Decoupling?

By Pete Southern in LiveWire Economics Blog | January 15, 2008 9:48 |

The buzz words keep changing, from  2005 to mid 2007, the word was Goldilocks, or how everything in the financial world was perfect and even if the economy slowed, the landing would be gentle. So gentle that the feather filled pillows of interest rate cuts would be hardly used to cushion the slight brush with a slowdown.

Yes, Goldilocks, where everything was just right. Everyone used it, Brokers, Banks Investment Analysts, Rating Agencies, The Fed – it was the undeniable path ahead. To speak against the Goldilocks Theory was to invite derision, a hate filled rant against the position you held. 

No one could stand against the roaring masses of talking heads in the media and the financial world who screamed out the benefits  about the end to “boom and bust” the boon of globalisation and the spreading of risk through new financial innovation using  derivatives.

To say otherwise was to be labelled a bear, a doomsayer and a pessimist. Of course at the height of the “buy it all!” propaganda rant we even saw a regurgitation of reports that proved pessimists have a shorter lifespan than optimists.  Coincidence?  

For some, like Stephen Roach,  who spoke out about  global imbalances and the under-estimation of risk, it eventually got too much. Even he moved toward the happy-clappy crowd .  Within 2 months of his new found optimism he began to reassess his stance.

 Don’t get me wrong, Mr Roach is an intelligent, perceptive writer whose views I respect.  This is not an attack upon him but it has to be remembered that by May 2006 the Goldilocks Theory was at its height. Very few were immune and it shouldn’t be forgotten that  Mr Roach does work for Morgan Stanley.  Was the word spread around Morgan Stanley and all the other Financial Banks/Brokers that  the Goldilocks Theory  was not to be questioned?  Was there a full court press mounted against the bears?

We can look back and realise that the Goldilocks Theory was built upon nothing more than hope and a manifestation of group greed, it suited the purposes of so many different interests in the financial markets that its adoption was guaranteed.  It also helped stabilise markets into the July 2006 low. Sentiment was clearly affected by the jawboning of the Goldilocks Theory.

s&p500 

By mid-July in 2007, even the most fervent bull could not ignore the credit crunch as it manifested itself. Talk of Goldilocks disappeared,  vanishing from the media and the newswires almost as quickly as Alan Greenspans reputation.  Gone, without even a blink or an embarrassed smile from its proponents. Mind you, by now they had already lined up the next great saviour of the global economy.

Even if the US is going to suffer a slowdown, muddle through, mild recession (take your pick) say the talking heads, globalisation had ensured that other developed and emerging economies would be fine for investment. They had the ability to decouple from the US lead influence on the global economy.

The problems of the US economy won’t  spread, we are told, thanks to the domestic  growth of the emerging markets and the ability of developed markets to trade with each other and the emerging bloc.We face another barrage of optimism all based on a theory that is untried and founded upon……hope and greed.

We did get a decoupling,  yes it happened.  It wasn’t the one that most were expecting though:

 compare 

 Can we learn lessons from the past? Indeed we can and in doing so, remember this simple lesson. Just because someone says something doesn’t make it right. Keep a wary eye on the media and watch out for the next buzzword.   Think very carefully about the advice you read or receive from your Broker/Analyst.  Did you follow the calls to invest in the Overseas,  Far East and Emerging Markets instead of the US as they will surely  “decouple”  from the woes in the West?

Or did you buy gold?  

Market Snippets

NEW YORK (AP) – Shares of International Business Machines Corp. jumped in premarket trading after Big Blue unexpectedly said its fourth-quarter earnings from continuing operations rose 24 percent from a year ago, widely beating analyst expectations. The report, posted ahead of its quarterly financials expected Thursday, sent shares up $8.28, or 8.5 percent, to $105.95 premarket, from their close Friday at $97.67 in heavy trading.

US OUTLOOK: From Nomura: ’08 GDP est is now +1.9%. “We now judge that the economy’s fragility will persuade the Federal Open Market Committee to cut the federal funds rate 3.75% by the end of March and to 3.00% by the end of June. In addition, the pressures of an election year has fostered an air of urgency in Congress and the Administration that now seems likely to lead to some sort of fiscal policy stimulus.”

EMERGING MARKETS: “It didn’t take long for the champagne to go flat in 2008,” says Emerging Portfolio Fund Research of the retrenching seen by global investors recently. During the week ending Jan 9, global
investors pulled $11.2bn out of US European and Japanese equity funds and another $2.4bn from emerging markets “as they sought the safety of cash, defensive sectors and fixed income assets.” Money Market, Balanced, Utilities, US Bonds and Global Equity Funds combined took in $21bn in the same period. Not all investors were risk averse, with the Real Estate Sector and hard currency debt oriented Emerging Markets Bonds Funds both receiving about $600 mn. “Africa Regional, EMEA and Russia Country Funds also posted inflows,” EPFR says. EPFR tracks both traditional and alternative funds domiciled globally with $10 trn in total assets.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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