CIO of Alhambra Investments, Jeff Snider, talks on the real causes of slack in the US economy and its underperformance against potential. He cites a global shortage of dollars and broken financial system as the main problem.
• The current low in US unemployment is not the sign of strength it is often made out to be as it no longer aligns with other economic variables. And despite the current expansion officially the longest on record, Snider argues current growth feels like a contraction since it is below the long-term average (around 5%).
• Snider points to potential growth estimates from the congressional budget office (CBO), which since 2016 show growth dropping below its long-term average. Overlaid with a chart on 10-year treasury yields, falling rates tell us that tight monetary conditions are constraining growth.
• Multiple rounds of QE failed to bring back growth to its long-term average leaving some to conclude that if QE didn’t work the economy is broken. But the main reason is that monetary conditions have not been normalized.
• The bond market reminds us of this global dollar shortage and resulting tight monetary conditions. The clear indicators are falling Treasury yields and the spike in repo rates.
Why does this matter? A broken financial system and global dollar shortage is negative for global growth. Although bullish for the dollar any resumption of Fed cuts and shift back to QE in the long end bring this to an end.
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