A few months ago I asked a yet unanswered question – “is the USA decoupling from Europe?”  My thinking was rather simple.  Both regions of the world were/are suffering balance sheet recessions, but the difference is that Europe is imposing austerity while the USA is running large budget deficits.  That meant the US economy was unlikely to be dragged down by the Euro crisis.   Back in December I said:

“The United States, on the other hand, has been running steady 10% budget deficits throughout the last 3 years – there has been no real austerity.  This has helped the private sector de-leverage without crushing economic growth.  I’ve maintained an unpopular position over the last few quarters that the USA would “muddle through” as opposed to falling into recession.  This position has been based on my idea of a continuing balance sheet recession in the USA combined with a government that, despite its inability to agree on most things, has not torpedoed the economy via austerity.”

The latest industrial production data shows how this decoupling has indeed occurred (via Reuters):

“Until recently, that is. As the chart on the right shows, the recent crop of crises among countries on the periphery of the eurozone – most dramatically Greece, but also Ireland, Portugal, Spain and Italy – has caused industrial production to plunge in the eurozone as a whole. Ironically, at the same time, the same data in the United States has rebounded, helping to fuel confidence in the US economy and fueling the recent stock market rally. So, on a relative basis, the U.S. economy looks particularly robust, while the modest gains reported by France and a small slide in growth announced by Germany have been more than offset by the economic slump on the part of the eurozone’s laggards.”

Will it continue?  It’s certainly hard to imagine that things in Europe will change any time soon.  As I’ve recently said, I don’t think the crisis in Europe is over by any means.  But I do still believe the US economy is healthier than most believe….


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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  • Andrew P

    That is a dramatic divergence after years of correlation. If the IP level surpasses the 2006 peak, should the employment situation be fully restored?

  • Larry

    If a Republican is elected president in Nov, and the Repubs take control of the Senate, then US budget deficits are likely to fall dramatically, perhaps reduce from 10% to 5%. If Obama wins re-election, which now is looking a bit more likely, then even with a tax increase on the rich, budget deficits are likely to come down much more gradually, say from 10% to 8%. So the current equity rally may depend on continued strength in Obama’s poll numbers.

  • Kobayachi

    Very strange, I just came across a similar chart comparing the DOW transports versus SP yesterday. It looks exactly the same.
    Too bad we cannot post any pics directly here.

  • Outlander

    The question is:

    How you will hold the USD? Printing more… pushing China to ride off them?
    If Europe really lives the crisis (I am not saying GR/PT/ES/IT … I say the core GR/FR) will USDEUR move or we will play a FED standard FX manipulation?

    It is just till 4th Nov….. ??

  • KB

    God allmighty, how simple!!! And could you imagine how better would it be if we run 20% deficits? or 30%????? I strongly believe, that in next 10 years of running 10% deficits, we will leave EU in the dust. The only important point is not to let idiots in the government to cut spending……

  • BillOhara

    “But I do still believe the US economy is healthier than most believe….”

    The best discounting mechanism I know to measure how the general public perceives the health of the economy is the stock market. Consumer confidence numbers are flakey and noisy, retail sales give you a good coincident indicator, but the market gives you a genuine (wallet-connected) read on what a relatively informed marketplace thinks of the economy’s future prospects.

    What are the markets saying then? Well, the S&P 500 is up over 100% from its lows 2.5 years ago. The Russel 2k +135% and the DJIA +99% over the same period. Over the last four months these indexes have climbed 25% or so. The Russell 2k is a few percentage points from its all-time high, sporting a fairly optimistic (by most people’s standards) trailing 12 mo p/e of 42x and forward p/e of 20x. The S&P sells at 13x forward eps which is a bit off of historical average but not bad considering the kind of GDP growth we’ve experienced.

    The general consensus seems to be that the economy is not only healthy, but that there are no storm clouds on the horizon. We’re in the middle of the worst quarterly report in three years (see Jim Bianco’s piece on % of s&p beating expectations) yet the market continues to levitate. While this is likely partially inspired by monetary stimulus, it is still quite obvious that the markets are very bulled up on our economy’s prospects.

