Black Swan Problem: Not All Markets Are Down in 2008!

As we noted in our November post Black Swan Problem: Not All Markets Are Down!, hasty generalizations won’t do any good. Despite the recent squall in the global financial markets there are still some countries that have managed to end up in green or have not fallen below the 20% threshold which technically delineates what is known as a bear market.

Bespoke Invest provides the annual performance of stock markets of 84 countries in 2008…

According to Bespoke, ``32 of the 84 countries were down more than 50% in 2008, while just three countries finished in the green -- Ghana, Tunisia, and Ecuador. Iceland was down by far the most, losing nearly all of its value at with a decline of 94.43%. Of the G-7 countries, the UK did the best with a loss of 31.33%, followed by Canada (-35%), and the US (-38.5%). With a decline of 48.4%, Italy was the weakest of the G-7 countries. At the start of 2008, the decoupling trade was all the rage, as emerging markets such as Brazil, Russia, India, and China (BRIC) were supposed to hang in there much better due to continued growth prospects. When all was said and done though, of the BRIC countries, only Brazil did better than any of the G-7 countries, while India, China, and Russia were all down more than 50%.”

Some added observations:

-Including the 3 ‘advancers’, there are 9 national benchmarks that have not fallen below the bear market threshold of 20% in losses. Of course this is based on domestic currency metrics and is likely to smaller when adjusted for US Dollars.

Said differently, the 9 benchmarks have decoupled from most of the global markets.

As we earlier quoted, ``No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion," wrote philosopher David Hume in his Treatise on Human Nature, which is a rephrase of the black swan problem posed by John Stuart Mill [Nassim Nicolas Taleb: Fooled By Randomness p.117]

Thus, decoupling then a myth? (Decoupling for us is a semantic argument; our point is in a world of globalization which is another word for more integration, the greater interconnectedness of markets and economies are likely to reflect more “synchronization”, but integration won’t be perfect. Besides, it our suspicion that forcible liquidations due to debt deflation have been the unseen knot responsible for the near simultaneous reaction of markets.)

-Asian Markets have been significantly hit compared to its European counterparts or even the source of the troubles…the US.

To consider it has been the US and Europe suffering from a combined debt deflation, economic slowdown and balance sheet impairments.

Courtesy of ADB’s December Asian Bond Monitor

Meanwhile Asia’s link has been through mainly through trade, liquidity and capital flows. Thus, it is my hunch that Asian markets could outperform as previously discussed 2009: Asian Markets Could OUTPERFORM