Wednesday, July 18, 2007

Increased Wall Street-America Decoupling

Swedish neoconservative blogger Dick Erixon is as clueless as usual when claiming that America is in a cyclical boom, only to be puzzled as to why Americans aren't upbeat about the economy. That may have something to do with the fact that America is not in a cyclical boom. While not yet a recession, it is certainly a cyclical slowdown with year over year growth being just 1.9%, significantly below the historical average and most other countries.

Just about the only fact he got right was that Wall Street is at record highs (or at least the Dow and the S & P 500, NASDAQ is still nearly 50% below its March 2000 peak). Yet as I've explained before,
Wall Street and the
U.S. economy is increasingly decoupled.

We have gotten more confirmation of this trend this week. First, in many earnings reports (which BTW have been surprisingly weak so far. While they are still likely on average the beat official estimates, they seem to be doing so with a smaller margin than usual) it is reported that revenue and earnings growth is concentrated to its foreign operations. Case in point is Coca Cola, which saw domestic sales volumes drop 2%, while its non-U.S. sales volumes rose 9%.

We also saw another explanation to why stocks have been rising so fast despite stagnant earnings growth, besides the rapid money supply growth I reported about a few days ago. The Treasury International Capital Data reported that foreign net acquisition of U.S. stocks rose to a record $41.8 billion in May, after being $27.4 billion in April, after being roughly $10 billion per month the 10 months before that. It is also far higher than the roughly $10 billion monthly acquisition of foreign stocks by
U.S. residents. Why foreigners have started to show such an interest in U.S. stocks is not clear, but presumably it reflects at least partly the fact that the weak dollar and the boom in other stock markets have caused the relative weight of the U.S. market many fund managers portfolio to decline, which means that they'll have to buy more U.S. stocks to achieve their desired level of diversification.

This reflects a global trend where both operations and ownership of companies are increasingly globalized . This, as I've discussed before, is a factor which have helped reduce cyclical fluctuations in the economy. It also means that local stock markets will to a lesser and lesser extent follow the movements of the local economy.


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