Global decoupling? Then answer this conundrum

[Jim Nickerson]

Re: Global decoupling? Then answer this conundrum

				United States
LOW	HIGH	IN RANGE		1/11/2008	INDEX	CHANGE	% CHANGE	% OFF HIGH
11927	14280	29		DJ Industrials*	12606	-246.79	-1.92	-11.7%
2332	2862	20		Nasdaq Composite*	2440	-48.58	-1.95	-14.7%
1364	1576	17		S&P 500*	1401	-19.31	-1.36	-11.1%
13769	15939	13		DJ Wilshire 5000*	14043	-202.64	-1.42	-11.9%
690	856	9		Russell 2000*	705	-15.56	-2.16	-17.7%
		18					-1.76	-13.4%
41179	65791	84		Brazil: Bovespa	61942	-1573.12	-2.48	-5.8%
5898	7922	87		Russia: DJ Russia Titans*	7664	2.96	0.04	-3.3%
12415	20873	99		India: Bombay Sensex*	20827	245.37	1.19	-0.2%
16555	44744	98		China: DJ CBN China 600*	44294	176.75	0.40	-1.0%
		92					0.21	-2.6%

[zmas28]

Re: Global decoupling? Then answer this conundrum

Jim,

This is exactly the point I made in a different thread. India (Sensex) and China (Shanghai) look different on the charts from the DJIA and are still trending downward, although Shanghai did take a little hit earlier in 2007. The market till now does seem to believe that the US recession will not affect these economies too badly.
I think this could change if the US recession deepens as many commentators (that I conside credible) expect. I've read (in more than 1 place) that a mild recession in the US would likely cut Chinese economy growth rate by a couple of percentage points from the current 11% growth rate. Not sure how that would translate to stocks, but if I were investing in Chinese stocks for example, I would avoid companies with higher export exposure and focus more on those with domestic exposure.

[Jim Nickerson]

Re: Global decoupling? Then answer this conundrum

Jim,

This is exactly the point I made in a different thread. India (Sensex) and China (Shanghai) look different on the charts from the DJIA and are still trending downward, although Shanghai did take a little hit earlier in 2007. The market till now does seem to believe that the US recession will not affect these economies too badly.
I think this could change if the US recession deepens as many commentators (that I conside credible) expect. I've read (in more than 1 place) that a mild recession in the US would likely cut Chinese economy growth rate by a couple of percentage points from the current 11% growth rate. Not sure how that would translate to stocks, but if I were investing in Chinese stocks for example, I would avoid companies with higher export exposure and focus more on those with domestic exposure.

The data I put up reflect what has happened til now and in just focusing on the US markets, which have so far undergone the worst "correction" in five years, the slide here has so far left BRIC markets unscathed.

[zmas28]

Re: Global decoupling? Then answer this conundrum

Sorry, typo on my part.
Note should've said India (Sensex) and Shanghai are still trending upwards, not downwards.

[touchring]

Re: Global decoupling? Then answer this conundrum

Some people still believe in the decoupling theory, so Asian markets are still in euphoria. It will take a sharp fall (more than 15%) in the combined US and European imports to cause factories to start mass laying off workers and only then, this will impact on Asian bourses.

The data I put up reflect what has happened til now and in just focusing on the US markets, which have so far undergone the worst "correction" in five years, the slide here has so far left BRIC markets unscathed.

[GRG55]

Re: Global decoupling? Then answer this conundrum

Some people still believe in the decoupling theory, so Asian markets are still in euphoria. It will take a sharp fall (more than 15%) in the combined US and European imports to cause factories to start mass laying off workers and only then, this will impact on Asian bourses.

Equity markets notwithstanding the consequences of a US consumer cutback on the global economy may be overblown.

Quote:

American consumers spent close to $9.5 trillion over the last year. Chinese consumers spent around $1 trillion and Indians spent $650 billion. It is almost mathematically impossible for China and India to offset a pullback in American consumption.

It may be "mathematically impossible" for consumers in China and India to offset a pullback in US consumption, but consumption in the rest of the world is more than just China and India.

Here's a few things to consider:

• In the 1990 recession US consumption only fell for 2 quarters - maybe this time it will be twice as long?
• According to the FDIC (http://www.fdic.gov/bank/analytical/...032306fyi.html) 26% of the US population lives near the poverty line - will we see any material change in consumption from this segment?
• A 5% decline in US consumption (at the bottom of the recession) would be significant - that represents only $475 B of spending, a figure that the rest of the world including Russia, the Middle East, and Africa could probably largely offset (C1ue: what do you think will happen to Russian consumption in the event of a consumer pullback in the USA?)

