A good friend of mine and of theis blog wrote a piece yesterday on the decoupling of the US from other world economies. Here is the link http://mksense.blogspot.com/ . Since this topic is of interest to me, I have decided to put forth my two cents here.
Today, I listened to an interview with Mohammad El-Erian, formally of the IMF, Citi, Harvard and now co-CEO and co-CIO of Pimco. He shares that role with Bill Gross, of course, and their relationship has quickly developed into Mr. Inside/Mr. Outside relationship. (no, I am not old enough to have seen Davis and Blanchard play). Mr. El-Erian rarely speaks in public, so when he does it is usually worth listening to given the amount of money he controls. Mr. Gross, on the other hand, is available everywhere talking about the fixed income market as if he were an independent observer rather than the world's largest bond fund manager. While he has gotten better recently, if Mr. Gross had been an equity fund manager saying the types of things he does, let's just say he wouldn't enjoy the unimpeachable reputation he seems to have in the market.
Anyway, Mr. El-Erian was speaking on the topic of decoupling. His expertise is in the area of emerging markets. He had one very good point on decoupling. Mr. El-Erian made a strong and logical case that there are two components of decoupling: markets and economies. His point was that as markets are so interwined, one cannot truly decouple from the other, particularly when the one market is the United States. Where he misses the point, in my opinion, is that he believes the economies, particularly emerging economies, can decouple from the US indefinately. Mr. El-Erian gives all the standard answers for this that have been bandied about for months: continuing growth elsewhere; increasing domestic demand; yada, yada, yada. He maybe right in certain circumstances, but not everywhere.
My abovementioned friends writes on his blog about the developed countries turning downward. If anyone questions this, I suggest you read the front page article in the WSJ from Thursday (here's the link, but the WSJ isn't free http://online.wsj.com/article/SB120234240716748807.html ) about the UK. The emerging markets will be affected as well. They have experienced market declines so far, although, in general, not to the degree of developed markets. If it wasn't for the the speculative bid propping up commodity prices to artificially high levels, the selloff in EM would be much worse.
In this selloff, sovereign wealth funds have been falling all over themselves to invest in Western companies, especially the US. I'm not trying to make the case that these funds are the most astute investors out there, but they do have long time horizons. Why not plow more money into EM? The growth rates are higher and they already have big investments in developed countries. I'm sure they could find suitable EM investments. The reason is simple, and one the Mr. El-Erian discounts way to much. These investors, more than funds' investors, are concerned with return OF capital in addition to return ON capital. What seem to get lost in the discussion (or isn't discussed at all) is that the much badmouthed and reviled United States of America has created a worldwide environment where these types of investments can occur. Without that environment, who knows how many Hugo Chavez's we'd have running around? The largest of the EM countries, the so-called BRICs, do not have a long history of democratic rule, or any history of democratic rule, with the notable exception of India, of course. The legal systems in EM countries do not offer the same protections as in the West. Anybody that invested in APP and got their head handed to them knows this well. Even the bigger players in EM, as they done for decades, have invested the bulk of their funds in the West.
But, I digress (or decouple). The market declines worldwide will have a noticeable effect on worldwide demand. Like Reaganomice, it eventually trickles down to everyone. Does that mean worldwide recession? Probably not, but like in the US where the quarter to quarter growth rate went from 4.9% to 0.6%, it will feel like one. If the post-Olympic growth rate in China drops, to say, 5%, wouldn't that feel like recession there to? For better or for worse (I think for better), both markets and economies are entwined to some degree, leading to mutual growth or weakness.
1 comment:
Thanks for the plug.
The only way suppliers can decouple from a consumer's market is if they find other consumers. Where are these other consumers. I can't find them, neither can suppliers, EM or developed. Just listedn to the whining coming out of the G-7 about the strong dollar cripplingt their export-driven economies.
You are also correct regarding the sovereign wealth funds investing in the U.S. for long-term growth and security.
I suppose that one can invest in the BRIC countries. China and Russia have long track records of adhering to the rule of law and supporting property rights. Oh, no they don't and Putin is looking more despotic every day.
I will leave eberyone with this:
Critics bemoan the fact that the U.S. is beholding to China for cheap goods and for keeping long-term inetrest rates low. However, they and every other export driven economy is at our mercy.
How is this? If China decided it was no longer going to export to the U.S. (or even merely raise its prices), dozens of other countries would trip over each other to fill the void. If the U.S. decided to restrict Chinese imports, we have the same dozens of other suppliers in which to turn.
It is all about diversity. The U.S. has a diverse group of suppliers. Each of these suppliers has only one market.
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