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The Markets Call “BS” On the Decoupling Argument
One of the primary arguments that the world is in “recovery” comes from the decoupling argument: namely that emerging market economies have grown to the point that they will hold up even if there’s a downturn in the US economy.
For certain, emerging market economies have indeed experienced economic growth and stock market gains far exceeding those of the US and other developed countries. Possibly, the best example of this is Brazil which has seen an inflow of fresh capital from investors looking for greater returns that those proffered by developed nations and increased domestic growth courtesy of commodity prices rising (Brazil is the largest exporter of many commodities).
In simple terms, the fundamentals in Brazil were much better than those in the US in the post-2008 Crash period. As a result of this, the Brazilian market bottomed in November 2008 (compared to March 2009 for the S&P 500), and more than tripled from its market bottom vs. a 95% rally in the S&P 500.
Given this relative strength, many bulls believe that Brazil (and other emerging markets like it) have “decoupled” from the US economy, meaning that these emerging market economies are strong enough to stand on their own two legs and will hold up regardless of what happens in the US.
However, this whole belief came crashing down earlier this year when the Brazilian market first peaked out before falling further than the S&P 500 in this latest market rout: the Brazilian ETF is now 23% off its highs compared to 16% for the S&P 500.
Moreover, Brazil’s growth forecasts have now been lowered for three weeks in a row as inflation soars and the global economy slows. Indeed, even Brazilian economists have noted that the global economy slowing is impacting Brazil:
Forecasts for Brazil's economic growth are being driven lower by its tighter monetary policy and a slowing global economy, a central bank survey showed on Monday, signaling a steeper-than-expected slowdown is looming.
The central bank survey found that forecasts for economic growth this year fell for a third week to a median 3.84 percent in the week ended Aug. 19.
The situation holds true for China (the emerging market “darling”) as well: the Chinese market is over 20% off its highs and Chinese GDP estimates are falling. So right off the bat we see the “emerging market decoupling” thesis being refuted by both the markets AND mainstream economists.
Indeed, it is quite telling that the S&P 500 has fallen far less than the BRIC markets: the S&P 500 is 16% off its highs, while Brazil is off 23%, Russia is off 22%, China is off 20%, and India is off 28%.
So right off the bat, the “emerging market decoupling” argument falls flat on its face. So scratch that as a reason that the global economy and financial markets will improve in the near future.
Indeed, I fully believe we have entered the Second Round of the Great Crisis: the Sovereign Default Round. What’s coming will involve stock crashes, civil unrest, food shortages, bank holidays and more.
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The 'decoupling' meme never made sense, the global wage arbitrage scheme behind it all makes the 'decoupling' dream of globalists the reason for failure. Bad karma is a bitch
You have no idea what you're talking about. U will feell much better when you admit this to yourself.
Your argument that emerging market economies have not decoupled from those of the first world is correct, however not because of any of the thought you've applied to the subject.
There is no decoupling from BRIC for one simple reason.
PEAK OIL.
The First World, from which the emerging economies are supposedly decoupling, are not so quietly gobbling up Iraq, Libya, even Syria's meager reserves. Soon they will gobble up Iran and Venezuela.
What is BRIC gobbling up? And how will their economies (of course, with the exception of Russia) do as oil production dwindles down?
You better get a report out on PO pronto.
How will the BRIC economies do post-peak? Let's see... B - net energy exporter, does very well indeed, reserves growing. R - likewise, indeed requires a post-peak environment to prosper (until reserves fail, which may be soon unless it hits big in the arctic). I - importer, suffers, but very formative, adapts, grows since the alternative is death, by means of organizational, social evolution. C - tricky case, importer, divided between underdeveloped continent and overdeveloped coast, has more money than it can count, suffers slings and arrows, but seems well-run, shrewdly managed, and will benefit first from technological change.
Your analysis of the BRIC post peak economies/oil reserves is both thoughtful and well spelled out.
But what is missing is a description and analysis of post peak Realpolitik. Where the rubber of the future meets the road out of the past.
The best I can come up with is Oceania, Eurasia, and Eastasia. But it's so yesterday. No surprises there
What do you think?
We keep hearing about PEAK OIL, but new huge deposits come on line:
http://economicsnewspaper.com/policy/german/statoil-norwegian-discover-h...
http://www.miamiherald.com/2011/07/19/2321559/venezuela-tops-world-oil-r...
http://mx.ibtimes.com/articles/16657/20110822/pemex-descubre-yaciminetos...
Peak oil is another of Al Gore's frauds intended to tax sheeple to death.
500 million barrels??? That is huge??? LOL.
Sorry, but that is nothing. The US alone would consume that in about 25 days. If this kind of discovery is now considered huge, than we are really in trouble.
And Venezuelan reserves are crappy heavy oil, with a low energy return on energy invested. It is expensive oil.
Also look at the map where is the Norway discovery. That is above the arctic circle. No cheap oil will flow from there.
It is not the volume that matters but the net energy available to society. And that is in decline.
So the Fed can put a floor under the stock market and has a fraudulent relationship with Wall Street and the banks. And all governments lie about everything except oil discoveries when they and the oil companies are more honest than Lincoln himself.
Did you believe Iraq had WMD when they first appeared in the papers and cable tv?
Peak Oil theory allows for the discovery and production of new fields. But these new discoveries must outproduce that which is continually being lost from older wells which are slowing down.
I don't mean to argumentative, but PO is the only theory that makes sense to me. If the government and banks can't be trusted, why should the oil companies be believed about the size of their finds?
.
the world will never run out of oil but it's running out of oil that we can afford. how much will cost to extract one barrel of oil from the sea in Norway?
The peak oil comment is irrelevant. We cannot use all the oil there is without dooming our children to a world full of air and water pollution and escalating war. We should de-centralize energy production for lasting benefit.
More happy talk, when are you going to give it to us unvarnished.
I agree and disagree. almost the rest of the world is in bear market except the US. I see the rest of the wporld sell off, and us still buying the dips. I see the plunge protection team working the home market and hence influencing the world. all you need to do is look at udn to see it, how we buy and then europe sells us into a lower low, but we keep always buying so they sell into strength. been going on for months.
yes there is no decoupling, but our riggged markets are keeping things higher, as they ran things much higher than they would have done othewise.
the other thing I find interesting is that last year during the "crisis" the dollr gained, treasuries gained, not this time. in effect there has been no unwind of the carry trade. it has confused my signals this time around.
funy stuff is going on in the fx world.
"funny stuff is happening in the fx market"
What is happening in all western economies can be explained and described in only one word....
P O N Z I E
The S&P is dollar denominated, hence it has fallen less nominaly because the dollar is now weaker against the BRIC currencies.
Ding! Ding! Ding!
We have a winner!