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What’s That Smell?

Summary:
“At least we aren’t Europe” wasn’t quite the standard for excellence Ben Bernanke was originally shooting for. Certainly not when he began QE in the United States, nor at the inauguration of its repeat not even two years later. The former Fed Chairman had promised recovery and delivered instead a highly disputed number of “jobs saved.”Framing it this way, the Chairman showed up in the Wall Street Journal in late 2015 to attempt his victory lap. With inflation on the horizon, he said, as did “everyone”, and rate hikes to commence, there must’ve been some recovery in there somewhere. He just couldn’t find it any of the numbers, as I rebutted five Octobers ago: That means by count of real GDP and the Establishment Survey’s measure of labor utilization, both mainline statistics that are

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“At least we aren’t Europe” wasn’t quite the standard for excellence Ben Bernanke was originally shooting for. Certainly not when he began QE in the United States, nor at the inauguration of its repeat not even two years later. The former Fed Chairman had promised recovery and delivered instead a highly disputed number of “jobs saved.”

Framing it this way, the Chairman showed up in the Wall Street Journal in late 2015 to attempt his victory lap. With inflation on the horizon, he said, as did “everyone”, and rate hikes to commence, there must’ve been some recovery in there somewhere. He just couldn’t find it any of the numbers, as I rebutted five Octobers ago:

That means by count of real GDP and the Establishment Survey’s measure of labor utilization, both mainline statistics that are constructed most auspiciously toward a positive economic outlook, the current age is significantly and seriously worse than the Great Inflation – and it isn’t even close…From 15% in payrolls to not even 3%? From 22% in real GDP during one of the most universally reviled economic periods in history (anyone recall Gerald Ford resorting to WIN; Whip Inflation Now?), featuring oil, dollar and political crisis almost everywhere, to not even 10%?

The US economy “somehow” managed to meaningfully underperform each and every recovery period in postwar history, coming in significantly behind even the latter half of the 1970’s which was no sane person’s idea of a minimally acceptable economy. If you can’t get close to the Carter administration…

A few years further on, inflation (meaning acceleration) once again failed to show up as promised, meaning the decade of the 2010’s couldn’t even manage to live up to the 1930’s. Yes, the Great Depression (unit roots, anyone?)

What’s That Smell? What’s That Smell?

So, for Bernanke, the standard was shifted to Europe because there was nothing else. Take a look at how much worse things are over there!

It’s nowhere near grounds for a grand celebration and parade. Scraping the bottom-est part of the bottom-est barrel, however, Europe is what was left to salvage the smallest bit of QE pride. Pity all of us.

But even the difference between the US and Europe, while smaller than Bernanke could admit, was even smaller still. The US recovery didn’t qualify as one, nor did Europe’s, and if there was any distance jammed in between them it had nothing to do with QE (none of Bernanke’s four).

Instead, what made such difference was when Europe fell hard into recession beginning in 2011 whereas the US merely skirted along the edges of one. Both “unexpected”, of course. Economic performance was determined by eurodollars, meaning Euro$ #2 and its epicenter at that time in that particular end of the global PIIGS-infested repo market.

What’s That Smell?

This was a difference of gradation, however, rather than the categorical one as Bernanke was claiming. Both economies were lashed by the unanticipated setback which hit Europe harder because that’s where the trouble was most focused. In both places, more importantly, it thwarted real recovery (as Bernanke even admitted in his ridiculous memoir, properly calling it a “false dawn” while carefully avoiding any blame for it; “jobs saved”, remember).

In other words, there’s no real differences in these two parts of the global economy nor much by the way of the rest of it. During Euro$ #3, the next “unexpected” and unidentified setback, the one ongoing when Bernanke wrote this embarrassing salvage attempt, emerging market economies took the worst of it but once more that hadn’t left either Europe or the US unscathed.

Everyone suffered, though the extent to which everyone did depended upon to which group one belonged.

The big problem with 2017’s globally synchronized growth debacle, therefore, had nothing to do with the term’s first two words. Those were fine, appropriately included; it was the idea that it had been “growth” and that in 2017 it was somehow different than it had been in either 2010 or 2014.

What’s That Smell?

And that’s where Bernanke really missed his chance to figure it all out. In between each and every Euro$ #n, after every eruption of global dollar shortage, the reflation period which inevitably followed was as much if not more synchronized than the downturns which preceded them. In truth, 2017’s reflation wasn’t so different, after all.

When it goes up again, everything goes up (just never enough, nor for long enough since always interrupted by the next “unexpected” dollar shortage in line).

What that leaves for us, however, is that under these circumstances (dollar shortage) once any part of it starts to go wrong or continues to go wrong – no matter where on the map the epicenter of each particular one might lie – it’s only a matter of time before the whole thing gets pulled in or, as in Euro$ #2, pulled back in.

It’s like the cliché of mixing ice cream and dog poop; adding the former to the latter will never make the latter more like the former. Rather, putting the two together in any fashion or in any order you’re left with a smelly, disgusting mess each and every time.

When globally synchronized growth (read: reflation) is detoured by a eurodollar squeeze (dollar shortage), no matter where it hits hardest or shows up first, over time we expect a globally synchronized downturn to follow every time. The good parts never pull the bad parts out of it, rather the bad parts always bring down what’s not already bad.

What’s That Smell?

This post-Euro$ #1 fact has been most evident during the current globally synchronized downturn which is approaching its fourth year. Yeah, four. COVID was merely a shock added on top of what had already been a recession in Europe as well as nearly one in the US.

As I wrote yesterday, Europe took the hit first (along with China); that was the leading indication for the rest of the world, including the US economy. And while it proceeded the bright flashing warning was ignored, “everyone” absolutely convinced of inflation and growth acceleration (sound familiar?) during the balance of 2018, expecting, at least, the US to further move in the opposite direction from Europe (ah yes, “decoupling”).

Nope. I cautioned that particular summer not to expect anything other than synchronization – of the dog poop variety:

There’s economic trouble brewing in the world, and if Europe’s rebound was foretelling of a global one, what might we discern of Europe’s increasing retrenchment? The timing is particularly suspicious, though not in the way it will be classified all throughout. This is not trade war stuff, particularly since it appears Europe will have been largely spared.

What happened in January 2018 demands our immediate attention; first global asset liquidations and then the turn in the euro that suggests why there were liquidations in the first place. The ECB’s balance sheet continues to swell, and thus euro bank reserves, but eurodollars do not.

The latest batch of global PMI’s from IHS Markit for October 2020 are…not good. In the US, the numbers managed to tick higher (another one of those “highest in [fill in the blank]”) but you can see that it only equates to a struggling rebound rather than an accelerating one or one that’s nearing completion (which would’ve been the original “V” case, but isn’t).

As problematic as that is, in Europe the composite is back under 50 for Markit. And it’s not just this one sentiment survey; a whole range of data suggesting the European economy which barely moved off the bottom may be moving again in the wrong direction. “Worries” about “renewed COVID” aren’t the problem, merely the latest in a long line of excuses to save some more jobs.

What’s That Smell?

Nor is that problem just about Europe. It’s never either/or. This economy is synchronized, and while it is, sorry, Bernanke, that means there’s not the chance to escape when one part of it is sinking. The European economy has, as I wrote in 2018, proved an unfortunately reliable indicator in several of these eurodollar episodes.

Has anything meaningfully changed in the last few months?

No, and that’s why the noises about “stimulus” grow louder in every corner of the globe. That’s getting synchronized, too. People everywhere can smell the dogsh- -.

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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