As we head into December and the market anxiously awaits an FOMC decision which, if the Fed were truly “data dependent”, should tell us something about what the PhD economist cabal thinks about the state of the US economy, the market is bracing for a significant monetary policy divergence between the US and the rest of the developed world.
According to the standard and oft-repeated narrative, the US is the so-called “cleanest dirty shirt.” Growth is abysmal, especially in a historical context, but at least America didn’t just enter its fifth recession in as many years (like Japan).
Similarly, inflation expectations may not be where Janet Yellen wants them to be (understated rent inflation and $170 million Modiglianis notwithstanding), but hey, at least the US isn’t sinking into deflation (like Japan and Europe).
Of course it’s not just about the US vs. Europe and Japan. The world’s emerging economies are at another point in the cycle entirely and are in many cases (e.g. Brazil and China) facing an outright meltdown.
For those looking to make sense of it all, SocGen is out with an updated “leverage clock” which shows where the world’s economies are in the “deleveraging-no bubble-leverage-bubble burst” cycle.
As you’ll see below, the cycle begins after a burst bubble with asset price stabilization. As the private sector stops deleveraging and confidence comes back, debt growth accelerates anew and monetary policy “fails to curb” excess leverage. Ultimately, the music stops, “asset prices decline triggering balance sheet destruction,” and central planners resort to QE. Once QE bumps up against the law of diminishing returns, governments make the switch to fiscal stimulus and the cycle starts again.
Obviously this is an oversimplification and one wonders whether, given the myriad idiosyncratic factors at play across individual markets, it’s even possible to categorize all of the world’s economies based on the cycle as described above.
In any event, here is SocGen’s “leverage clock”:
Our SG Leverage Clock summarises our current view on the positioning of each economy in the cycle. As seen, the advanced economies span the full spectrum of recovery. Most advanced is the US entering the more mature phases of the cycle, but with further life left in the current cycle. Turning to the emerging economies, these tend to group at the top half of the clock, with the notable exception of the CEE region which groups closer to the US. China is turning over and we expect the cycle to bottom out soon, but this against the backdrop of a structurally slower economy.
For brevity's sake, we'll save you our country-by-country analysis and simply ask the following: "Why the hell is everyone other than Brazil, Canada, and India parked in one of the three 'no bubble' zones when at least 9 countries have debt/GDP above 300%, and a whopping 39% countries have debt-to-GDP of over 100%?"