De-coupling lives again, but I wouldn’t bet the farm on it.
Remember when it made the rounds over a year ago?
The idea was that even if the U.S. economy caught pneumonia, the rest of the world would at worst get a bad cough. It was argued that Europe and China were much less reliant on the U.S. economy than ever before. And China, with its massive import needs, would also keep economies from Brazil to Australia humming.
This gave governments, businesses, and investors hope. It was about as good as any other unproven theory – but it didn’t quite work out, did it?
America’s economic malaise quickly spread to other countries, including China in a very big way, and they caught much worse than just a cough.
Fact is, replacing the U.S.’s massive market is easier said than done. China’s quickest road to recovery is helping the U.S. recover. That’s why, despite a lot of moaning and groaning, China will continue to finance our growing debt and take their chances on a future devalued dollar.
China’s leaders understand better than most people in America that their heady economic growth was entirely dependent on our “borrow-and-spend” behavior.
With no replacement in sight, it’ll be next-to-impossible for China to turn around its economy. De-coupling has once again miscast China. China is no savior. The crisis began in the West and will end in the West. Only then will a recovery spread elsewhere.
Read my lips: A rescue is not around the corner. You should continue to invest defensively (in gold, for example) or bet the market short, because it still has another leg down to go.