Thursday, January 24, 2008

Recoupling Financial Markets-Decoupling Economies

As was explained in the video in the previous post, the most important thing you have to remember about financial markets is that they are driven by sentiment. And sentiment means that they often sell off even when it's not justified while rallying or keeping steady when it would be justified to sell off. This means that one shouldn't take market movements as evidence of movements in the real economy.

Case in point is the recent sell off in European equity markets. Despite the fact that valuations in Europe were lower to begin with and despite the fact that the U.S. recession is likely to affect European firms much less than American firms, European stock markets have in fact fallen more than the American stock market.

Many advocates of the "recoupling"-theory, the view that the U.S. recession will cause a global recession, such as Nouriel Roubini, take this as evidence that Europe (and the rest of the world) is falling into a recession too.

Yet there is no evidence from real world economic indicators of this, at least not yet. For example, we saw today that the German Ifo business index rose. Yesterday we heard that industrial new orders rose 2.7% in November 2007 in the euro area compared to October 2007-and by 11.9% compared to November 2006. These numbers indicate a quite robust manufacturing sector in Europe. People keep overestimating the impact of the U.S. recession on Europe as they forget that gross exports to the U.S. are less than 2.5% of GDP (net exports is far less of course. Indeed, the biggest impact may in fact come not from real economic developments, but from the self-fulfilling prophecies who overestimate the extent of European dependence of the U.S. economy.

China is too handling the U.S. downturn quite well, with real GDP growth holding up at 11.2% in the fourth quarter. China is far more dependant on the U.S. than Europe is, although it should be noted that this dependence is often exaggerated and considering China's overheating tendencies, less exports to the U.S. might not be so bad after all.


Anonymous Zeitgeist said...

Seems Nouriel had the correct "holistic" view and compass.

Roubini is an Iranian-Jewish and Greenspan a Hungarian-Jewish, looks like Jews they like to rule economies and predict their crises (?).

Wonder "who" they really work for...humm

4:05 PM  

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