The U.S. economy is booming, because you know, America is great again!
Guess what? SocGen’s Albert Edwards isn’t buyin’ it. Well, actually I don’t know what Albert thinks about the relative “greatness” of America, but when it comes to whether the U.S. economy is still hitting on all cylinders, he’s skeptical.
Edwards kicks off his latest missive by characterizing the ongoing U.S. expansion as a product of “President Trump’s veil of fiscal profligacy”. While you can debate the extent to which U.S. economic strength is illusory and/or sustainable, what you cannot debate is the fact that some of what you’ve seen in 2018 is the product of deficit-funded stimulus piled atop a late-cycle dynamic. That’s fiscal profligacy at its worst: It’s irresponsible and ill-timed. Here’s the quote from Albert’s latest:
August’s US ISM was a blowout data point showing US manufacturing is booming fit to bust! That will certainly keep the Fed tightening. But – there has to be a ‘but’ – this data point contradicts a lot of other evidence that lurks just behind President Trump’s veil of fiscal profligacy that a notable slowdown is already underway.
The problem here is glaringly obvious. Steady-as-she-goes growth is not only not acceptable under MAGA, it’s explicitly forbidden. There is nothing “great again” about growth that’s less spectacular than it’s been in the past. Growth that’s lower than yesteryear is the exact opposite of “great again” if you equate “great” with growth.
So come hell or high deficits, Trump is going to restore that bygone era of American “greatness” and in his Simple Jack world, that’s as “easy” as tax cuts and fiscal stimulus. And you know, if we weren’t where we are in terms of the cycle and we weren’t nearing what certainly looks like a peak in economic momentum, that might be fine. But we are where we are and so what he’s doing is going to juice things further in the short-run at the expense of the medium- and long-term. But hey, that’s populism for you.
Of course Trump isn’t a guy who is easily deterred by reality, which is why in July, he held an actual White House press conference to celebrate a quarterly GDP print. At that press event, he characterized a 4.1% (since revised a shade higher) annualized rate of growth as “amazing”. Spoiler alert: It’s good, but it ain’t “amazing”. In fact, Q2 would have qualified as just the fifth best quarter under the Obama administration.
The real problem for Trump, though, is that the more “success” he has at making America’s economy overheat again (#MAEOA!!!), the more he pigeonholes Powell’s Fed into hawkishness. That, in turn, increases the chances of a policy mistake. That’s something Albert Edwards talked about earlier this year. “Either way, wage inflation will begin to rise more quickly, driving market expectations of Fed Funds higher”, he wrote in a February note, adding that “just like the peak of the last two economic cycles, it will be the implosion of financial markets that causes the next recession [and] President Trump’s grotesquely ill-timed fiscal stimulus will be identified in retrospect as a if not the trigger.”
Again though, Powell is damned if he does and damned if he doesn’t here, something Edwards makes clear in his Thursday note that finds SocGen’s incorrigible bear this time criticizing Powell for praising Alan Greenspan’s gradualist approach to raising rates. To wit:
Fed Chair Powell spent five paragraphs of his long-awaited Jackson Hole Speech congratulating Alan Greenspan for his gradualist approach to raising interest rates in the late 1990s without mentioning that this timidity led to the tech and corporate debt bubbles! In uncertain times (when are they not uncertain…?) the only time he foresaw when more decisive action was needed on rates was in the case of a meltdown when Draghi-style do what it takes action is warranted, or if inflation expectations become unanchored. Powell said nothing on the slow pace of tightening causing debt excesses to build until they burst and lay the economy low. Truly little has been learned from the past.
That’s fair, but again, the story of the last six months has been overt hawkishness from the Fed leading directly to an unwind in EM. Now, more than a few folks are calling on Powell to put the “gradual” back in “gradualism” – if you will.
Read more on Powell’s Jackson Hole speech
Anyway, getting back to the U.S. economy, Edwards notes that Trump isn’t going to be thrilled with the latest trade data. “If Powell remains timid on the pace of rate hikes, the same cannot be said of President Trump on trade, and the latest US trade data out this week will surely get him riled up”, Albert writes.
Edwards goes on to critique the blockbuster ISM manufacturing print we got earlier this week – as a reminder, the survey hit a 14-year high.
Albert thinks it might be lying. You’re probably aware that the Citi economic surprise index has been fading of late (we’ve mentioned that on any number of occasions – basically, when it comes to beats and misses, the momentum seems to be waning). “Certainly, the Citi Economic Surprises series seems to concur with the Markit PMI showing that the economy seems to have gone off the boil somewhat”, Edwards says, referencing a less ebullient read on the Markit survey of manufacturing activity.
He also grabs chart from Nordea that betrays a notable disconnect between tightening financial conditions and the ISM:
Finally, Albert reminds you that ISM is like spec positioning – a contrarian indicator.
“The ISM should be used in the same way as technical analysis uses the put/call ratio or the speculative positioning data from the CFTC (i.e. when the economic data, market sentiment or positioning is strongly in one direction, it pays to bet the opposite way)” Edwards warns, describing the following chart which features a not-so-subtle header for those of you who might not be picking up on what Albert is laying down:
The bottom line here is the same as it ever was. Albert is skeptical of whatever degree of optimism you might be harboring.
And he’ll tell you about it again next Thursday or maybe three Thursdays from now, depending on whether he decides to take another vacation to Jamaica in order to hang out with the ghost of Marilyn Monroe.