Decouple or Couple or Shifting Tides?

Recently Sacha wrote an article on the topic of world markets "decoupling" myth or reality in response to questions raised by Mukund Bhide in his investment question post.

I posted my agreement with Sacha's thoughts and added my reasoning for why Stock Markets are more connected than ever. But I will now provide thoughts on why there is truth in rationalizing a trend towards more decoupling from an economic dependence on USA consumers (due to our decline in middle-class spending power) to the more rapidly rising tide of China and India consumers in the future.

My thesis is these trends will result in a gradual economic decoupling and shifting of dependence between countries, but not a total financial market decoupling.

Most people define this word "decoupling" as all or none. I see it more as the continous shifting winds of our economic times. I see it not in terms of black or white but in changing shades of grey.

Sacha noted that the proponents of world "decoupling theory" were mostly American Wealth Management People. Yes, it's true these people are motivated to sell ideas that gather assets. But they have no allegiance to a nation only to their own compensation. They could just as easy sell the notion of buy American Blue Chip stocks paying dividends as emerging markets.

I agree with many of their thesis on world economic trends. But I'd say the recent trends in major world stock market movements this decade prove there is a greater correlation in world stock prices, even if underlining economic trends are radically shifting as they point out.

The world financial crisis and recession and world's stock markets certainly responded as if we were 100% coupled in 2007-2008.

One can make similiar comparisons to 1999-2002. But while World Stock Markets maybe more correlated then 20 years ago, I would also rationalize that there are changing microeconomic trends that are building into major shifts in the future macroeconomic world landscape.

An Article by American Richard Karn of Finance Sense University makes some interesting observations in a 5 part Emerging Trends Article

Such specious rationalizations reek of another Wall Street and City of London concoction to sell an investment theme

"There has been a significant shift in the tenor of the discussion regarding emerging markets ‘decoupling’ from the economies of the US in particular but the OECD generally. The decline in especially American consumer spending gets the most press, but as discussed in Chapter 2 regarding emerging market difficulties accessing capital markets, without western fundraising for emerging market business and economic development the growth story is seriously threatened. The European Central Bank reached a similar conclusion in January of 2009: on the one hand we find no evidence of decoupling, but on the other hand we calculate that emerging Asia is less ‘coupled’ with the rest of the world than trade data suggests.”

"Considering how dependent the global economy is on American and European fundraising efforts, tight credit conditions’ impact on the following chart raises the question of just which country is going to step in to fill the void: Chart 1: Cumulative Fundraising by Region over the Last 5 Years Note: The chart shows over 70% of capital fund raising comes from America and over 90% when you add in Europe. Source: Reiman/UBS5"

"Wall Street and the City of London would have us believe the answer is China.
In the aftermath of the financial crisis, we are reading a lot today about how for centuries China and India were the world’s economic superpowers and that the shift in power and riches from West to East that gets so much press these days is only a return to the historic norm. Such specious rationalizations reek of another Wall Street and City of London concoction to sell an investment theme."

I do believe there is an element of truth in everyone's point.

For example it is true that as a countries middle class grows they will become more depend upon the consumption from within their own country and less on the USA consumer (and their exports). And it's also true that over the last 20 years much (if not most) of America's old-line fortune 500 companies have expand more abroad than in the USA. So, even American companies can be said to creating more jobs in China and India than the USA. Even the long-standing American dominance in oil exploration, drilling and refiner engineering companies have move offshore and expanded overseas. USA exploration of shale gas is an exception to this trend.

Consider this fact:

America the world's biggest consumer of gasoline has not built a new refinery plant in the USA in 30 years ( many old ones were closed). Reliance Petroleum Ltd. (RPL) of India has built a $6 billion state-of-the-art oil refinery and petrochemical complex in Jamnagar Gujarat, India, using U.S. equipment, technology and services financed by a $500 million loan guarantee from the Export-Import Bank of the United States. RPL's primary shareholder, Reliance Industries Ltd. (RIL), I believe is one of India's largest private companies. The new refinery is the world's sixth largest and will be located adjacent to RIL's existing refinery and petrochemical complex in Jamnagar. Together the two refineries will comprise the largest refining complex in the world. It's my understanding that at least 80% of the refined oil is being exported to Europe and America.

Reliance owns nearly 25% of the world’s complex refining capacity. Reliance now operates the largest refining complex at one site globally. It has enabled Jamnagar to become the refining capital of the world. Reliance is the only company in the world to have built two large super-size complex refineries in the last decade. Reliance is now among the largest producer of ultra clean fuels in the world. Reliance is the only large refining company in the world today that operates its facilities in excess of 100% of rated capacity.

So, what has this example got to do with "decoupling"?
Well in my mind, it's just one more example of why more middle class jobs for both professionals and for blue collar workers are being created in Asia and India and less in the USA. Those in the USA pitching the notion that the continous offshoring of manufacturing jobs, service and processing jobs combined with importing everything including labor and now even paying to ship gasoline to the USA are doing so for their own profit. Yet, it is a fact this trend has been in place for over a decade which is why America has the "jobless recovery" and China and India will have the "job recovery".

Here is more proof.

Look at Bangalore, India. It's a city that in spite of my knowledge of India I knew nothing about 15 years ago. Now it's the headquarters of Infosys, India's second largest IT company. I believe Bangalore is called the Silicon Valley of India because of the large number of information technology companies located in the city which contributed about 30% IT exports in 2006-07. While I've done no research on the topic, I'd bet far more middle-class jobs have been created in Bangalore, India then in Silicon Valley CA. over the last decade. I believe once the cost of long-distance communication cost collapsed in the late 90's it enable Bangalore to sell itself as the outsourced capital of American and Europe Cos. for back-office processing services and inbound service call centers. Combining this trend with America's creation of the H-1B visa (early 90's)which was well intended at the time but has now resulted in fewer young Americans wanting to get traditional IT college degrees as they saw their IT degreed fathers and mothers outsourced and downsized. Now, Infosys, along with Wipro and Tata accounted for nearly 80% of the [H-1B] visa petitions approved in 2007 for the top 10 participants in the program. In plain English that means 100% of those 80% will be jobs created for Indians on par with American pay. Again just more specific proof of the decline of the American middle-class and rise of India's middle-class.

The same trend took place in American manufacturing (including, consumer appliances, furniture and clothing) moving offshore and eliminating the middle-class blue collar worker jobs and the supporting professional white collar jobs in America.

The trend is clear more Americans will be left with more lower paying jobs. The American consumer spending power of the middle-class has been dying for two or three decades.

Mickey Mouse Theory

We love the Mouse. Kids love the Mouse. And even different world religions will love the mouse for basic family values and timeless, boarderless magically stories of human struggle and inspiration. Even the Chinese will be impressed with the level of sophisticated nightly pyrotechnic shows. The folks at Disney have been brilliant in making a very few billion dollar bets on theme parks over the last half century. Paris was the one slow exception, but what else can one expect from the French.

First in Calfornia which took advantage of migration trends within the USA and next in Florida a ditto success also capitalizing on migration trends to the south and florida over the last 30 years. Now with a move into India and China I see this just more confirmation of a bet on a rising middle-class from all the new job creation.

"Wealth Management" may still be one of the few areas where the British and American's dominate simply because it has been a part of our culture, education and jobs market for decades. So, I understand why these Americans are touting this "Decoupling" theory based upon the shifting economic sands of time.

A Google Search shows "Decoupling Theory" is a hot discussion topic. So anyone with any recent articles or research papers on this topic are invited to upload them for the benefit of all.