Equity markets could do anything, but the real consumption in large parts of the rest of the world may be surprisingly less dependent on US economic activity than we have come to expect.

[Spartacus]

Re: Global decoupling? doomers hoist by their own petard ???

if you believe the US gov statistics are cooked, then decoupling already happened -

John Williams claims the US has been in a recession for some time already, right?

So China and India have been going gangbusters DURING A US RECESSION

1 So either they've already decoupled
2 or Williams' statistics are misleading in some way
3 or the foreign statistics are lying as well, and those countries are also rigged

I suspect a combination of all 3

[Jim Nickerson]

Re: Global decoupling? Then answer this conundrum

Equity markets notwithstanding the consequences of a US consumer cutback on the global economy may be overblown.

Quote:

American consumers spent close to $9.5 trillion over the last year. Chinese consumers spent around $1 trillion and Indians spent $650 billion. It is almost mathematically impossible for China and India to offset a pullback in American consumption.

It may be "mathematically impossible" for consumers in China and India to offset a pullback in US consumption, but consumption in the rest of the world is more than just China and India.

Here's a few things to consider:

• In the 1990 recession US consumption only fell for 2 quarters - maybe this time it will be twice as long?
• According to the FDIC (http://www.fdic.gov/bank/analytical/...032306fyi.html) 26% of the US population lives near the poverty line - will we see any material change in consumption from this segment?
• A 5% decline in US consumption (at the bottom of the recession) would be significant - that represents only $475 B of spending, a figure that the rest of the world including Russia, the Middle East, and Africa could probably largely offset (C1ue: what do you think will happen to Russian consumption in the event of a consumer pullback in the USA?)

Equity markets could do anything, but the real consumption in large parts of the rest of the world may be surprisingly less dependent on US economic activity than we have come to expect.

Here's what John Hussman just wrote http://hussmanfunds.com/wmc/wmc080114.htm in the fifth paragraph under the topic of "The Future"

...a century of economic experience suggests that major countries intertwined by trade do not “decouple.” My impression is that in the coming quarters, the word “decoupling” will be increasingly replaced by the phrase “synchronous global recession.”

Despite jk's consternation with Hussman's Strategic Growth Fund, I think Hussman is one of the more credible people out there in the investment world, and I'm not speaking for jk to say he may not think the same as I do.

[c1ue]

Re: Global decoupling? Then answer this conundrum

A 5% decline in US consumption (at the bottom of the recession) would be significant - that represents only $475 B of spending, a figure that the rest of the world including Russia, the Middle East, and Africa could probably largely offset (C1ue: what do you think will happen to Russian consumption in the event of a consumer pullback in the USA?)

The Russian economy has very little direct relationship with the US economy, but as a commodity based nation - Russia would be subject to secondary effects.

For example, should US reduction in consumption cause oil prices or metal commodities to drop, that would affect Russia.

In either case (no negative effect from US slowdown on oil/metal commodity prices, some negative effect from US slowdown on oil/metal commodity prices), I do not see Russia spending MORE than they are now.

Anecdotally I can assure you that they are spending all they can already!

This then is the conundrum:

China as a government has money, but collectively per capita don't have a lot of discretionary cash to spend more than is already being spent on food - especially since prices in China continue to rise. This is especially true given the large % of the total economic contribution of China's exports.

India has a similar problem - food spending still a large percentage of per capita income, economy also heavily dependent on FDI and US-related exports (more labor than mfd. goods).

As for the middle east:

Saudi Arabia: 20M citizens
UAE: 1.7M citizens
Iraq: 27M
Iran: 63M
Yemen: 20M
Oman: 2.5M citizens
Jordan: 6M

Source: Wikipedia

From a population basis, it might be possible to derive the $475B in question. That's only $3400 per person or so.

However, average income is the key:
Saudi Arabia: $11,770
UAE: $23,770
Oman: $9,070

outside of these 3, it gets ugly:

Iraq: $1,500
Iran: $2,770
Yemen: $600
Jordan: $2,500

Multiplying population sizes by per capita incomes yields a total of:

Saudi Arabia, Oman, UAE: $298.5B
IIYJ: $242.1B

Total per capita income for these countries: $540.6B

So if 88% of all dollars spent in these countries is re-tasked to recreating US spending, then perhaps the world economy won't eat s**t.

I don't think so.

More realistically there might be $50B worth of extra consumption available beyond what is already being spent - a far cry from $475B.

As for Russia - per capita income is $4,460.

Actual incomes are probably higher due to the extent of the black market economy coupled with large relative amounts of cash savings.

Coupled with the 141M population, we're looking at $628B available spending.

Even should Russian spending ratchet up 10% (beyond an already very high rate), we're looking at $60B extra spending.

