USA – STILL DECOUPLING FROM EUROPE?
Last year I made a very unpopular call that the US economy was likely to remain in positive growth territory as Europe sank into recession. In an increasingly interconnected world this idea of decoupling doesn’t always make a lot of sense to most people. But the policy response in Europe and the USA has been so dramatically different that the signs of this decoupling become increasingly obvious. The latest industrial production data via Reuters really highlights this point:
“Historically, it has been the pattern for economic weakness and recessions in the United States to trigger economic woes among its trading partners globally; as this chart shows, the U.S. is always just slightly ahead of Europe when it comes to an economic downturn. Now the question becomes whether this pattern will reverse itself: the fear that Europe’s economic woes will come home to roost in the United States sparked what some pundits have dubbed over-reactions in both bond and stock markets during May. True, some economic data has come in slightly weaker than expected, but there are no clear indicators that growth is poised to evaporate. Still, the anxiety is that Europe’s woes are so severe that it is impossible for them not to spread.”
The big difference between Europe and the USA has long been the difference in budget deficits. Many of the European countries are suffering through extreme austerity while the USA continues to spend. This is helping to bolster the economy as we suffer through historically low levels of private investment due to the balance sheet recession. But in Europe it is like trying to swim with a weight tied to your foot. I don’t see any reason why this decoupling trend should end now given there has been no substantive change in policy….
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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Just look on Chinese export data to EU, the austerity probably is far less from people imagined here. Spain probably hasn’t tasted much of austerity yet, their budget defict suggests that too.
Spanish government expenditures, millions of Euros
2007 139 704
2008 148 082
2009 189 319
2010 179 572
2011 151 095
Now say you’re sorry.
Congrats, Cullen, you got this right one…partially. Europe is decoupling only in severity. The US will enter recession in 2012. You were right about Europe in worse shape because of Euro problems, but the world is still interconnected in terms of global recessions…and we have on in 2012-?
Thanks. Things can change quickly in this business so one day you’re right, the next you look like a fool. I’ve come to learn that’s just the way it is.
I think the US will more likely enter recession in 2013. But not because of Europe in my opinion….More so because of the coming decline in federal spending that is likely to occur….
Cullen, do you really believe there will be a big dropoff in gov spending? I guess I have a hard time seeing our politicians committing to cut spending.
I really don’t know. I am inclined to say no, but my crystal ball got stolen from me 10 years ago.
If we have one party in control of both the Legislative and Executive branches next year, I’d say we won’t have budget austerity, or if we did it wouldn’t last very long – 6 months max. If we have divided government, no matter which party has what, protracted austerity is much more likely.
Andrew, I just don’t see it. Politicians will do whatever they need to do to get reelected. Forcing the economy into a downturn surely will not get you reelected so I don’t think it will happen.
Industrial production is part of a larger, currency shift. I think there’s plenty of evidence that there isn’t any genuine decoupling. US growth this quarter is on track to come in at about 1%. That slowdown is at least in part because of Europe… as is the -.4% ex autos de-growth in retail sales, month on month.
I don’t think the U.S. has really decoupled in the meaningful sense of “avoided a recession”. The U.S. has prolonged the period of entering into one.
The ECB even to this day doesn’t have 0 % interest rates. The Fed does, and have done quite substantial rounds of EQ compared to one round of LTRO.
Add to this very hefty deficts in America. Gross debt-to-GDP is already over 100 % and public debt is set to enter mid-70s next year. If recession hits this or next year, net debt will soar over 85 % at least, perhaps even over 90 %.
What I look at isn’t only the fiscal cliff, which I am not that worried about. I am more worried about the drama which will surround it. Justin Wolfers and Betsy Stephenson have published a study that suggested that the last budget showndown nearly caused a recession, not the last European crisis last summer.
And in conjunction to that, 70 % of the U.S. economy is consumer based. The savings rate have declined quite substantially and the median wage, adjusted for inflation keeps falling every year. Last month full-time jobs actually fell and part time jobs surged(100 % of all job gains).
