The Real Decoupling

With everyone focusing on Bernanke's liquidity pump and its favorable near-term consequences on US stock markets, which have shifted from a leading indicator to a liquidity indicator, one of the true decopulings, and not in the mythical China-US realm, as both those countries are joined at the vassal hip in perpetuity, has been the Nikkei's divergence from global equity markets, and from the S&P 500 in particular. In fact, over the past several months the Nikkei has been underperforming the S&P dramatically. As deflation has once again gripped Japan, after two decades of failed Bernanke-style policies, it is only a matter of time before it becomes all too clear that the Japan experiment is doomed to be repeated by the US, with the same deplorable results.

The first chart indicates the recent divergence in the S&P and the Nikkei:

The next chart presents a more recent perspective of the decoupling:

A very long-term comparison of the ratios of the Nikkei and the S&P indicates that the ratio has been at record lows for the last decade with the most recent reading once again scraping at the bottom. Ironically, as the S&P itself suffers the same fate as the Nikkei on an absolute basis, we look for this ratio to begin creeping higher, as the Japanese pain, on an absolute basis, is recreated domestically.

Lastly, and perhaps most importantly, is a correlation analysis between the NKY and the SPX. With the two market traditionally correlation quite effectively, at well over 0.5, the latest reading of -0.4235 is conclusive proof that the two equity markets have decoupled to a level last seen in 2005. Inevitably, a recoupling is imminent. The question is whether the S&P will be dragged down to Nikkei levels or vice versa. As the Bernanke experiment is percevied by more and more people to be an utter disaster, our money is on the former.