Busting the Myth of Global Market 'Decoupling'

by: Enzio von Pfeil

Some people believe that insidious drumbeat of "this time it's different", as in: "Asia has de-coupled from America." We already suggested what is "different" this time - and what is not, but now want to wreck that toxic myth of de-coupling once and for all.

The idea to read eminent Morgan Stanley Chief Asia Economist Stephen Roach's comments in our venerable South China Morning Post of 15th November was given to me by my wife. Today, we add to Stephen's salient points - and, crucially, give you five ways to make money off our ideas.

In today's piece, we link the myth of de-coupling to the stability of The Economic Clock™ (sub. req.). We also introduce a new concept, the "feeling" economy: never underestimate the power of psychology when it comes to consumption or to markets! Indeed, recently we pointed to Prof. Maslow's correct observation that if people's shelter is at risk - as America's current subprime woes are doing to many a home - people get insecure and stop spending.

1. A matter of logic

This is simple. If the world has "globalized" then how on earth can Asia have de-coupled from the U.S.? We reckon that there are at least three ways that Asia is joined at the hip with America, as we discuss next: in monetary, real and in psychological (or "feeling") terms.

2. Monetary economic chains

Whenever The Economic Clock™ in America shows an excess supply of money, down go interest rates. This rate cut, of course, directly affects rates in overtly - pegged currency regimes such as Hong Kong and Latvia, but U.S. rate cuts also affect the interest rates of currencies less tied to the US dollar, e.g. the Korean won and the Chinese RMB. Indeed, the more open that the capital accounts of dollar-linked currencies are, the stronger the influence of U.S. interest rate changes on that country's domestic monetary economy - whether it be located in Asia, Latin America, Europe or Asia.

3. Real economy chains

Whenever The Economic Time™ in America is characterized by an excess supply of goods, down go Asian exports. And whenever The Economic Time™ there signals an excess demand for goods, up go Asian exports.

But we don't fully buy this "Asia's growth is totally determined by the level of of her exports to America" myth, either. Of course, Asian exports are key. But, in order to export, most companies have to import inputs first. Which goes to say that the net effect of exports, at least when it comes to numbers, may be less significant than popularly thought. In my brokering years, that net effect equated to the visible trade balance, which usually came to about three percent of GDP. Hardly earth-shaking. But, there is a very real linkage between how people feel and how enthusiastically they shop...

4. "Feeling" economy chains

So, here is a "real economy" linkage in the psychology department. Private consumption is two-thirds of any economy - and relies on peoples' income security - i.e. on their feelings. So, the indirect power of exports from Asia to America is that if Asian employees feel less secure in their exporting jobs, they reduce private consumption.

But a second "feeling" chain exists in the monetary economy of the psychology department. Despite all of this "de-coupling" hype, our South China Morning Post proudly displayed its headline recently: "HSI rebounds 4.9% as fears of U.S. slump ease." Surely you have to admit that this is 'feelings' at its rawest and most basic, no?

5. So why The Economic Clock™, then?

Good question. We get back to the less -important "real economy" linkage of trade flows. Their real importance lies in how they affect people's income security - and thus their willingness to consume. So trade flows, like Central Bank monetary policy, can swing domestic moods into "buying" or "selling" ones.

Thus, domestic monetary and fiscal policy, along with domestic political moods, influences The Economic Time™ (sub. req.) enormously. And even if we are globalizing, don't believe for a minute that domestic monetary and fiscal/political policies are irrelevant!

6. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Short the U.S. stock market.
3. Buy the Proshares Ultrashort S&P500 (NYSEARCA:SDS), for instance.
4. Buy commodities, perhaps via the following ETFs:

  • Oil. Seems as if the Muddle East mess is going to worsen. That, along with winter approaching the Northern Hemisphere and energy demand rising in the likes of China and India, means that oil demand has to remain high. (ETFs Oil Securities are one vehicle: (NYSEARCA:OIL)).
  • Gold. We all know that this is a "fear" investment. Besides, with non-dollar commodity currencies rising, along with the Euro, gold is cheaper for them than it is for a USD-based investor. So you might want to by Physical Gold ETFs such as IAU.
  • Platinum. Johnson Massey has just released its 2007 Platinum Review. Demand is outstripping supply, courtesy of booming car industries in the likes of China and India. Besides, labor unrest in South Africa is not boosting mining output, either. Have a look at a physical platinum ETF such as the London traded PHPT.
5. Our Hong Kong stock exchange is a quoted share, 388:HK. That share is driven totally by market turnover. So, whether our market goes up or down is neither here nor there. As anywhere, the stock exchange's profits are driven primarily by turnover.

How to Save/Make Money Off This Idea

1. Always consult with your financial adviser first!
2. Short the US stock market.
3. Buy high-yielding consumer staples along with utilities and medical. People don't stop eating, showering and getting sick just because The Economic Clock™ is "telling" them to!
4. Once it has cracked, wait. Once you are ready, then load up on those Asian and other economies where The Economic Time™ is good.
5. Particularly focus on buying the cyclical and discretionary sectors in the upturn. And, of course, the financial sector such as banks and brokers.