So Much for the Decoupling...

Includes: EEM, EFA
by: Barry Ritholtz

World markets are plunging in response to fears and expectations that the United States will be (or already is) in a recession that will be both long and deep.

Headlines around the globe are rather stark:

Major Indexes Drop Sharply On Worries Over U.S. Economy [WSJ]
Europe Starts to Feel Pinch as U.S. Slowdown Spreads (Bloomberg)
Global markets plunge on U.S. recession fears (CNN/Money)
US recession fears sink global markets [AP]

So much for that decoupling thesis.

What is rather incredible about the past few years are the number of pinheads who so totally got this wrong. Not your run of the mill liars/idiots who insisted Housing and Credit would have no broader impact; these hacks were merely blind incompetent cheerleaders. No, what really stunned me is the number of otherwise intelligent people who, once again, claimed "it's different this time."

It's one thing to be wrong, but it's another thing to have your entire philosophical world view invalidated. That included the primacy of seeing what is going on in the real world, of understanding what the official government data really means, of not ignoring broad and deep concerns amongst the population.

It's one thing to guess a specific data point wrong -- does anyone reliable forecast NFP? However, it's a horse of an entirely different color to stay wedded to a completely invalidated heuristics, or ignore economic truths with a long history of being right.

Consider these statements which we heard over the past few years:

The Yield Curve no longer mattered
The population is upset about Iraq, not their own finances
Earnings at an unusually high % of GDP are sustainable
The Business Cycle has been defeated
Real Income gains were irrelevant
Mean reversion no longer works
Supply side tax cuts pay for themselves
Dow Theory is antiquated and no longer works
The (so-called) Fed Model = equities are vastly undervalued
There is no significant Inflation.

I'm sure there are more, but I'm only on my first cup of coffee.


QUESTION: What other economic statements, investing beliefs or market philosophy have been shown to be wildly false? What investing beliefs are horrifically and expensively wrong? I do not mean specific calls, but rather, the larger rules and philosophies that are now being shown to be utterly incorrect?