The De-coupling of the US Economy From the Rest of the World

Before I get onto today’s subject, the property debate is still raging on the Money Morning website. There are plenty of comments from those that agree with your editor and those that don’t.

Just so you’re sure, we don’t edit any of the comments providing they are fit for publication. One comment which questioned the legitimacy of your editor’s birth for instance, didn’t make it through!

But other than that, you can write what you like about property or any other subject. Even if it’s to disagree with us.

But one thing is obvious from some of the posts, and indeed the emails we’ve received arguing with our position, is the inability of the property bulls to grasp the concept of an analogy.

Just to set the record straight, we’re perfectly aware that you can eat an apple yet you can’t eat a house – unless it’s a gingerbread house. And we’re also aware few people buy bananas for investment, and that bananas don’t give you a rental yield.

So, just to help the property bulls and spruikers out, here’s a basic definition of an analogy from the online dictionary:

“A similarity between like features of two things, on which a comparison may be based: the analogy between the heart and a pump.”

For the record, we’re also aware that a ‘heart’ and a ‘pump’ while having some similarities, have a lot of differences too. Such as it’s difficult to pump water from a well using your heart, and that a Davey Silensor SLL pump won’t be much of a replacement if you have a coronary.

Maybe the property bulls and spruikers could actually look at the real point and explain how the Australian property market is the only asset class in the world ever that is immune from falling in value.

Given all the PhDs floating around the property industry we thought they could answer that easily.

Instead, nearly two weeks into this debate, all we have seen are trumped-up and questionable statistics from the bulls and spruikers.

Why This Could be De-Coupling in Disguise

For years everyone – including your editor – has been talking and writing about de-coupling.

That is, the de-coupling of the US economy from the rest of the world. As Peter Schiff says, “the US isn’t the engine room of the global economy, it’s the caboose.”

In other words, the US is a big fat drain on resources. It’s no longer needed. But it’s not quite that simple.

The wonderful de-coupling theory crashed harder than global markets last year. Investors decided it was too scary to leave the US behind right now and so piled in to the US dollar and US Treasuries.

The mistake everyone made – again, including your editor – was not that de-coupling is a myth, but rather that it would be a smooth transition.

Was it really possible the US economy would calmly hand the baton to the Chinese and then watch as the Chinese economy showed it a clean pair of heels?

No.

It didn’t happen like that, and it won’t happen like that. Very rarely does any sort of change come without pain.

The de-coupling of the US economy from the rest of the world is no different. It will be painful for just about everyone.

The market and economic crash of the last two years truly is the beginning of the chain of events. Premature hurrahing about the recession being over and a return to normality is just that, it’s premature.

What we are really seeing now is an economic ‘dead cat bounce.’ It’s an economic mirage.

The illusion of an economic recovery.

And the more convinced the mainstream economists and commentators become of the recovery, the nearer and harder will be the next slump.

To digress, it’s like the housing market. The greater the bravado from the bulls and spruikers, the nearer they bring the inevitable collapse of house prices.

But anyway, back to the de-coupling. The facts are, Western economies are built on paper-thin foundations. Namely the banking system.

We’ve seen over the last two years the current system is unsustainable. It does not work and it cannot work. Metaphorically – not literally – the banking system should have been taken out the back and shot.

Instead it’s been patched up and wheeled out to try and fight another day.

That’s part of the reason why the de-coupling of the US economy from the rest of the world will be so much more painful. It wouldn’t have been a pretty sight to begin with, but policies that prop up the US and other Western nations are making things worse.

Surely even the most Keynesian of Keynesian economists can see that it’s not possible to spend or borrow your way out of debt.

It appears they can’t. They are blind to the facts. They are blind to logic.

Instead, taxpayer money is wasted on pointless ‘shovel-ready’ projects. Individuals are told to spend for their country. And businesses are induced to invest in capital that will never be used.

Meanwhile, Asian economies are torn between two posts. They are producing for the consumption of their own population, yet perhaps unexpectedly, they are also producing for the continued consumption of the West.

Something has to give.

The time must surely come when the Chinese decide they don’t actually want US dollars in exchange for the goods they sell to the West. And they will want US Treasuries even less.

As you know, we do a lot of research on Australian small cap resources companies. The funny thing is, despite the idiocy in Western economies, the Chinese still seem to be investing in real assets and real resources.

The fact the Chinese stock market has ‘crashed’ during the past month could turn out to be the biggest red-herring we’ve ever seen.

Put it this way. The Chinese economy is far more important to Australia than the US economy. We are prepared to take a punt that betting on the future of China is a better bet than a punt on a collapsing US economy.

De-coupling lives.

But make the same mistake as before by thinking it will be a smooth transition.

Other Stuff on the Markets

The S&P/ASX200 gained 0.79% yesterday, while overnight on Wall Street the Dow Jones Industrial Average slumped 185 points. In Europe the FTSE100 dropped 1.82% and the CAC40 dropped 1.92%.

The price of gold in Australian dollars is trading at $1,156.27, while in US Dollars it is trading at $954.73.

The Aussie dollar dropped versus the US dollar and Japanese Yen, trading at USD$0.82.78, and JPY76.72.

Crude oil closed overnight at USD$68.37.

For the biggest movers on the market yesterday click here…

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Tagged as: Australian property market, Chinese economy, Chinese stock market, de-coupling, investment, investors, Keynesian, property, property bulls, spruikers, us dollar, US economy, US treasuries