Countries Must Un-peg Before They Decouple
The Wall Street Journal ran a piece today titled: "Right Forecast by Schiff, Wrong Plan?"
Peter Schiff is the president of the Darien, Connecticut broker-dealer firm, Euro Pacific Capital Inc., which specializes in investments in foreign dividend paying stocks. He has come under some criticism recently concerning the performance in 2008 of foreign stocks tied to his investment strategies - namely, that the U.S dollar would weaken significantly and that foreign economies and stocks would outperform those in the U.S.
In 2008 the dollar rallied against most currencies, and foreign stocks were not immune to the carnage on Wall Street, as they too saw significant declines.
In the Journal piece today, the authors bring up the decoupling theory, writing:
"One of Mr. Schiff's biggest forecasts was that many overseas economies would "decouple" from the U.S., gaining strength even as the American economy struggled. Instead, overseas stock markets plunged as much or more than U.S. stocks in 2008 as the global economy skidded. Prices for commodities also tanked, torpedoing another favorite investment theme of Mr. Schiff's. After last year's losses, his firm has about $845 million in assets."
The decoupling theory held that emerging economies around the world, particularly in China, had developed to the point where they no longer depended on the US for growth, and that increased domestic consumption would replace lost U.S exports if the U.S entered recession. Faith in the theory had generated strong out performance of foreign stocks compared to US markets.
The decoupling theory however was prefaced on the removal of currency pegs, as there can be no decoupling where countries continued to suppress the value of their own currencies. By doing so, these countries took, and continue to take, purchasing power out of the wallets of their own citizens, who arguably would have used their newfound wealth for additional consumption spurring domestic economies.
A global economy operating on exchange rates determined by the free-market, as opposed to the printing press, is a healthier global economy. Instead, what we have is a basket-case global economy, that maintained the status quo all along yet continues to find peculiar that the U.S consumer, much like the fallout following a fireworks display, had to, at some point, come crashing back down to earth from the debt gorging of the century.
Some of those scratching their heads and gloomier than usual are the attendees at the Davos World Economic Forum this week. Instead of pointing fingers at the U.S, however, they might be better served looking in the mirror. Perhaps Peter Schiff or any one of a number of commentators, ourselves included, can fly over there and have them stand and repeat one of Newton's laws in unison, which reads: An object in motion will stay in motion until acted on by another opposing force.