    If you think the economy is healthier than most believe then you must be very, very bullish indeed. The point is that you’re not making a contrarian call, you are consensus. The market has firmly priced-in decoupling, and has decided that a sovereign default in a dramatically over-leveraged system is nothing to worry about. The thing that puzzles me a bit is that I remember you mentioning a few weeks ago that you had finally switched your portfolio’s position to reflect a more negative or at least neutral bias. Why would you do this if you believe the economy “is healthier than most believe?”

  • freemarketeer

    Bill sums up my thoughts. I see little risk/reward opportunity in U.S. equities. My top picks in October were domestic names with exposure to construction/manufacturing/housing. I feel like they have less downside exposure still, but not a lot of upside from current prices.

    I believe Cullen’s trading is all algo driven, FWIW.

  • quark

    The stock market funcrtions is also a beneficiary of relative values….that is how the stock market decouples from productivity. Despite our productitvity divergence from Europe the US is still in trouble and so is the stock market.

  • BillOhara

    Thanks. You’ve done very well. Better get fat, not slaughtered.

  • krb

    Hi Cullen!

    Be careful my friend! This could be your personal George Bush “Mission Accomplished!” moment.

    We are years away from being able to do any post mortems about the steps taken by the two equally incompetent leadership groups in Europe and US… least if we want to do it using facts rather than fudged, spun, manipulated stats….you know what they say about stats after all. Rather than concluding we’ve “decoupled” an equally valid argument could be made that we will both eventually have to pay the same heavy price for taking on excessive debt, the Euro group just seems to be trying to begin paying the price now while we in the US are choosing to do more can kicking. Our time will come, our current class of politicians just hopes that it will be at least after they are out of office and maybe even passed away. krb

  • Cullen Roche

    Ha. Yes. I’m not breaking out cigars on this baby. But I still don’t see recession on the horizon so if it comes, I’ll take my lickings….

  • krb

    And by the way, I’m a believer in your theories. I just believe we’ve gone way beyond the debt and deficit levels that represent “efficient” spending beyond revenue, to the extent the private sector saves. To get back within that “efficient” level, whatever it is, will eventually require some level of austerity here as well. Geithner and the Euros can point fingers at each other like two children about who is being more responsible in the short term….or maybe more accurately, like two drug addicts requiring bigger and bigger hits. Go to rehab now or go to rehab later when we are sicker but hopefully not yet dead……the Geithner Bernanke cabal have chosen another dose. krb

  • Cullen Roche

    Agree 100% KRB. We could utilize resources much more efficiently than we do.

  • Wantingtoretire

    The world markets assess countries productivity and “debt” level. At what point does the US “debt” level hurt the US and how will it hurt the US?

  • B Ferro

    US decoupling from Europe or the other way around. When it comes to asset returns Europe is smoking the US this year…looks like they’re doing the real decoupling, ironically as all the bears bang their drums about “recession” over there.

  • Octavio Richetta

    A great one for. Shillinh, even if on the bearish side.

    Lots of great analysis and facts condensed in a single article. It is like one of his letters but without the insightful backup charts.

    Take for instance his observation on the contribution to consumer spending from people who are not paying their mortgage but have not kicked out from their (?) houses: this amounts to about 65 billion or 5% of Groos Domestic Income!

  • anon

    I’m not sure about all of this logic. The stock market has an uncanny ability to top out precisely before the start of each economic downturn. This indicates the market is a very poor predictor of near-future economic activity.

    For me, the stock market is a wonderful coincident indicator of people’s attitude towards STOCKS… Its not a great forward indicator of the economy…

  • Octavio Richetta

    Latest teeth from BG:

    Gross: Creditors #lent 2 much during bubble. #Greece in “ashes” #Portugal may follow. Only free central bank credit offers temp “salvation”