Again, a very far cry from $475B

Finally, the $1T for China and $650B for India is composed of at least $750B of food spending - I don't see that re-tasking to buying HDTVs.

The remaining $900B goes for shelter, education, medicine, transportation, etc.

Again, there might be some $100B or even $150B extra that could be spent, but even in this case I'm just not seeing how the $475B shortfall is being met.
---------------------------------

http://www.rebuild-iraq-expo.com/New...ws.asp?id=2036

http://www.finfacts.com/biz10/global...epercapita.htm

[c1ue]

Re: Global decoupling? Then answer this conundrum

So China and India have been going gangbusters DURING A US RECESSION

1 So either they've already decoupled
2 or Williams' statistics are misleading in some way
3 or the foreign statistics are lying as well, and those countries are also rigged

Spartacus,

Note that housing has only recently (less than 1 year) begun to implode.

Consumer spending, while low in December, has only begun to weaken.

Thus India and China could easily have not felt any US recession yet because of last gasp inventory building by retailers along with "going out with a bang" consumers.

Time will tell if there is decoupling or not - but it is too early to make any pronouncements.

What I've been talking about are projections based on existing US consumer spending and existing incomes in other countries.

While these are only projections, at least to me the scales are such that it appears impossble for these other countries to replace US consumer spending should this spending falter significantly.

[GRG55]

Re: Global decoupling? Then answer this conundrum

Here's what John Hussman just wrote http://hussmanfunds.com/wmc/wmc080114.htm in the fifth paragraph under the topic of "The Future"


Despite jk's consternation with Hussman's Strategic Growth Fund, I think Hussman is one of the more credible people out there in the investment world, and I'm not speaking for jk to say he may not think the same as I do.

Jim: I don't disagree with Hussman's observation about intertwined trade, and there is certainly a case that the world as a whole is more trade connected now than perhaps ever before.

Quote:

Originally Posted by Hussman ...a century of economic experience suggests that major countries intertwined by trade do not “decouple.” My impression is that in the coming quarters, the word “decoupling” will be increasingly replaced by the phrase “synchronous global recession.”

My point is that we may find that the high global dependency on the US economy, that has existed since the end of WWII, is no longer as valid as it has been in previous economic cycles in the past 60 years. In other words, not a "decoupling", but much less dependence.

Referencing jk's other thread on Hussman, I have a great deal of respect for his analysis, but he appears to be a quant at heart, and makes rigorous use of historical data. If, as EJ suggests, we are on the verge of an economic circumstance (debt deflation) that has occurred very infrequently, I wonder how quickly the type of analysis Hussman and others like him perform would identify such an anomalous situation.

Then again "synchronous global recession" sounds much like EJ's latest...

[jk]

Re: Global decoupling? Then answer this conundrum

re: hussman- i still think he's a very smart guy, and as of the close today i still have a 15% position in his fund [though i'm thinking about whether to maintain it]. i think he's missing something, just like he was when i thought he was a smart guy in the 90's but he was consistently wrong about the market. then he was missing what he later dubbed "speculative merit." this time he's missing globalization/foreign investing/currency issues, and he's missing a structural change in the global economy around resources, and he's missing debt deflation. [actually, i will modify what i just said about currency issues- if you read his column this week you'll see that he points to the large gold stock position in his total return fund. he then says, essentially, that his growth fund is TOO BIG to take positions in miners - the gold mining market is too small for him. his total return fund is $200million, his growth fund is $3billion.]

re: decoupling. i think the coming synchronous global recession will result from global dependence on the u.s. consumer. i think the eventual recovery will reflect a significant degree of decoupling.

[Jim Nickerson]

Re: Global decoupling? Then answer this conundrum

re: hussman- i still think he's a very smart guy, and as of the close today i still have a 15% position in his fund [though i'm thinking about whether to maintain it]. i think he's missing something, just like he was when i thought he was a smart guy in the 90's but he was consistently wrong about the market. then he was missing what he later dubbed "speculative merit." this time he's missing globalization/foreign investing/currency issues, and he's missing a structural change in the global economy around resources, and he's missing debt deflation. [actually, i will modify what i just said about currency issues- if you read his column this week you'll see that he points to the large gold stock position in his total return fund. he then says, essentially, that his growth fund is TOO BIG to take positions in miners - the gold mining market is too small for him. his total return fund is $200million, his growth fund is $3billion.]

re: decoupling. i think the coming synchronous global recession will result from global dependence on the u.s. consumer. i think the eventual recovery will reflect a significant degree of decoupling.

jk, do you want to expand your thinking on that last sentence? And share it here.

[GRG55]

Re: Global decoupling? Then answer this conundrum

The Russian economy has very little direct relationship with the US economy, but as a commodity based nation - Russia would be subject to secondary effects.

