Decoupling

Yes, I'm being naughty with the title-caption. I did realise that, taken in the context of current affairs hitherto, decoupling will be taken to be a pejorative word that describes certain political leaders extricating themselves from the non-gender-specific nether region of their erstwhile partners. But that is not the thrust of this blog entry (stop it! stop the puns!).

What I want to highlight this time around is the hallucenogenic effect that financial analysts and financial writers can have on investor sentiments. In this case, the example is the myth that Asian economies were in a position to elect whether, or not, to decouple from the ailing and moribund US economy even way back in December, 2007.

Will the following categories of persons please read the link that immediately follows the list; amnesiacs, selective amnesiacs, voluntary amnesiacs (i.e. those who choose to forget because the memory was too painful) and those who claim plain ignorance, read this first.

Being Rip van Winkle?

When some of us first read about the angle of Asian economies having reached an apotheosis of economic growth, maturity and mutual consumption, we must have immediately wondered if we had become the proverbial Rip van Winkle, having completely missed this phenomenon of decoupling, in the context of Asian economic development.

The hypothesis of decoupling is the proposition that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the US for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. Faith in the concept generated strong outperformance for stocks outside the US.

In January 2008 as fears of recession mounted in the US stocks declined heavily. But, Lo! And, behold! Contrary to what the decouplers would have expected, the losses were greater outside the US, with the worst experienced in emerging markets and developed economies like Germany and Japan. Exports make up especially large portions of economic activity in those places, but that was not supposed to matter anymore in a decoupled world because domestic activity was thought to be so robust. Read this in Wikipedia.

And so, the myth of decoupling was very quickly busted. Read Why the US Economy Still Matters for the run-down on the bursting of the myth.

The moral

We should be leery of the spin made by analysts that make a living from investment houses and brokerages or, at the very least, place a huge caveat and weigh what the reports say very carefully. Often, these reports are used to justify a "Hold" position while graduated selling of stock and investment positions are taking place. At other times, these reports generate a classic herd behaviour on the part of the investment community.

The myth of decoupling was perpetuated for many months. I believe many investors who would have taken shorter positions i.e. slowly sold down their investment holdings in regional bourses actually held on or, worse, increased their holdings. So, to the retail investors out there, the world of stock brokerages and investment funds may be awesome with their lingos and numbers-spewing prowess, but at day's end you have to use your innate cow sense because behind the full glass walls, leather upholstery and double-Bloomberg screens, there is a bunch of 20-year old finance graduates (called researchers) who are only crystalball-gazing and reading tea leaves. But, Boy! are they good at stirring and spinning their financial yarns!