Contingent Causes and Consequences of Human Action Should Underpin Decoupling Theme

``The only effective way to address corruption is to change the system itself, by radically down sizing the power of the federal government in the first place. Take away the politicians' power and you take away the very currency of corruption.”-Congressman Ron Paul

What was previously pronounced as the hottest emerging trend easily became an orphan overnight following the synchronous Jan 21^st global equity markets meltdown. Even some of the most revered advocates of the so-called Asian “century” went on air to debunk the so-called “Decoupling theory” as a myth or as the emperor with no clothes.

Ironically, it seems like logical fuzziness to claim that Asia will be the next economic powerhouse when supposedly its fate has been declared as being foreordained towards the growth trajectory of western nations due to its trade, economic and financial links.

In a positively correlated economic and financial sphere, does it imply that Asia would outperform only when global economies and markets are accelerating upwards?

Maybe, the difference lies in the definition from timeframe dimensions (not today but tomorrow or sometime in the future perhaps?). Maybe also, too much emphasis has been devoted to a singular event or analysis based on the rear view mirror or recency bias or past performance as guide to future events.

Again as a reminder, we do not deny that under globalization trends which means more heightened interconnectedness, linkages (trade, financial, labor) have been tightening and is likely to get tighter. And such dynamics are likely to be reflected on the markets as had been the case since 2000. But again the caveat is that there is no pure globalization or integration.

We argued the case of positive interrelationships since 2003, and in fact took on the prisms of a bear (last week) to show that under selective dimensions; particularly the induction premised from exports and remittances, a severe US slowdown will negatively impact the Philippine economy.

But unlike then, our idea today is that markets and economies could possibly be rediscovering its individualities due the different dimensions of exposures to what has weighed in on some economies or markets. Besides, under diverse conditions people, societies or even nations react divergently to changing conditions.

To quote Jörg Guido Hülsmann in his article “The Epistemological Case for Capitalism” published at the mises.org (highlight mine), ``The causal analysis of individual human behavior must take account of the fact that any human action has certain invariant consequences — that is, consequences that result from like action at any place and any time. For example, an increase of the quantity of money tends to entail an increase of the price level above the level it would otherwise have reached, irrespective of when and where the money supply is increased. The study of such consequences is the task of praxeology and economic science.

``But human action also has contingent causes and consequences. The very same action — increasing the quantity of money — can be inspired by very different ideas and value judgments. And the objective consequences resulting from any action can provoke very different individual reactions at different times and places. In other words, the causal chains through which ideas and value judgments are connected with human action are contingent. The elucidation of these contingent causal chains is the task of historical research.”

Recent examples, in the recent G7 finance ministers meeting, media asked if global central banks would concertedly lower interest rates to help stave off a world recession, here is the reply of Finance Minister Fukushiro Nukaga, ``Each country needs to take a step, and it is important to push that move based on its own economic and fiscal situation”. (highlight mine)

The interview best described by Japan Times, ``…the G7 had dashed any hopes of concerted international action, such as coordinated interest rate cuts and fiscal stimulus packages, because economic and fiscal conditions differ from country to country.” (emphasis mine)

So while global central banks would work to coordinate with each other, policy stimulus would have to be applied distinctly.

Oh, speaking of surprises, just when mainstream experts had been almost unanimously bearish brought upon by the “contagion” effects from the US mortgage crisis saga, Japan’s last quarter GDP unexpectedly soared.

From Bloomberg (highlight mine), ``Japan's economy grew 3.7 percent last quarter, twice the pace economists forecast, as business investment rose and exports to Asia helped companies weather the U.S. slowdown.” So contrary to most expectations capital expenditures (based on rising demand from Asia, Russia and the Middle East according to Bloomberg) and exports have remained resilient in the face of a US downturn during the last quarter of 2007.

We don’t like to read too much from a single event. Yet this imparts an important message- analysis based on “sterilized” conditions exhibits vulnerability. While some analysts call this a “blip”, one said that Japan’s GDP was not the appropriate indicator. A seeming case of denial?

Since a quarter does not imply a reinforced trend, it could be that the mainstream will be proven correct; as the downdraft in the US economy intensifies these positive variables could reverse. In the meantime some even assert that Japan will be the next country where the next wave of Pandora’s Box of toxic papers will surface, as measured by the recent spike in iTraxx Japan (a measure of default risks of Japan’s top 50 companies). So the global credit crisis is popularly expected to further curtail its economic activities. But on the other hand, again they could be wrong.

We read that Japan’s economic problems have been mostly about the unintended effects as a consequent to the recently imposed policies more than the ramifications from a global contagion, this from Takehiro Sato of Morgan Stanley (highlight mine),

``Japan’s “errant policy-induced slump” is already widely acknowledged among investors as “Kansei Fukyo”. The three main components are 1) heightened liquidity concerns for SMEs with de facto volume restrictions and caps on the loan interest rate for consumer financing and a shared responsibility program launched by the Credit Guarantee Corporations (CGCs) in October 2007, 2) a sharp downturn in residential investment under the revised Building Standards Law, and 3) diminished investment in risk assets following implementation of the Financial Products Transaction Law…”

``We think that liquidity restrictions from cutbacks in consumer credit and loans guaranteed by the CGCs, though for very different reasons than in the US and Europe, might be interfering with corporate activity in Japan as well. The scaled-back credit guarantee program is not having a major impact yet since the changes were accompanied by transition measures to cushion the blow.”

Of course, Mr. Sato like most of the mainstream believes that external conditions combined with internal forces are making Japan’s situation ``increasingly difficult to envision a convincing upside scenario for Japan.”

Figure 1 stockcharts.com: Japan’s Nikkei 225

We don’t know much about Japan except through the reports we read. So our outlook depends on the accuracy of the information we gather. From our perspective, many analysts have deduced Japan’s present woes as having been more internally generated, whereas the impact from external factors has yet to be actualized or has yet to surface on the economic data.

This means that if economic data continues to prove that the contagion impact from the US may have been exaggerated then Japan’s dramatic swan dive (a peak-to-trough decline of about 32%-see figure 1) could have been an overshoot.

In other words, Japan’s decline appears to have priced in more of the expected “global contagion related” bad news than is otherwise reflected in the present economic data. The major benchmark the Nikkei 225 is down about 11% year to date.

This implies for two scenario, one market is wrong (overshoot) and the Nikkei should start bottoming out 13,000-14,000 before recovering. Or two, Japan’s economic conditions will likely deteriorate further and may fall into a recession (from which the Nikkei could decline somewhere into 11,000 to 12,000).

We can’t say if the Nikkei has reached its bottom, time will make the cycle apparent but for the moment it looks like the major Japanese benchmark is poised to test its resistance level.

From the above examples (G7 and Japan), we can conclude that the battle between a globalized and a divergent outcome has yet to be resolved decisively.