The Real Decoupling

[Mar 3, 2012]

Some years ago one of those new silly words became popular among the financial elites; decoupling. It referred to the fact that China and some other emerging countries could carry on developing even when the fat and happy developed countries didn’t. But perhaps it isn’t the word that’s silly, but rather the elites that recouple with words and we get a contagion (another of those silly words) of silliness.

Speaking of decoupling, I wanted to let you in on a really important decoupling that has been going on for about 10 years. This has been largely unnoticed by the financial professionals, despite the vast amount of information available.

The decoupling I’m thinking of is perhaps best shown by the following graph. It shows the development of Nasdaq from 1979 up until the end of 2011. The black graph simply depicts the Nasdaq Composite Index as we are used to seeing it, i.e. in US$ terms. The most conspicuous thing of this time period is the dot-com spike.

The golden brown graph depicts the Nasdaq Composite Index in terms of gold ounces. We see how the two graphs follow each other closely, the golden graph below the USD graph, and we see the spike in both graphs. But after that something happens. Around 2001-2002 the US$ graph starts to climb while the gold ounce graph starts to fall. This is highlighted by the red cricle.

This is also conspicuous. It’s a significant decoupling that has been taking place, and it might provide some important insights.

decoupling1

Nasdaq 1979-2011

First of all, it show that Nasdaq perhaps isn’t doing as well as most investors seem to believe. In terms of gold ounces, you would have to go back to early 1991 to find Nasdaq at today’s level.

Secondly, this all began when Alan Greenspan, then Fed Chairman, started to accelerate the rate of dollar inflation in all possible ways. He cut the Fed Funds Rate from around 6.5% to 1%, which is the same as halving the interest rate about 2.5 times, with all the chaos that might render for balance sheets. Then the new Chairman ‘Helicopter-Ben’ Bernanke really, really started to accellerate the dollar inflation, taking the fed funds rate down to zero, expanding the dollar supply manifold and expanding the Fed balance sheet in ways unheard of.

So while we have had inflated stock indices in terms of USD, the real story is rather a collapsing market. This is similar to what happened in Weimar Germany in the 1920’s where at times the stock exchange did very well when measured in the fiat currency, the paper Marks. But when measured in gold Marks, the story was different. Then and now, it’s about pure index inflation.

Thirdly, we should also note that this actually happened at the time of the previous big dip in the USD/oz rate (or the spike in the oz/USD rate) by the late 1970’s and early 1980’s. But it wasn’t as pronounced as now, and the decoupling ended within a couple of years. So while this to some extent followed from the great USD/oz dip (or spike in the oz/USD rate), there seems to be something more going on today.

I think one major difference is the policies of Greenspan/Bernanke of the last 10 years or so. To get a feeling for the serious impact they have had on the USD, have a look at the next chart. We clearly see the sharp fall in the USD during the dip in the late 1970’s and early 1980’s. But we also see the even greater downward trend of the last ten years.

decoupling2

USD 1978-2011

Now, we have only looked at Nasdaq, but what about NYSE? Let’s have a look at the next chart. We see pretty much the same story here. The major difference is that the dot-com bull market was less conspicuous than with Nasdaq.

But the real decoupling of the last 10 years is still far more conspicuous than the dot-com spike since both Nasdaq and NYSE are significantly up in dollar terms and significantly down in terms of gold ounces.

NYSE 1979-2011

NYSE 1979-2011

The story is the same if you look at the same charts for Dow or S&P500, i.e. there’s a real decoupling taking place since the early 2000’s and it’s continuing right now. Not much has changed so far during 2012.

To round up, if you want to use a silly word like decoupling, at least do it in connection to a real decoupling. The US stock markets suck, so does the USD. Gold is cash, and perhaps cash is king right now.

This was the top story for the March 2012 Golden Markets Monthly Midas Touch, a free newsletter that tracks the World’s major stock markets, currencies and commodities in terms of a single currency, gold. 

© copyright 2011 Golden Markets Group Ltd. Permission to reprint in whole or in part is gladly granted, provided full credit is given. Make sure you read the Disclaimer.

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