In my last note we talked about the synchronized global easing cycle.
Major global central banks responded, in coordination, to the global health crisis.
They responded, in coordination, to the subsequent inflation.
And over the past year, they've responded, in coordination, to the disinflationary trend.
So, global policy making has been intentionally synchronized, and that includes Japan — which served a very important role as the global liquidity provider (with QE + negative rates) as the rest of the world was inflation fighting.
Now Japan is attempting to "normalize" policy, as the rest of the world is easing.
But as we also discussed in my last note, while monetary policy has converged, the economic outlook within this consortium of major central banks/ leading countries has diverged.
And if we simply use consumer and business confidence as our gauge, the divergent economic outlook has come from diverging structural agendas (structural policy).
The U.S. has had a populist political shakeup.
And that catalyst for change has infused confidence in the U.S. economic outlook.
It's a new roadmap. And this chart highlights the impact (i.e. divergence in government policy paths = divergence in economic outlook).
And as I suggested in my note on Thursday, this divergence doesn't close without a catalyst, and that catalyst might come in the form of a populist political shakeup in Europe.
We've seen the Macron government fall in France over the past two weeks. And just this afternoon, the screws were turned on Scholz in Germany. He lost a confidence vote. The Germans will have a snap election likely in late February to determine what might be a new political landscape.
And in Canada, Trudeau's government lost two key cabinet members today to resignation (Finance Minister and Housing Minister), and a no confidence vote looks likely early next year.
This is beginning to look like the 2015-2016 populist pushback that delivered Grexit, Brexit and the Trump vote. The people want freedom from the globalist agenda, and they want sovereignty restored.
In Europe, if the political dominoes fall in the coming months, it will come with complicated financial risk — a reversion to nationalist governments in Europe would be a clear threat to the future of the euro (the common currency).
