This Shouldn’t Be Possible...

Summary

The global economy is facing synchronized declines, with weak economic momentum reflected in manufacturing data from the US, Canada, Mexico, and Europe. Tariff distortions have temporarily boosted economic activity, but as these effects dissipate, the broader trend shows waning demand, declining order books, and monetary tightening. Key indicators like PMIs point to further contraction in the goods economy, with major risks for 2026. The Eurodollar system’s issues, including credit market cracks and shadow bank bailouts, signal heightened financial instability. Experts warn that the US is edging closer to a recession as the global economy enters 2026 on a shaky footing.

Takeaways

• 😀 Economic momentum is weakening globally, with synchronized slowdowns across the US, Canada, Mexico, Europe, and Switzerland.
• 😀 The US Treasury market reflects global economic conditions, with inflation expectations subdued, signaling suppressed demand worldwide.
• 😀 Manufacturing activity in the US, Canada, and Mexico is contracting, with weakened orders and inventories building up in response to declining demand.
• 😀 Economic slowdown in Germany, Italy, and Switzerland points to a broader trend of waning demand across Europe.
• 😀 The removal of tariff uncertainty has not led to a recovery but has instead exposed the underlying global economic weakness as trade and demand decline.
• 😀 Eurodollar monetary tightening is contributing to financial stress, with credit market disruptions and risk aversion becoming more pronounced.
• 😀 Global financial institutions, including European banks, are grappling with tight liquidity and a need for emergency bailouts due to Eurodollar system strains.
• 😀 PMIs across multiple countries, including the US, Canada, and Mexico, are signaling contraction, particularly in goods-producing sectors like manufacturing.
• 😀 The global economic slowdown is attributed to a lack of growth recovery, not just temporary setbacks or tariff distortions, with a sharp decline expected in 2026.
• 😀 The synchronized global downturn, highlighted by weakening sentiment and employment indices, suggests a high likelihood of a global recession by 2026.

Q & A

What is meant by 'globally synchronized' in the context of the script?

In the script, 'globally synchronized' refers to the pattern of economic slowdown that is happening across multiple countries at the same time, particularly in the manufacturing sector. It suggests that economic declines are not isolated but are happening simultaneously worldwide, indicating a broader systemic issue rather than individual country problems.

How does the economic situation in Canada relate to the US economy?

Canada is described as a 'proxy for US demand' in the script. This means that Canada's economic performance, especially in manufacturing, reflects the health of US demand for goods and services. A slowdown in the US economy often shows up in Canada's data, as it is highly dependent on trade with the US.

Why are the Treasury market and TIPS break-even rates important in this analysis?

The Treasury market and TIPS (Treasury Inflation-Protected Securities) break-even rates are used as indicators of future inflation expectations and global economic sentiment. A decrease in TIPS break-even rates suggests that inflation expectations are weakening, which aligns with the broader theme of waning economic momentum and suppressed demand across multiple global markets.

What is the significance of 'repo fails' mentioned in the script?

Repo fails refer to the failure to settle repurchase agreements, which are a key component of short-term funding markets. The script suggests that an increase in repo fails is a sign of tightening monetary conditions, indicating stress within the financial system. This is particularly relevant in the context of the Eurodollar system, where monetary tightening is impacting global liquidity.

What role do tariffs play in the economic slowdown described in the script?

Tariffs are mentioned as causing distortions in trade flows and contributing to temporary economic highs, such as in the US and Canada. These distortions artificially inflated certain economic metrics in 2025. As the tariffs are phased out, the economy is left with the true underlying slowdown, which is now becoming apparent in global manufacturing data.

How does the script describe the economic outlook for 2026?

The outlook for 2026 is not optimistic. The script highlights a globally synchronized loss of economic momentum, exacerbated by ongoing monetary tightening, tariff distortions, and issues in the credit markets. The overall theme suggests that 2026 is likely to begin on a negative note, with signs pointing toward a global economic downturn rather than a recovery.

What is the significance of the PMI (Purchasing Managers' Index) data mentioned in the script?

PMI data is used as a forward-looking indicator of economic activity, particularly in manufacturing. The script mentions PMIs for multiple countries (e.g., US, Canada, Mexico, Germany, Switzerland) to highlight weakening demand and economic contraction. PMI scores below 50 indicate a contraction, and a consistent drop in these indices suggests a global slowdown.

What is meant by 'cockroaches' in the context of credit markets?

In the script, 'cockroaches' is used metaphorically to describe hidden or unnoticed risks within the credit markets. The term implies that financial instability and poor lending practices have been ignored or downplayed, but these issues are now emerging, causing cracks in the credit system that could lead to broader economic consequences.

How does the economic situation in Germany relate to the broader European economy?

Germany is described as a 'bellwether' for the European economy, meaning its economic performance is often an indicator of broader European trends. The script notes that Germany's manufacturing sector faced a downturn in late 2025, which was mirrored by other European countries, pointing to a wider regional slowdown and a lack of real economic recovery.

What does the term 'Wy Coyote' situation refer to in the script?

The 'Wy Coyote' situation, mentioned by S&P Global’s chief economist, refers to a situation where economic activity appears to be stable or even growing temporarily, but in reality, it is about to collapse. This is used to describe the US manufacturing sector, where output was artificially boosted by tariff distortions, but underlying problems are now becoming evident as sales and orders fall off.