Debunking the decoupling myth
Contrary to current popular theorists, we are still in this together
It has been said that if the United States sneezes, the world catches a cold. This means that if the U.S economy experiences a downturn, then the rest of the world enters a deep recession. The reason for this domino effect lies in the United States’ power as the main consumer of goods produced throughout the world. When the world’s largest customer stops buying, it leads to high unemployment and deep recessions in other nations.
The decoupling theory received a great deal of attention – encouraged by many of the end of the world crowd – as the current economic crisis unfolded. The theory can be summarized as follows.
The rest of the world was dependent on the United States. Now because of the new middle class
developing across the world, other countries such as India and China no longer need the United
States. They can simply sell to their own brand-new middle class. Because these other countries do
not need to sell to U.S. consumers, they will not suffer a recession along with the United State. The
United States, dependent on loans from China, Japan and other countries, will find itself without a
lender. Without a lender, the United States will not have access to the money needed to fund
recovery plans during recessions. The United States would then fall into a depression while the rest
of the world gets along just fine.
Many proponents of the decoupling theory moved most or all of their investments overseas either prior to 2008 or in the first half of 2008. Unfortunately for them, last year proved there is no such decoupling, at least not yet. If you thought it was bad here, check out how the rest of the world fared. Most foreign countries fell into a deeper recession than the United States, and most of the foreign stock markets followed suit.
According to the MSCI Index, the United Kingdom and European countries, such as France, Germany, Sweden and Spain, declined between -40 percent and -48 percent in 2008. Russia, India, Brazil, China and Australia plummeted between -50 percent and -73 percent. The only country to outperform the United States’ 2008 return of -37.1 percent was Japan, at -29.1 percent.
The United States is still the center of the economic universe. However, we are headed down the decoupling path. It might take years or even decades for the decoupling to develop, but nonetheless it is important we control our nation’s debt before that day comes. China and Japan might not be here in the future to buy our Treasuries. If those countries develop the ability to sell to their own emerging middle class, then the U.S. government would not have access to the money it needs to spend our way out of the next financial mess. For now, China has an incentive to help us because it needs our consumers as much as we need to borrow from it.
From an investment perspective, it is important to position a portion of your portfolio in international stocks, not because decoupling will occur this year or next, but because some countries simply do better than others in any given year. By owning companies in various countries, you hedge against a crisis in any one country, spread the risk across various currencies and smooth out the volatility of a portfolio.
In 2008, imminent decoupling was not only exposed as a myth, but it also revealed the countries of the world are more dependent on one another than ever before. Thus, the scope of the current crisis is both systemic – a problem with the financial system itself – and global. Because of this, we are currently witnessing the largest, most coordinated international economic recovery effort in history.
We are truly all in this together. 
Peter Mallouk, J.D., MBA, CFP
Thinking Beyond
E | mallouk@thinking beyond.com