhart wrote about?

    That’s my point..Rogoff and Reinhart write this stuff and investors don’t buy stocks. Yet…RGR would have made you 319% since 2007. How about apple? Heck have you seen Amgen recently..Alaska Airlines…etc. How do these stocks line up with deleverging? If this was true…why is LULU ripping?

  • Andrea Malagoli

    VII – quite contrary. These market rallies are perfectly compatible with a secular deleveraging cycle view, and in fact they are to be expected. If nothing else, the debate is about the interpretation of these rallies.

    I have a lot of respect for the folks you cite, except that I think Warren Buffet has gotten senile of late. In fact, these gentlemen are very prudent investors who hand pick their stocks. They rarely make statements about stocks as an asset class.

    See, I am not advocating a gloom and doom scenario either. A point I often make is that the economy is not the market. This is a historically proven fact. However, I look at the markets with the idea that there are cycles and mean reversion, not linear extrapolations. These are principles shared by the investors you mention, and by Jeremy Grantham as well, whom I include in that respectable list.

    I also try to look at the indicators in some depth, and I see mixed signals there. It is a fact, for example, that the recent market rallies have coincided with the beginning and ending of stimulative operations. We have seen a lot of this in the past. It is that simple.

    Finally, I hear a lot of stories about how companies are achieving their fabled margins. A couple of recurrent ones has to do with curtailing travel and cutting coffee for employees, not to mention putting pressure on clients to send payments before the end of the reporting quarter.

  • BJM

    Eff manufacturing. 70% of the US economy is consumer spending and as Cullen has pointed out ad nauseum, we’re in a balance sheet recession, i.e. consumers are unable to spend without government help.

    Nominal GDP just came in at 4% YOY with MASSIVE deficits and MASSIVE central bank intervention. That is BOOMING?

    Plus it doesn’t matter whether anything is booming or falling – all that matters is the price you pay. Prices are elevated relative to what you’re getting even assuming normal growth of 6%….we’re growing at 4% and we’re overvalued. This is not a new secular bull…..

  • B Ferro

    Fair enough. Start shorting then.

  • Andrea Malagoli

    BJM – you think this should be pretty much common sense, right? Evidently it is not.

    The bulls seem to think that one can print and leverage his/her way into economic prosperity with no consequence. This is what they were thinking in the Weimar Republic just before it all collapsed (although no, I am actually not an advocate of hyperinflation yet).

    To be sure, this is NOT a call to start shorting. Trading cannot be done based on fundamentals alone. Momentum and other technicals matter, so discussing the economy is NOT the same as discussing investing positions.

  • B Ferro

    Both you guys continue to think in too narrow a fashion…

    Did you both choose to ignore #jaymaster’s commentary??

    He told you that Americas and Asian growth =20%-30% YoY…

    What is that then that this represents of global GDP, ~40%?

    Who cares if good old USA is growing nomianlly at ~2-3% and in the aggeregate Europe is flattish when RoW is growing so fast?

  • BJM

    S&P 500 sales growth is sub 2% right now on a YOY basis. What is growing at 30% right now? Outside of Apple and some asinine cloud computing company, I can think of none.

    I’d like to invest in jaymaster’s business :)

  • SilentKz

    “The bulls seem to think that one can print and leverage his/her way into economic prosperity with no consequence. This is what they were thinking in the Weimar Republic just before it all collapsed (although no, I am actually not an advocate of hyperinflation yet).”

    Was it really what they were thinking in the Weimar Republic? Never mind that the comparison itself is apples to oranges, but the Weimar Republic was probably thinking “I need to pay off my mountain of war debts!”

  • B Ferro

    As I said earlier, surely this must mean it’s time to begin shorting the SPX in size right now.

  • VII

    @ Andrea

    I agree….I was trying to throw water on the passenger next to you. Sorry it got on you.

    Great points.

  • VII


    “I hear a lot of stories about how companies are achieving their fabled margins. A couple of recurrent ones has to do with curtailing travel and cutting coffee for employees, not to mention putting pressure on clients to send payments before the end of the reporting quarter.”