The American consumer is slowly getting replaced by somekind of part-time economy which is stuck in perpetual stagnation. So on my horizon America is actually mired in a depression, but not the kind of that people think. It’s a much slower, ‘gentler’ process where the ‘recovery’ means continual replacement of fulltime jobs, much lower wages and lower savings rate. A trillion dollar deficit and 0 % interest rate can mask that for only so long. At one point, there will be a widespread recognition that something has fundamentally changed.
All I want to know is if the stock is going crash again to the depths it did in 2008 and when will the happen………………
The problem is : 2011, market priced in crash, so it was a relief the muddle through case. Now the market is price in the muddle through case, and the expectation for government intervention is too high, it is hard to see the market has bottomed with such high un-solid expectation. Without market pressure, how EU countries fill the gaps between their interest?
We just picked up a sliver of a part of Europe(we started small)-personally and in our portfolios-I’ll post the country once I’ve confirmed were done.
Our directional bias is still down although we closed out RWM- with a slight loss. But like Arnold says..”i’ll be back RWM”
Europe is broken but one country is about to get fixed(we hope)
I’m headed to Dublin, London and Paris from June-July. If there are Prag Cap readers in these cities and you’d like to get a drink..I’d love to meat some of the good people I’ve met on this site. I’m not on Facebook or have a site so this if you live in these cities and have an interest please reply and I’ll send you my e-mail. No talk about the financial markets…just would like to get to know some locals and meet some new friends I can take with me through out life.
I’ll be in Ireland in Sep for the ND/Navy game – bad timing.
WTF?! I hope your cheering for NAVY!
When you’re in Chicago, let me know.
Absolutley!
What part of the country do you guys live in? I’m in San Francisco.
Any thoughts on the largely sideways action lately? I keep reading this indicator and that indicator (stock, commodity, or sector) is at a make or break line, and it just looks like they are all hovering right there not wanting to go in either direction… maybe waiting out Greek elections this weekend, and Bernanke next week ?
hangemhi-
Southern California. RE: the market- I’ve been 20% short here adding all week.- So I believe with my money the market will head lower right here right now.
I am working under the idea we have topped out and will decidedly head lower quickly. And that should the Fed give the Bulls some Bath Salts the Bull will start to eat the Bears face. I’m short heading into this meeting. Today.
I’m ready for both outcomes..I have the most difficulty should the market NOT receive more bath salts and yet move higher above some resistance into August. This would really confuse me. It’s that idea that the market needs Monetary easing and then shows it doesn’t. That outcome could be my achilles heel as it would seem to be telling me something I’m not prepared to recongnize. The market could be stronger than I believe it is. It doesn’t need Ben. Cue- the end of the Bond Bull…enter the Bond Bear.
I hit up Chicago once a year in September for a fundraiser for Alzheimer’s.
Unrelated: Wasn’t it your idea to have a PragCap get together a while back?
Yeah, I had mentioned it a while back. Everyone’s pretty busy and dispersed it seems. I’ll be in Chicago for most of September. When’s the event?
Hit me up at somnolento at gee mail (I’ll send you my real email address from there)
Done.
The event is-
http://act.alz.org/site/TR?fr_id=1725&pg=entry
Its an event run nyt the Alzheimers Association , I think they’re doing it at Montrose Harbor again this year.
That in no way answered your question about when the event is-
Sunday September 9th. Will be in town all weekend.
I’m in London, happy to have a drink and share some european perspective
I edited your email. Hope you don’t mind. I wouldn’t go leaving your actual address on the internet (with the @) or the crawlers will find it and spam the living hell out of you….
Hey I got his email, feel free to delete it entirely if the spammers are that bad.
Thanks CR-
Yep is there any way to delete it- I’ve connected with two people already if you can please do.
Hit me up if you’re ever in NYC.
It was GREK. Picked up 2.5% of GREK and today it’s up 10%.
We’re closing it out. For a 11.5% gain in 24 hours????
WTF.
Talk about getting lucky.
uhhh, do not pass go, do not collect $200, go directly to Vegas.
