Crescenzi: De-Coupling Bet Will Again Fail

One of the most debunked ideas of 2008 was the idea that the global economy and its financial markets would de-couple from the U.S. and remain buoyant.

This theory crumbled when the global economy followed the U.S. economy and began weakening, hitting commodity prices hard and spurring large-scale unwinding of the massive amount of commodity-linked trades positioned worldwide. Investors were long commodities outright, the currencies of countries benefiting from higher commodity prices, as well as the stocks and bonds of these countries.

In addition, investors went long the financial assets of countries benefiting indirectly from the massive amount of cross-border flows that went to countries such as those in Eastern Europe, Asia, and Latin America. Those that bet on de-coupling lost. The theory has credence but only from a secular standpoint; cyclical pressures are too great at the moment.

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Monday's dollar drop and commodity rally was another bet on de-coupling. It is an idea that makes sense from a secular standpoint but is a miserable idea from a cyclical standpoint. How, for example, will the global economy recover from its woes if commodity prices rally and the dollar's decline prevents a recovery in export growth in foreign nations? It can't.

What is happening is that investors are again betting not only on de-coupling but on the idea that the price tag of the government's mortgage plan will boost U.S. debt and debase the value of the dollar. This theory has credence but it is far too soon to assess the cost of the government's plan, which could well turn a profit and result in a more stable economic and financial situation than if the U.S. put no skin in the game.

Another factor of late is that investors are peering into the future--well into the future, to a time when the U.S. and global economy will emerge from the current crisis and boost demand for commodities and enable the secular bull-run for the global economy to return. When it does then it will make sense to rally commodities and revisit the de-coupling idea. It is far too soon on this front.

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Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to"