    I have a question for you. Reading what you just wrote. Does it matte how you survive? Using any sports analogy…let’s use soccer(football). When the defender slips does it matter? If in the end the player scores a goal. Doesn’t it only matter that they did acheive the results. The score is 1-0 when the 90th minute expires. Does it matter..why? Do the bookies not pay you because the player who should have stopped the player slipped? Does the market not pay you the gains because a company creatively cut coffee, travle etc.? Isn’t this what you expect the most creative, dynamic capitalistic engine to do? Arn’t they paid to figure a way?
    Arn’t we wasting time judging the morality or durableness of that gain? I’m not Dr. Hussman….I don’t hold peak to trough. I sell the iSPX as often as my baby boy goes through diapers.

  • jaymaster

    We’re private, so sorry, no investment opportunities. I can tell you that our sales are historically correlated at about .98 with global semiconductor sales, and that is how I usually play it out in the market.

    I should also point out that it has been a very rough ride since the crash. 2009 sucked (down 25%). 2010 was great (up 25%). Do the math, and we were not quite back to previous highs. 2011 sucked (down 15%). So we are now just actually breaking the peaks of late 2008. Buy and hold was scary, but active trading paid well.

    And I agree with those who are saying the market does not equal the economy. Yes, absolutely.

    But my point is, the economy is not all gloom and doom. Europe sucks, and it could get worse, even very bad indeed. So keep your money out of Europe. I think the main point of Cullen’s post is the fact that Europe just ain’t what it used to be when it comes to the global economy. We can still find growth elsewhere.

  • Mr. Market

    Lower US prices for natural gas certainly do help.

  • BJM

    Good close today – very strong conviction on the upside….

  • VII

    @ Andrea

    This is all very indulgent. I don’t get to worry about economic consequences my job is different than yours.

    But let’s wrap this up. The Fed is a problem for you…’d say..the fed is a problem for me. You are looking out for all us. And if you could just get rid of the Fed and it’s policies well….everything would be ok. Right?

    Guess what Andrea? YOU CAN’T. The Fed and Bernanke are their. NOW get over it. Learn to live with what you wish was not alive. Because they are more powerful then you or I. So since we live in the real world where people, places and things exist which we hate(I am probably now one of them)…what do you do?

    Exceptance and use the VII judo theory. Just go with the flow. Stop fighting something you can’t win.

    Also…make a call. This chatter and talk means nothing. What do you think the SPX will be on June 30th? What do you think it will be come December 31st.
    Isn’t that what it all comes down to?

    I can tell you what I think. I have NO clue.

  • B Ferro

    SPX closed up 8 pts I believe, not down.

    And if we see follow through weakness tomorrow, surely that must mean we’re headed sustainbly lower and you’ll double down on your short, no?

  • BJM

    No clue what will happen tomorrow, nor do I care – just find it odd the lack of conviction ending the day today…my bet would have been a violent finish upwards.

    As I’ve said, I actually wouldn’t at all be surprised to see 1500-1800 or higher at some point this year, I just A) don’t think it will be straight up from here, and B) think it will be preceded by a bigger drop followed by Bernanke swooping in. If a recession/Europe blows up, all bets are off….and under no circumstance do I believe we’re back in a secular bear, unless secular means less than two years….

  • jt26

    Often the decoupling is not really a decoupling in non-local currency. This time, for non-US investors its like 2000 bubble, stock gains + currency gain … the win-win! As someone noted above, this is foreign flows or repatriation of foreign investment. Hope there is not a repeat of H2 2000 …

  • Michael

    B Ferro,

    I respect your trading acumen but for me, I rather forgo the next 50-70 SPX points than buy here and have to wait until the end of the year to get back to this level. Sometime it’s better to hide in 2-3% bonds than to risk having to average down. Maybe I will be wrong and this will continue in a straight up line but history doesn’t have many of those situation. I think it is rather presumptive of you to think that those who are cautious are looking to short. Rather most are thinking that we will wait for better opportunities than to continue to chase the market up.

  • innertrader

    Its election year in the US. The socialist FED government will make sure ALL the numbers come out to support their candidate; to the best of their ability! Otherwise, they’ll get fired! I’ve watched this for decades. Over the last 4 elections, they don’t even wait a month or two to “correct” them, they “correct” them ALL within 48 hrs after the election, with no fanfare. Therefore, make money on the “good” numbers, but don’t forget to take profits!!

  • Mr. Market

    Austerity is Europe means lower commodity prices in the US. So, US citizens should welcome austerity in Europe. But lower commodity prices is bad for the health of the US financial system.

