``The highest intellects, like the tops of mountains, are the first to catch and to reflect the dawn.” - Thomas Babington Macaulay (1800-1859), British Poet, historian and Whig politician
If we accept the US-OECD-Asia-Emerging Market sequencing of the global slowdown as proposed by the doomsayers, then by the chain of logic, the
But this is unlikely to be the case since, aside from a busted financial-real estate sector, NET exports have been a key factor to the apparent resilience of the
This is where we part from the doomsayers whom have made the decoupling-recoupling debate as a religion or as some form of abstractionism similar to “If you are not with me then you are against me.” Such rigidity makes us unconvinced.
Merrill Lynch’s Richard Bernstein (HT: Craig McCarty) notes that “only 32% of the world’s equity markets are outperforming the S&P 500 so far this year (in local currency). With that performance backdrop, an appreciating dollar could attract “momentum” capital to the
In such a case where then is the recoupling? With 1/3 of the equity markets outperforming the
Think of it another way, if oil and food prices will remain depressed over the interim wouldn’t we be seeing some reprieve to the headline inflation pressures of non-commodity export emerging market economies from which they may be allowed room for a recovery and possibly see a reacceleration of economic growth?
Besides, if Mr. Bernstein is right and a strong dollar could push up the
Commodity Prices Reflect Fundamentals Aside From Monetary Factors
Another, we find it puzzling how the logic of “commodities-will-decouple-but-emerging markets-won’t” will prevail. The cornerstone of such theme is US dollar-paper money oriented.
True, we agree that the US dollar has been an important variable in shaping oil or commodities prices. But again, the world doesn’t seem to operate in simple cause and effect clauses, see figure 2.
From the CFTC report, ``The key driver of oil demand has been robust global economic growth, particularly in emerging market economies….world gross domestic product (GDP) growth (with countries weighted by oil consumption shares) has averaged close to 5 percent per year since 2004, marking the strongest performance in two decades.”
In other words, the price dynamics reflected the imbalances derived from variance in the pace of world economic growth against global oil production output more from than speculative activities. Oil production simply couldn’t keep up with global economic growth especially from emerging economies.
In the recent downturn in oil and commodity prices we see the same phenomenon at work, see figure 3 from BCA Research.
Figure 3: BCA Research:
BCA’s view buttresses our position on the slowing economic world growth and the sensitivity of the
So as we mentioned above, the US-OECD-Asia-Emerging Market sequencing on the recent economic downshift could be the case today, but from a recovery perspective the market leadership will unlikely come from the same order.
The Acceleration Phenomenon: A Key Emerging Market Dynamic
Now take a look at this commentary from Bloomberg (highlight mine),
``In the past, when the
``That didn't happen this time. The world expansion barely slowed last year and oil prices surged, even as the
And such outlook seems to square or match with the idea the world has been significantly less correlated with the
This very important observation from Mohamed El-Erian, author of When Markets Collide: Investment Strategies for the Age of Global Economic Change and co-CEO of bond-investing giant Pimco (emphasis mine),
``In the old days, if the
And perhaps the economic principle that underpins such dynamic is called “The Acceleration Phenomenon”, which was developed by Aftalion a French economist as shown in Figure 4.
Figure 4: Gavekal: The Acceleration Phenomenon
``In
``If, in China, the purchasing parity adjusted average income in 1998 was US$2,000/year, then the number of people earning more than US$10,000 was have been quite small. But if, by 2003, the average income had risen to US$3,000 per person, then the number of people earning more than US$10,000 will have probably increased by a lot more than 50%.
The above chart shows a hypothetical case. If a country’s average per capita is $10,000 where the elite class (having over $15,000 per annum) comprises 2.28% of the population, an average income growth of 25% will push those in the higher echelon from 2.28% to 15.87% of the population!
The significance, again from the eloquent Mr. Gave,
`` Because we know that when it comes to the buying of certain goods and services, the historical evidence seems to suggest the existence of ‘’thresholds’’.
``For example, if the average income in a country is below US$1,000, nobody owns a television; when the income moves above US$1,000, then almost everybody buys one. For the automobile industry, the critical level seems to be US$10,000/year. For university education US$20,000, etc… Today, as
While indeed international channels through trade, capital flows, labor and financial linkages or even monetary pegs could combine to impact an economy, especially in today’s more globalized settings, they don’t constitute everything.
Other significant variables as political, monetary and economic framework similarly determines the internal savings and investing patterns of a country and can present itself as the defining difference to a boom or gloom. As in
Thus, it is possible that the prospective recovery could even come from a MIRROR progression of the proposed US-OECD-Asia-Emerging Market ranking. Likewise, monetary aspects cannot totally be distinct from economic fundamentals.
Overall, recoupling and decoupling debate should not be seen from an absolutist stand. There will be no perfect decoupling as much as there won’t be perfect recoupling.
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