Monday, September 14, 2009

WSJ: Asian Growth Revives "Decoupling" Concept

Ah, Decoupling 1.0 - it was a nice concept, and a place we hid out in, in latter 2007 through spring 2008. Then commodities fell off a cliff and many of the major Asian markets, after showing weakness late 07/early 08 really tailed off. Now we have Decoupling 2.0 ("The Decoupling Strikes Back") ... any more validity this time around? Perhaps a bit, but considering the US consumer is still the world's major engine it seems improbable at this time. But frankly we cannot tell with all the world government stimulus coming from all sides ... that tsunami has effectively replaced the US consumer as the global steam engine.

I think Decoupling 4.0 circa 2014 should have more legs and then Decoupling 7.0 circa 2019 will be valid. By that point a new axis of power shall be entrenched in Asia, and with it a lot more domestic consumption in China, India (and by proxy Brazil). But with the US at roughly a quarter of world GDP, versus China's sub 7%, Brazil's 2.5% and India's 2% the world is not ready to leave the US consumers arms.

Just doing the most simplistic of math - in a $14 Trillion economy, 70% dependent on Americans "consuming", simply seeing a return to long term trend rates of that figure returning to 65%, takes $700 Billion of consumption out of the system. To put that in perspective there are only 17 countries on the globe with GDP > $700 Billion. Canada's entire economy is about double that figure, etc. So while I like the concept of decoupling eventually, it appears to be another hope rather than reality at this time... but with so many "visible hands" mixing with the invisible hands, trying to prove that is now impossible.

  • When markets around the world tumbled in unison last fall, the once-popular view that Asian markets and economies could hold up despite the turmoil in the West was quickly forgotten. Now, investors have once again embraced the idea of "decoupling." Markets in Shanghai, Hong Kong and Singapore are up nearly twice as much as those in the U.S. and Europe as their economies recover strongly from the recession.
  • Optimism about Asia focuses largely on China's success in kick-starting its stalled economy with stimulus spending and easy credit. Exports to China are helping a number of other economies recover, too, including Japan, South Korea and Singapore. Australia's economy is getting a boost from Chinese demand for its metals.
  • Frederic Neumann, an economist with HSBC in Hong Kong, still believes in decoupling. "I actually think we had decoupling in train since the middle of 2006, and that process got derailed temporarily by the breathtaking disruption in financial markets" when Lehman went under, he says. "Now we have it back," he says, thanks in large part to loose monetary conditions.

Oops, that was Neumann, not Newman. Carry on...
  • The question remains, for how long? Exports are still the key to Asian growth, and consumer spending in the U.S., their biggest target market, remains anemic.
  • Economists and policy makers agree that Asian consumers need to spend more if the region's manufacturers are to wean themselves off exports. Efforts to spur domestic spending include beefing up health-care protection and retirement benefits that will ultimately convince people that it is safe to buy more now and save less for a rainy day. They also include tax breaks and other short-term incentives.
The irony is great - the key to a global rebalance is to get Americans to act like Asians, and Asians to act like Americans.
  • Americans are formidable consumers, spending nearly $10 trillion a year; consumers in China and India combined manage to spend only about a fifth that much.
  • Mr. Neumann says the growth in Asia is making up for some of the slowdown in the U.S. This year, Asians outside of Japan will spend about $165 billion more than they did in 2008, according to HSBC's forecasts, even as U.S. consumer spending shrinks about $30 billion.
  • Not everyone is convinced decoupling is a valid story. Asian markets fell more sharply that Western markets, so investors who held tight in Asia would likely be no better off than if they had invested in the U.S. In recent weeks, the rally in emerging markets has stalled on concerns that investor enthusiasm may have gotten ahead of reality.
  • "Decoupling is a myth," says Stephen Roach, chairman of Morgan Stanley Asia. "In the aftermath of the post-Lehman demand shock in the developed world, every single Asian economy either slowed sharply or tumbled into outright recession. How can anyone call that decoupling?" [May 31, 2009: Stephen Roach on Asia - No Sail]
  • Speaking in Hong Kong recently, David Wyss, chief economist for Standard & Poor's, called decoupling "one of the dumbest ideas any magazine writer has ever come up with." (actually to be fair to magazine writers, I believe this concept was advanced most heavily by the "give us your money; the water is fine" Wall Street / CNBC cabal)
  • For his part, Mr. Neumann acknowledges that the decoupling story isn't that tidy. (but it sure goes down great with Kool Aid) Asian monetary policy is likely to remain loose for some time even as economies pick up because the region's central bankers, who tend to shadow the U.S. Federal Reserve, fear that raising rates will cost them a competitive edge against their neighbors.
  • "This is the critical issue: we don't have monetary-policy decoupling," Mr. Neumann says. The result is that asset bubbles are building in China and other Asian markets "that might end in tears in a few years time," he says.
And round and round we go, when we ever get rid of central bankers who do nothing but build bubbles to crash.... nobody knows.

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