For example, should US reduction in consumption cause oil prices or metal commodities to drop, that would affect Russia.

In either case (no negative effect from US slowdown on oil/metal commodity prices, some negative effect from US slowdown on oil/metal commodity prices), I do not see Russia spending MORE than they are now.

Anecdotally I can assure you that they are spending all they can already!

This then is the conundrum:

China as a government has money, but collectively per capita don't have a lot of discretionary cash to spend more than is already being spent on food - especially since prices in China continue to rise. This is especially true given the large % of the total economic contribution of China's exports.

India has a similar problem - food spending still a large percentage of per capita income, economy also heavily dependent on FDI and US-related exports (more labor than mfd. goods).

As for the middle east:

Saudi Arabia: 20M citizens
UAE: 1.7M citizens
Iraq: 27M
Iran: 63M
Yemen: 20M
Oman: 2.5M citizens
Jordan: 6M

Source: Wikipedia

From a population basis, it might be possible to derive the $475B in question. That's only $3400 per person or so.

However, average income is the key:
Saudi Arabia: $11,770
UAE: $23,770
Oman: $9,070

outside of these 3, it gets ugly:

Iraq: $1,500
Iran: $2,770
Yemen: $600
Jordan: $2,500

Multiplying population sizes by per capita incomes yields a total of:

Saudi Arabia, Oman, UAE: $298.5B
IIYJ: $242.1B

Total per capita income for these countries: $540.6B

So if 88% of all dollars spent in these countries is re-tasked to recreating US spending, then perhaps the world economy won't eat s**t.

I don't think so.

More realistically there might be $50B worth of extra consumption available beyond what is already being spent - a far cry from $475B.

As for Russia - per capita income is $4,460.

Actual incomes are probably higher due to the extent of the black market economy coupled with large relative amounts of cash savings.

Coupled with the 141M population, we're looking at $628B available spending.

Even should Russian spending ratchet up 10% (beyond an already very high rate), we're looking at $60B extra spending.

Again, a very far cry from $475B

Finally, the $1T for China and $650B for India is composed of at least $750B of food spending - I don't see that re-tasking to buying HDTVs.

The remaining $900B goes for shelter, education, medicine, transportation, etc.

Again, there might be some $100B or even $150B extra that could be spent, but even in this case I'm just not seeing how the $475B shortfall is being met.
---------------------------------

http://www.rebuild-iraq-expo.com/New...ws.asp?id=2036

http://www.finfacts.com/biz10/global...epercapita.htm

C1ue: You and I are on different wavelengths. It is completely inconceivable to me that overall global consumption outside the USA is somehow limited to a mere $50 Billion increase. A number this small just doesn't pass the smell test for me.

The government's share of the economy in all these various nations is huge, these governments have been accumulating surpluses for years, and it wouldn't take much of an increase in government consumption (spending) to generate far, far more than $50 B of global stimulus.

Russia's government has been accumulating surpluses since 2001. Although Russia is heavily dependent on petroleum and other commodities for it's GDP, Russia's trade surplus in 2006 alone was $139 Billion. According to the US State Dept net Russian exports to the US in that same year were only $15.1 Billion (which is consistent with your point that Russia is not highly dependent on the US directly).

If things start to slow down in the surplus countries outside the USA, even the SWFs could be put under pressure to "invest" more at home and support their domestic economies.

Several hundred $Billion of additional spending is a drop in the bucket collectively for these governments, and it will happen if they need to keep their economies from slowing in concert with the USA.

[GRG55]

Re: Global decoupling? Then answer this conundrum

re: hussman- i still think he's a very smart guy, and as of the close today i still have a 15% position in his fund [though i'm thinking about whether to maintain it]. i think he's missing something, just like he was when i thought he was a smart guy in the 90's but he was consistently wrong about the market. then he was missing what he later dubbed "speculative merit." this time he's missing globalization/foreign investing/currency issues, and he's missing a structural change in the global economy around resources, and he's missing debt deflation. [actually, i will modify what i just said about currency issues- if you read his column this week you'll see that he points to the large gold stock position in his total return fund. he then says, essentially, that his growth fund is TOO BIG to take positions in miners - the gold mining market is too small for him. his total return fund is $200million, his growth fund is $3billion.]

re: decoupling. i think the coming synchronous global recession will result from global dependence on the u.s. consumer. i think the eventual recovery will reflect a significant degree of decoupling.

jk: Could be it's easier for people like you and I to run concentrated portfolios based on these types of factors compared with a US fund manager with $3 Billion that he has to invest (according to the rules in his prospectus and while staying onside with the SEC, etc) ?