Decoupling- a reality?

Replies to This Discussion

Permalink Reply by Daniel Chow on November 1, 2009 at 6:31pm

A lot of the decoupling theories hinge on the Chinese consumer changing their spending habits.

For hundreds of years the Chinese have traditionally been very keen savers, stashing money under their pillows to tide them through periods of turmoil. It is a cultural force of habit that will be difficult to change overnight.

Having said that the youth are rapidly changing this perception of the Chinese consumer, and if recent indicators are to be believed are lapping up consumer goods fervently, though mostly from daddy's hard earned salary as opposed to their money.

I don't think we'd be able to make a real call on de-coupling being a reality until the current generation of Chinese youth start entering the workforce and making & spending their own money. So maybe from the next 5 years or so.

▶ Reply to This

Permalink Reply by Sachidanand (Sacha) Singh on November 1, 2009 at 11:42pm

Decoupling theory is just a high sounding name given to the trick adopted in 2006 by investment managers in US to encourage the potential investors to part with their monies for investment in emerging markets. I do not think any serious academic work has been done on this theory.

Decoupling theory contrasts with the concept of markets' integration on which a lot of work has been done and empirical analyses carried out to discover that markets are indeed more integrated today than earlier.

▶ Reply to This

Permalink Reply by Bill M Wright on November 2, 2009 at 12:12am

Sacha, as usual is spot on the money -100% correct. But let it be said, that I trained my Investment wholesalers, to understand that decoupling was faulty thinking in today's world. Still, many wholesalers with no formal college education in investing refused to accept empirical analyses and continued promoting the myth.

The notion that major world economies were/are decoupled had lots of truth a 100, 50 or even 25 years ago but today the largest world economies are more coupled than decoupled.

Here is my reasoning:

In the 70's -90's we sold American's on the idea of diversifying 10-20% of their investments outside of the USA to offset the risk of declining economic recessions in the USA under the "decoupling" or "emerging markets" theory.

But based upon my eyes and the reports I've read most major world economies are linked (coupled) far more today than 20 years ago. All the correlation research I've seen confirms this to be true. One need only go back to the 2008 crisis, 2000-2003 and 1997 Asian crisis to see how closely correlated world stock markets have become.

Just take two other examples 25 years ago in Asia Japan was the king, in large part because it had become the China of export to the west. So Japan and the Western economies were linked while China had little link to the USA (Korean and Vietnam wars still fresh in American's minds)

Today China is/has become the western world's factory and the USA's banker ( China and America might just as well get married) Yes, the China internal demand will grow rapidly with jobs. And the more jobs and the more secure people feel in having a job the more they are willing to spend ( It's a common human financial behavior trait ). But without the American consumer buying all those goods made in China, then China will have less jobs and less financial security for the individual factory worker. And we know China has a lot more workers to worry about.

Now take Norway with only 4 or 5 million people ( or Saudi Arabia). They are still cashing in on the 1970's North Sea oil field discoveries so their economy/wealth is more linked to the value of oil. In 1998 Oil was around $18b and the USA economy was booming. Today in a major recession Oil is $75b and they have no worry over the USA economy even though we are linked buy Oil purchases. Yet, they get huge benefits from growth in world demand at prices of $75.

Now take India, 25 years ago how much connection did the India economy have to the USA economy? How big was the India outsource or IT industry? I do not recall it existing 25 years ago. I believe the big expansion began in the early 90's as America was rapidly building out large corporate networking intranet and internet systems. The network build out did result in a shortage of qualified IT people in those boom days. Today how big is the India IT outsourcing industry? We know it's huge, 50% of the revenues comes from the USA and those jobs are now linked to the American and European economics.

So while the China and India and USA economy had little economic link 25 years ago -today they are more linked than any moment in history. And for 25 years commodity prices remained low and countries tied to commodities exports did ok but now they are in a boom but that boom is connected to world demand and consumption. So, even their new found prosperity ( Norway, Canada, Australia) is dependent upon the economies of the countries they export too.