  • Larry

    Decoupling can go on for a little while, but historically it cannot last very long, especially in a global and finance-oriented economy. The twin slowdowns in Europe and China will eventually spread to the US. It will hit the US financial sector first. Watch the performance of US Banks and XLF today and this month. In 2007 into early 2008, financials led the market lower. They are likely to do the same in 2012. Our banks are too closely tied to EU banks.

  • Larry

    The financials have been leading this market higher over the past 6 months, but watch them closely this month. If financials changes from leaders to laggards, that is a sign things will change. The other key leader has been tech, especially AAPL. Tech has turned weak, and if it stays weak this month, it is not a good sign for the rest of 2012. Which sector will become the new leader? My guess is it will be one of the defensive sectors.

  • AWF

    Here is a great site to check out

  • Michael Pitre

    I don’t put a lot of faith in ISM. Wait until you see the jobs report this Friday.

  • Colin, S.Toe

    Totally off-topic: on NPR’s ‘Fresh Air’ today, fascinating interview of Steve Coll talking about his new book on Exxon-Mobil.

    High points: Former CEO, Lee Raymond, although a trained scientist (chemist), convinced that global warming was neither caused by human activity, nor even happening, personally mobilized the company to support opposition ‘research’ and political action (it even employed some of the same actors that ‘big tobacco’ used to deny the latter’s health risks).

    However, his successor changed this position (without openly admitting the company’s previous denial or oppositional role). Under him, the company opposed Obama’s ‘cap and trade’, but is on record supporting a significant carbon tax ($20/ton) as a more effective measure.

    Moreover, the company is full of highly trained scientists, including geologists who are actively pursuing the opportunities that climate change is creating (eg due to reduction of the polar ice caps). They are also actively addressing issues such as carbon sequestration.

    The technological ‘game changer’ they are most concerned about, (although they consider it unlikely) would be a break-through in battery capacity.

    Coll notes that they would not be devastated by a major political groundswell to address climate change (coal would take the real hit). Rather if the world were to recognze it as an existential threat (on the order of nuclear war), this would motivate them to make a ‘Manhattan Project’ level investment to develop alternative energy.

    On the political front, he notes that they are neither controlled by nor controlling of the US (or any other) government; they pride themselves on being an ‘independent sovereign’ (with its own ‘foreign policy). Thus although Raymond was a close friend and frequent visitor of VP Cheney, he opposed the invasion of Iraq.

    This was in line with their general dominant interest in the ‘stability’ which their massive investments in production require to pay off. Paradoxically, however, they are dependent on either western sources of hydrocarbons (and are moving strongly into alternative sources) or on politically unstable ones (eg. in West Africa) – where the governments are too poor and weak to develop national oil companies.

  • Austin

    I try to read Mark J. Perry’s blog once a week or so, just to gain another perspective on things economic. His site will leave you feeling better than downing three fingers of hopium.

  • hangemhi

    apparently Koch brother financed researchers changed from denying global warming, to agreeing that it is indeed happening, but stating it is not man-made. I assume they’ll change that opinion too when there are more profits to be made than in not believing it

  • Ben Wolf

    Yep. Hard to call an economy which can’t produce enough employment to keep up with population growth “healthy” or “recovering” in a real sense.

  • Andrea Malagoli

    That’s right, the Weimar Republic was trying to pay off its mountain of debts.
    Of course, I guess the US does not have that problem … of course this time is different.

  • Andrea Malagoli

    VII – we are mixing issues here. If you are a trader, then yes, just look at technicals and go with the flow. If you are an asset allocator, then you need to make a statistical assessment over a long period and manage risk. Therefore, making predictions about where the SP500 will by the year end is pointless, although I have some idea. In general, I do not believe in point predictions, but in trends.

    I was having these very same conversations in March last year, and just like now I got a lot of patronizing comments just like yours about how I was missing that the market was poised for a major rally. Guess what, it did not happen, and despite all these impressive rallies, the SP500 not exactly at “all time highs”.

    So, for all their ‘bears bashing’, the bulls do not exactly have much of an argument. This game of calling for the next big bull market on any market rally is getting a bit boring …

  • Andrea Malagoli

    And by the way … the market is not exactly rallying today, isn’t it?