Tuesday, November 18, 2008

Forget decoupling or recoupling. How about resynchronizing?

In 2007, popular opinion held that the rest of the world (ROW) was decoupling from the US. The US could go in recession, and the ROW would still be fine. Even Canada. This was one of the stupidest arguments ever, since the US consumer was purchasing some many of the exports of the ROW. Many of the ROW countries were benefiting from high commodity prices, partly created by the US consumer. Throw in the fact that all the booms were based on a global credit bubble, a global housing bubble and a global commodity bubble and you see what has happened. Every major stock market is down big this year. Every major country is in or near recession. There was no decoupling or recoupling. You need a decoupling first to recouple!

There was a lag where certain economies were ahead or behind others by a few quarters. Case in point, housing. The US housing market started rolling over in 2006 and really went off a cliff in 2007. The Canadian housing market only started rolling over in early 2008, as the commodity boom allowed the Canadian housing market to soar in 2007. However, the lag is getting shorter and shorter?

Why? Resynchronizing! Every stock market is down, every form of credit is in a bust, every country is near recession. A process of resynchronizing has begun so that all asset prices are deflating at the same time. The lags are getting shorter and case in point, the US and Canadian housing markets are now falling off a cliff at the same time.

There are always lags and certain markets may make a bottom earlier than others, but the multi-year lags are over for the world for now. Hence resynchronization.

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