The Great Decoupling

Jeff  Carter
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Posted: Dec 08, 2011 12:01 AM

Correlations in statistics work until they don’t. Constant measurement and graphing regressions over and over again and measuring confidence intervals will help you keep confident that the correlation you are assuming is indeed happening.

If you are the first to spot a correlation, you can make a lot of money. It’s happened a couple of times in my life. Once I saw something happen and put two and two together. I started buying everything I could. One trader grabbed me by the scruff of my neck and simply said, “Sold.” to me. I turned and said, “1000.” Turned around and as I carded the trade the market flew higher. Was fun watching the blood drain from his face.

Over the past several years, there has been one truism in markets that everyone has leaned on. How many times have you heard some analyst say, “We are all connected.”. “Our market is down because the fill in the blank market is down and this whole globalization of capital is dragging us with it.” I bet a lot.

I have heard it so much that I am beginning to believe it’s not a true statistical correlation that has meaning anymore.

Check this out.
SPDR S&P 500 Stock Chart

SPDR S&P 500 Stock Chart by YCharts

The Hang Seng
Hang Seng Index Stock Chart

Hang Seng Index Stock Chart by YCharts

The Dax
German DAX Index Stock Chart

German DAX Index Stock Chart by YCharts

The FTSE
Ftse 100 Index Stock Chart

Ftse 100 Index Stock Chart by YCharts

All the markets are down, but some more significantly than others. I think the great decoupling has already started. It’s leading to sloppy analysis. My bet, a bunch of the HFT algo boys all have this programmed in and if markets really decouple they get an ass whippin.

Yesterday at an angel conference I spoke briefly about the economy and what will happen in 2012. Because I am not an economist, I surveyed what a lot of smart economists from both the fresh water and salt water school say about US GDP next year. GDP is the key thing that matters because growth is everything. You see a range of a pessimistic 2.0% to 3.0% depending on assumptions. My gut tells me the US will see growth in the middle of that range. It’s not enough to cure a lot of our problems, but it’s enough that we won’t be in a recession.

That’s not the case with Europe, and I don’t think it’s the case with China.

Europe will go into a recession because of the government debt crisis they have over there. China, Jimmy Chanos has predicted will pop, but I think the US will move steadily along. We have enough aggregate consumption domestically to keep the ship afloat. Corporations are sitting on huge piles of cash and their balance sheets look good. American companies have gotten incredibly efficient.

Another little bit of information that I have learned is that the consulting industry is booming. Companies are hiring consultants to perform tasks that they would normally employ workers to do. That’s not cheap, but it’s cheaper over the long run than hiring an employee. That tells me that there will be positive production going on, although it won’t affect headline employment.

There is no doubt that the US economy faces headwinds. Uncertainty, government spending and debt problems, over regulation, poor tax policy, and dislocation of a lot of unskilled labor. However, if we had some of those problems solved we wouldn’t grow at 2-3%, but more like 5%.

Watch for the great decoupling. Someday, the US market will be up, and the rest of the world will be in the tank. In the future, India, Brazil and China will have gigantic economies that will matter a lot more for the US than they do today. Despite what everyone says about the future, we are still the biggest kahuna on the block.