Decoupling and decorrelation...

If we were to take a snapshot of the global economy 10 years ago and today, one observation might be that the world depends less on the U.S. for growth today than at any time in the past. It can be argued that with globalization, greater integration between economies have led to an acceleration in development and a dramatic improvement in standards of living. Countries like China and India now have distinct middle classes which means that there is less dependence on the vagaries of trade. In the E.U., the last decade has brought about a marked improvement in economic integration. The costly burden of absorbing East Germany is a thing of the past. It use to be that higher oil prices would have a chocking effect on consumption, but today, thanks to greater integration, a more sophisticated financial system and fewer barriers to entry, we get more trade and investments. With the gradual decoupling of these new economic zones it is very possible that we will eventually observe a drop in correlation. In fact this is what seems to be occurring at present considering that the U.S. is heading towards weaker growth whilst the rest of the world continues to roar ahead. Correlation is not static mind you, it varies over time and a sudden shock (like the one we witness with China at the end of February this year) can lead to a dramatic surge in correlations. But with gradual decoupling, in times of economic shock to a particular region, it is possible that the correlation spike will become less pronounced. Only time will tell.