▶ Reply to This

Permalink Reply by Mukund Bhide on November 2, 2009 at 12:58am

Thanks,Daniel Chow,Sacha & Bill Wright,
Good to Know your view point and it is interesting to note observations ,Stephen Roach,Chairman Morgan Stanlay,Asia,i quote"There is a view that this part of the world is permanently decoupled from anything that can happen eleswhere in the global economy"in an interview published in today's Economic Times,2nd November 2009.
Mukund

▶ Reply to This

Permalink Reply by Sachidanand (Sacha) Singh on November 2, 2009 at 1:35am

It is an opinion - not backed with hard facts. Moreover, Roach, ever a smart player who keeps his bets covered, hastened to add in the same breath:"But the jury is out on that one".

▶ Reply to This

Permalink Reply by Bill M Wright on November 2, 2009 at 6:46am

Stephen S. Roach holds a Ph.D. in economics. I've listen to Steve and he's an old-timer who's been a chief corporate economist for a long-time. I'd be the first to say, one must always respect his Economic views.

But once he was ( I believe very recently) made Chairman of the Asia operations ( and got a hefty pay raise) you can bet he will be (like Jim Rogers) one of Asia's best cheerleaders and supporters against any change in US Trade policies which he knows have benefited Asia workers more than the US worker.

Trade policies aside, I've come to learn the word "decoupling" takes on different meanings to different people. And economist including Alan Greenspan admit their training was in economics not investment markets or behavioral finance. It would have made more sense for Steve to have said, " The economies of Asia are on the rise while American is in decline". I could agree with that statement.

Perhaps the quote is misunderstood. "There is a view...." ( implying Asians not Steve) does not have the same English meaning as " I believe...." ( implying Steve believes in decoupling)

This video of Steve speaking in January communicates clearly Steve's views and that he believes economies are connected. Listen to his statement on decoupling. I believe everyone will find it informative.

▶ Reply to This

Permalink Reply by Mukund Bhide on November 3, 2009 at 12:09am

Thanks Bill,the video is very informative and lot more on Asian export statistics in general to drive his point if i may say about coupling of Asian economies in isolation.He makes a point that China is the only major supply zone to the world economies.
Thanks again for the video input.
mukund

▶ Reply to This

Permalink Reply by Badarisha CFP CM on November 9, 2009 at 9:31am

Decoupling,disintegration between the economy does not exists and not a reality at all.

what is real?
How we can look at the world as single entity?
Every nation depends on other nation directly or indirectly for its own growth or other nation growth.
Growth happens unified manner not in isolated manner.

India or china or US cant growth on its own without the reliance on other nation.
Why Economic co-operation organisation being formed?

Think globally not locally because local economy does not exists without global.

Badrish

▶ Reply to This

Permalink Reply by BIYANKA WANASINGHE on November 9, 2009 at 2:14pm

With the great recession in US , recent trend is decoupling from US market to emerging markets .This is on the ground that emerging markets are making profits irrespective of the recession in US .One may view on this that emerging markets are independent from US .However, those on this theory has forgotten that still the major investments to emerging markets are from US and results of recession in US is greatly felt in emerging markets along with the timing .These impacts were not seen until last year .But, with declining market conditions , impact is clearly visible if one closely study the drowning economies of these countries.

▶ Reply to This

Permalink Reply by Sachidanand (Sacha) Singh on November 10, 2009 at 12:19am

Please do check out Bill's latest blog post. It seems the markets are integrated but economies are getting decoupled - to some extent and getting more so by day.

▶ Reply to This

Permalink Reply by PARVEEN ANTIL on November 12, 2009 at 5:44am

Like 'globalization' which has hogged the limelight in the recent past, decoupling theory has nowadays caught the fancies of the policymakers and investors across the globe. The supporters of the decoupling theory have been advocating the idea that the Asian economies can chug along even in case of a recession in the US economy which is indeed a local problem because it is an outcome of the widespread default in the sub prime mortgage market. The crux of their argument has been that the US and the rest of the world have now decoupled and so the economic growth path of the US and the rest of the world can diverge sharply. The theory is indeed modern, catchy and invigorating and has thus unsurprisingly created much hype. But now with the US slowdown spreading across the globe coupled with a declining dollar, advocates of the decoupling theory are debunking their claims. Even a couple of months ago, the Indian equity analysts were also claiming that India has decoupled from world markets. Now with the specter of US recession gradually gaining strength, the decoupling theory appears to be fast losing ground. The new theory is that in this utterly globalized world no market can remain completely insulated from global shocks

▶ Reply to This