The decoupling of Europe and the US was definitely a great call. The pertinent question now, IMO, is will Europe sink far enough that even with the current decoupling, US growth falls toward zero?
If Euro will start systemic risk within financial systems it’s far more important than Europe’s GDP Growth; Europe from a Global GDP point o view doesn’t matter all that much as long as the US keeps it’s path to a growth normality and BRICs keeps adding new consumers and investments at current investment rates.
So I believe what Europe need to do it’s to avoid worse case cenario in the end with huge firewalls. German politicians can keep the rethoric that they will not give more money but in the end the money will come just as it did for Spanish Banks.
BRIC new consumers ? BRIC new investments ? May be you have some supersized information sources because, well, I’m in India now and here the economy is at the lowest of the last 10 years. I’ve some good infos on China and frankly, things are not going well and… no it’s not Europe. These economies are ill, severely ill. Not to mention Japan where trade balance is going negative. One day, not so far, we will wake up and… uh Japan devalued 30%. Incredible ? No if you study macro economics instead that reading WSJ. Imagine what happen the day after…
Good decoupling to everybody.
Cullen, sorry but I concur with Alberto and disagree with your decoupling thesis as we go into the 2nd half of 2012. As Alberto said, it is not just Europe but also Asia that are in major slowdowns.
Another impact as we go into the second half is that even though interest rates are at record lows, banks may tighten up further on lending after they are hit with some financial contagion from Europe’s woes. European banks are already cutting back on loans in a major way.
And today’s news of 2 consecutive months of negative retails sales growth ain’t gonna help the U.S. to grow.
I’ll throw my 2 cents in here with BL and Alberto. I think the Cullen decouple has only been pertinent for the shorter term. The US has to have markets to sell into and tho’ i don’t know the figures, the India, Asian, Euro downturn HAS to affect the US markets. Even deficit spending by US gov’t into the economy will not make up for lack of sales.
Since timing is everything, I will say that the decouple will return to “couple” within the 3 months timeframe that LaGarde and Soros are talking about..
rhp
RHP, thank you! And now I will boldly and probably incorrectly put numbers on it from the view of US GDP. 1st Qtr GDP came in at 1.8%, 2nd Qtr will be about 1.3%, 3rd Qtr about 0.7% and in the 4th Qtr I would venture that US GDP will come in at Zero, no growth. Those figures will be nowhere near as bad as Europe’s , but clearly a trend back toward coupling with the rest of the world. Cullen, you even said that US would be in recession in 2013 and this is consistent with your view.
When an economy of a country as big as the US, with a growing population, huge imbalances, tragic inequalities, not to mention the real unemployment, is NOT growing at least 3%, night is coming. And here we have inequivocally a down trend. So why losing time about growing ratios that are smaller than the statistical error. Come on boys, there is a LOT of work to do, in the US, in Europe, in Asia. A faulted development model to correct, I mean, not less than that. But first of all, to solve a problem, it must be recognized, and we are still in denial. All of us just from a different point of view. There is a generation of failed politicians, failed leaders, failed corporate managers to fire, in the US, in Europe, in Asia. NOW. Hard work, they will resist, but is us or them, not both.
I agree with this comment. World still in denial: things are not working!
Wake the fuck up before it’s too late. Deflation or inflation will eat us alive, they are already doing except in lala land some people seems to live in. Majority is losing wealth on a daily basis, in USA, Europe and now also in developing nations.
When we finally wake up it’s too late and the world falls of a cliff, just like in the 30′s and 40′s. We seem to be following that path with fantasies to kick the can everyday.
A One day 30% devaluation of the Yen Alberto? And not so far away? Now I agree with the short Japan but I would suggest you play that with 15% downside Puts, I bet you can get some banks on the other side of that trade once you must be very lonely on that call. What would take for markets to have such a shift of confidence? The trade balance didn’t scratch it.
As for the Macro play I like unfortunately it’s not from WSJ, Gavekal / Dragonomics has that center scenario that I like and tend to agree.
