One over Zero and Decoupling

Europe woes have not gone away and though it feels as though the market's ADHD has already confined Cyprus to the toy box, TMM still see it as a jack-in-the-box. Lid down for the moment but there is a nasty clown about to bounce out again. S"EU"prise!!!

Yesterday's Euro  PMIs weren't a great shock but are confirmation that Europe is suffering from both of its perennial problems at once, politics and economics. In the past when we have seen economic crises the political will has held firm. Perceived breaks in the unity of policy have only tended to shine through when the economics were supportive enough to allow luxurious room for "debate". But now we appear to have greater policy split than ever occurring as the economic outlook is getting worse. TMM still vote with their P/L on Europe and call the zone lower.

Meanwhile the US markets are doing OK leading to calls that US has DECOUPLED from Europe, but the US is playing a two speed game. We note that US earnings are diverging depending upon their US vs ex US exposures. CAT and Fedex in the naughty corner, homebuilders, telcos and other domestic names are leading the charge. However the general tone is that US recovery, spurred on by its new found cheap energy and free money, is the story of the decade and to be long anything US vs the rest of the world, especially Europe, is the best trade in town. So local has DECOUPLED from international.   

Cheap money is changing many equations as one divided by zero gives an answer that is hard to use. Though we have long understood that if you fund at zero then any dividend paying equity can be attractive, the price can be anything you like for div/price to still be greater than zero. We have heard this quoted today re P/E "should be at 30".  but why stop there? It could be anywhere, pick a number.   

This has seen an argument flourish that equities can go up  based on them having a yield and be damned with the price risk. Which is interesting, because it is another example of DECOUPLING. This time from the bond markets where the reverse logic is being applied. You can't possibly buy bonds because despite their yield, the price is "obviously" going to dump.   

This leads on to another current belief, that Emerging Market Debt is a great buy as the only risk is if US treasury yields rise and you believe in the link. But EMD investors are being told that the asset class has DECOUPLED  from Treasuries and are a buy on their own merits of better debt dynamics, growth and  inflation. 

We hear the cry of decoupling everywhere. The usually steady path of AUS$ tracking the Aud mining index has DECOUPLED, Cyprus is assumed to have effectively DECOUPLED from Europe (Scotland could soon be DECOUPLING from the UK)  and we could say that Bitcoin has DECOUPLED from the USD. US data is even DECOUPLING with itself with this week seeing a sudden slew of softer numbers, but that's ok, it's only decoupled. It's getting to the point where decoupling arguments are being used to sell any old rubbish. 

Whilst we understand the effect zero has on some investment equations and whilst we also understand that the Japanese may be about do an "Exxon Valdez" with global liquidity, TMM have a simple decoupling rule-

"Decoupling works really well right up until the point it doesn't, which is just after the point everyone says it does".

And that would appear to be right now.