Decoupling
I love that word, decoupling. You can go in so many directions with it. Icvbnt can be the bucket of cold water thrown on two dogs to stop them doing what they do (I witnessed that one day during my youth in Maine, when a huge dog got “stuck” tying to exploit a smaller dog that had kegeled itself into protective rigor). It can be a long-overdue divorce that has waited for the kids to grow old enough to handle the truth (answer: they never grow old enough to get over mom and dad not loving each other anymore). In this instance, decoupling is meant to describe what happens when major world economic powers decide that it is no longer in their best interest to affiliate and economically link themselves to other world economic powers.
Let’s start with a quick review of who are the world economic powers just so we are all updated and on the same page (GDP levels):
1. U.S. – $19.5T
2. EU – $16.2T (Germany – $3.7T, France – $2.6T, Italy – $1.9T)
3. China – $12.2T
4. Japan – $4.9T
5. India – $2.7T
6. UK – $2.6T
7. Brazil – $2.1T
8. Canada – $1.6T
9. Russia – $1.6T
Global Total – $85T (87% comprised of those countries or blocks above)
These are the players on the world economic stage and everyone else is just an also-ran. Saudi Arabia and Switzerland combined don’t stack up to even Russia’s level. That’s not to say that some countries like those two don’t punch above their weight, as they say, because of brainpower, cunning and accumulated wealth. But the team that drives the stock market and the places that make the economic life of the planet really go around are those 9 above with proportionate power to their GDP level. One can argue that China is much heftier than the EU since the EU doesn’t really operate yet as a true collective like the United States of America does (thank you all you founding father Federalists!) And I think it’s important to note that while Putin seems to rule the world through his elections interference (What? No!) and his selective aggression finagling (Syria, etc.), the truth is that he has and should have a serious concern about being a little pisher on the economic front. Imagine how he feels that his great big strong country is 1/3 the size of the eenie-peenie Japan.
For some time now the globalization of the world economy has led to more and more virtual supply chain networks (for both manufacturing and services….think “Made in China” and think call center Indonesia when you try to call Citibank for an answer on something). That has generally served the common good as lowered prices have driven greater consumer value versus the job displacements that we hear some old complaints about. Well, now, the unions and other nationalist-leaning advocates have gotten the event that they have all been waiting to exploit. The Coronavirus is causing Apple, and everyone else, to accelerate the shut down of their plants in China (hence the hit to anticipated earnings at Apple and the concomitant fall in stock price of the overall market, but especially those that source in China). To be sure, those plants would have eventually been moved to a lower cost regime sooner or later, but the premature move certainly has a cost and that sort of supply disruption is a major headache, first to manufacturing and supply chain managers and eventually to investors and consumers. I recently tried to buy something (a screen cleaning tool I really like) and found it out-of-stock. I don’t know that the reason is the result of what I describe above, but I suspect it is. I did find a hidden cache of these handy little tools on Amazon, but it was telling me “only 5 left in stock” so I suspect there is a supply chain issue for one reason or another.
Well, look at the markets today for your answer as to whether this whole Coronavirus issue is going to impact the US or world economy…. they opened down 3% and ended the day down 3.56%, easing more than all the year’s gains to date and overall costing the global markets $1.7T in value (that’s more than your annual GDP Vlad!). Our stable genius leader tweeted that all was well because the USA has been barely affected by Coronavirus, showing yet again that he hasn’t a clue about how the global economy works. The markets are less worried about socialism this morning than they are about a pandemic. The real issue is that the current bout of nationalistic thinking gets a face mask full of support from something like this and the decoupling of major economic power (US, China, UK, Japan, EU) gets a further harmful boost. Apple starts moving production plants out of China as one of the more nimble players of the global supply chain game and soon many multinational companies that source supply chain elements offshore will take an immediate hit. I think Coronavirus alone is a problem for the health risks it represents to us all, but Coronavirus overlaid on growing protectionist thinking is a BIG problem economically.
A friend of mine involved in the global attractions business is consulting on a project in the middle of China, you know, in the center of that bubble map of where the Coronavirus emanated and is most strongly rooted. He says he agrees with my assessment of countries like China, who so severely suppress information both to their own citizens and to the outside world. Technology makes that suppression much harder and highly volatile causing it to inevitably fail and the truth comes out. They used to say that the only time the Chinese government lied was when their lips were moving. He still has several work friends on a large attractions project in Beijing. He says suppliers, vendors, consultants and about 60% of the expat staff can’t get back to the project (they’ve been gone since the start of Chinese New Year, when the Coronavirus was just starting) and those that do are required to “self quarantine” for 14 days. Then there is the constant checking of the staff at several points throughout the day, thereby reducing daily productivity and raising project costs. Laborers in China still largely come from the rural countryside and they have not yet returned to the site in any significant numbers, reminding us that economic gain at the expense of worker health is still a hard equation to manage. This all is resulting in slowing construction to a dribble at best. My friend is concerned that if the delivery of goods and services slows even further and the health security of those goods (food source mainly) remains suspect, the impact will be even greater. The Chinese menu is not so appealing to Westerners like me anyway, but a diet of boiled fish or chicken and noodles may have to be the food of choice in China for a long time yet.
Nationalistic and autocratic leadership like they have in Xi’s China will be shown for what it is, dangerous to world economic stability not to mention overall human health. Lack of transparency has a cost to it and that is being shown front and center now. Long run, its probably good for the world to get spanked for allowing autocracy to govern (turning a blind eye because the short-term wallet benefits feel so good). So, in a strange way, what hurts us short-term will probably help us long-term….if that makes any sense. So decouple away.