Decoupling the Myth

Monday 21st January 2008 saw big falls in stock prices but rather like February 2007 there is no clear consensus view as to why.

Ambac was the big story, the fear of $2.4 trillion being uninsured and/or unhedged with the monolines saw heavy falls in banking. Yet, the greatest movement was from the miners. The two biggest fallers in the FTSE-100 were the two largest miners, Rio Tinto and BHP Billiton. There was some company specific news: BHP lining up 7 (seven!) banks to tie-up a deal with Rio but other miners also fell sharply. Even Xstrata fell despite concrete talk of Brazilian’s Vale looking to make a bid.

Miners fell so much thanks to the macro sentiment. Japan saw the largest fall from an established market due to fears of an all-out US recession. Of the emerging markets India got the greatest hammering. The idea of “decoupling”, that resource stocks and far-eastern companies would do okay in a US downturn with the Chinese and Indian markets continuing healthy expansion, seems to be on life-support.

While many in the media, especially the left-leaning media (aka BBC/Guardian) have positively lapped up the decoupling hypothesis it has little basis in reality.

Paul Kedrosky makes the point that you could (and I would) argue:

“when it comes to the importance of the U.S. to global GDP, darn little has changed”

http://paul.kedrosky.com/archives/2008/01/21/deflating_the_u.html

The strenghening influence of BRIC countries is, perhaps, a very long-term trend. Yet that hypothetical trend is of no use when the US is still well within its long-term norm of % of world GDP.

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