Not everything can be traded, at least not by me. My opinions are macro based. 10 years ago Gary Schilling was writing about the coming deflation, real estate burst etc… reccomending people to buy long treasuries. People called him a fool. He wasn’t. Social and economical systems do not react instantly, they have a long inertia and this is not compatible with the typical short minded man. I dont’ know when Japan will devalue but ALL macros tell that it will. Not an easy trade but I don’t care, I’m not a trader. Just 10% of my portfolio is trading (with up to 3x leverage at max), 80% is statically allocated following macro analysis and 10% is gold (an insurance if things go really bad). That’s it. And guess it, I’m not rich as Cresus but I’ve never lost a cent in each of the last 8 years.
In an economy where a 1% difference means the difference between real growth or real degrowth fine lines are drawn.
I still have to comprehend how an economy with growing poverty, stamps food usage and more people falling off the working force is ‘growing’ or is ‘sane’ in anyway!? But still if I did comprehend this mysterious things (liquidation of assets to continue the pace of consumption and financial costs servicing? more private debt being added? did not learn anything apparently), which I may be too silly to understand, I still fail to see how the multiplier effect export/imports have on national economies won’t disrupt the pace of the economy at some point.
It’s true that the world is more dependant on ‘uSA imports’ than USA exporters are dependant on the world. But capital flows in this days where fine lines are walked can make the difference. So I may add if there is not an internal force to offset this give it a quarter or two and it will translate to american economy.
P.S: Anyway, is good to notice we haven’t recovered pre-2008 levels of activity, speaks volume of how after trillions of money printing, QE, stimulus,e tc. the economy ain’t responding and how broken things really are (and not being fixed).
Everyone needs to watch this…
http://www.youtube.com/watch?v=7y2KsU_dhwI
The Euro situation demonstrates and important point about fiat money in an international context.
We agree that the value of a fiat currency depends on the ability to enforce its use, and to demand it in taxes. The trust element is not a trust in the market sense, like the trust in a bank’s liabilities and solvency. It is political trust, trust in the political stability and political solvency of the state. It’s ability to enforce collection of taxes and use of the currency, maintain confidence, not destroy production, not be invaded, etc.
Only within a sovereign, national political unit can those conditions apply.
Trade between national political units always required settlement in real money because this political trust was absent between nations. Even within nations, the ability to impose these conditions was generally absent before the 20th century, except in war time. The state didn’t have the reach or power to impose a fiat currency, it didn’t have that level of totalitarian power.
Between nations, these limiting conditions were only overcome with the emergence of USA as a superpower able to impose a trade regime in its area of influence, settled in US dollars. The closing of the gold window was the overt act of political power that formalized this, when challenged by members demanding redemption of gold as promised. The veil was lifted and members accepted the de jure our de facto political position.
The ability to run a large trade deficit indefinitely without settlement in real goods, real money, or negative exchange rate consequences is an imperial privilege. There may be benefits to the member nations, such as industrial development from exporting, or pegging to a well managed, stable currency. But these are also imperial benefits, stemming ultimately to the political power of the power providing the currency and trade zone.
There is an element of mercantilism in the accumulation of dollars by developing countries like China, but that is just their strategizing within the system we set up for our benefit. Its not something than can be maintained in the long run without a concomitant area of political predominance.
In terms of the Eurozone, why would the stronger nations in the Eurozone permit a situation where the weaker nations run trade and budget deficits, without paying in real goods or money, and without negative exchange rate consequences?
Yes, Germans benefit from an artificially low exchange rate by additional exports, but as we agree imports are real benefits and exports real costs. Germany isn’t a developing country dependent on the demand of Greek consumers to maintain employment and social stability as might be argued re China and the USA. Nor are they an imperial power over the Eurozone either in fact or in law. They can’t enforce use or taxes in Euros. They don’t share a national identity, political identity or inherent trust with other Euro members.
Germans may have to accept a stronger currency in a break up, and may export less, but what is the real benefit to exporting for exportings sake?
Just some thoughts.