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INTERNAL NOTE ONLY.
My colleague Peter Garnry was kind enough to quickly program a small excel thing which can track changes to growth by consensus using the ECST function on Bloomberg. This is the result.
One of my main themes over the last quarter has been a "relative outperformance" of the US economy relative to consensus. This has materialized and our call was almost entirely driven by Consumer Metric data which over the last three years has outperformed any other relevant predictor. This is now slowing down slightly, but still elevated. Meanwhile Europe start election cycle where Spain goes to the election in less than two weeks, while Sarkozy starts his re-election campaign when he is done playing Napoleon in European politics.
The outlook for 2012 is a "Perfect Storm" with increased austerity, higher unemployment, and weaker global growth(read: China).
European consensus growth by market consensus
Source: Bloomberg & Saxo Bank
European growth coming off hard and has been in almost free fall since end of July.
US consensus growth by market consensus
Source: Bloomberg & Saxo Bank
Meanwhile US growth have seen low and looks higher, but……there is a number of issues ahead:
1. The Super Committee needs to finalize its work by this weekend in order to secure proper processing Congress. WSJ journal this morning says sources tell them some progress is being made and main point for now are: A. Limiting tax deductions replacing tax hikes. B. Getting permanent Bush tax as payment and most importantly for FX markets: C. HIA – Republicans seems fighting for repatriating capital back to the US at tax rate of 5.25% vs. presently 35% - this topic has even been on 60 Minutes, so to me it looks like "deal to be done shortly" as it plays nicely to create "Job creating program.
2. The headwind from fiscal tightening will equal negative 1.00 pc of GDP – this is federal, state and local communities trying to cut back mainly, but also investment remains meeker.
Conclusion
A long life have taught me that everything "mean-reverts" – when I moved back from the US in 2000, the EURUSD was trading below 0.8400 – since then the US has pursued a policy a "benign neglect" and succeeded in making the US extremely weak by all definitions.
Clearly the US has debt issues on their own, but currencies are relative trades. To me we are entering long-term up cycle for the US dollar. The final QE/Printing of money will come in Q1 of 2012 and could cement the low, but I am willing to start overweighting US dollar relative to Europe, not Japan, and further down the road to go full in. I suggest for European to initiate the first 25% now as EUR/USD is out of touch with relative rates, funding needs, and relative dynamics of the economies.
There are four major components to my long-term bullishness:
1. The EU debt crisis – when ECB becomes lender-of-last-resort we will see 10 figure move lower.
2. Relative growth differences – The US is more dynamic and with only "one master" . – i.e. Congress vs. Europeans 27 members and lacking fiscal union.
3. Competitiveness. US will able to compete on labor costs with close to 20 pc real unemployment and incoming tax incentives..
4. HIA – Homeland investment Act – as stated above the Super Committee is trying to get a reduced tax of 5.25% in place.
These things are floating. My bullishness is relative, but the biggest contributors to long-term wealth tends to be your choice of currency. I have a target of 100 in DXY for next year, so a 25% rise in the US dollar during 2012 – and in EURUSD terms the expected move is changed range from 1.30/1.40 now to 1.20/1.30 on ECB rolling over, another 5-6 figures on interest rates, and then HIA II we end around 1.10-1.15 for 2012 end target. Having predicted this I will, as always, add, my own believe in me being able to predict anything remains 0.001 pc.
Safe travels,
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