Everything's Correlated Now

09/13/2012 10:00 am EST

Focus: MARKETS

Jim Farrish

Founder and CIO, Jim's Notes

The increasing interrelatedness of China, Europe, and the US has made it very difficult for one to slow down without effects in the others, says Jim Farrish.

How are Europe, Asia, and the US going to get along moving forward? We're here with Jim Farrish, who is going to enlighten us.

You know, that's a big question, and I think it's one that we really have to answer. If you look at FXI or GXE for China for one, if you look at the IEV, which would be the Europe 350 Index for two, and then SPY would give you the S&P 500 for the United States, we lay them on a correlation graph to look at how they're correlating. Very highly.

As the US is going right now, so is Europe and Asia, but what you really have to be concerned about is this: I call it the tripod effect. The No. 1 trading partner for the United States is China. The No. 2 trading partner for the United States is Europe. The No. 1 trading partner for Europe is China. China's No. 1 trading partner is Europe. They're all in bed together.

Well, if Europe's got the flu, then you got to be careful with these other two. They're going to catch a cold...and we're already seeing it. GDPs are moving lower. We saw European GDP going down. China's GDP is at 5%. We're at 2.25% and going lower. I think if we get to 2% or lower, you're going to see Bernanke stand firm with QE3. We've got this whole risk factor that's really growing in the global market, and I think you have got to be careful.

And an increased interrelatedness from ten to 20 years ago.

Oh, absolutely. And everybody has talked about decoupilation, if that's a word, but that we've decoupled from the global markets. That's baloney. If you just lay them on the same graphs, same chart, we've had one that we've shown many times. The direct correlation right now is very high.

So when you look at the fact that United States started topping April 2, look at a chart of IEV. Look at a chart of FXI. They started topping. Look at the emerging markets. You'll start to see the same thing. You've got a stronger dollar that impacts the emerging markets, significantly a stronger dollar does.

I think the dollar gets strong. I think we could see $1.20 to $1.15 on the euro against the dollar. Some economists are calling for a dollar par on the euro. That could happen if Greece defaults.

Yeah, and almost the only time it was down that low was when it was first launched, right?

Exactly.

I mean, they launched it at about 80 cents, and it went up to a dollar, and then since then it's been off to the races.

Exactly.

Well, I think also to your point that you have Brazil, for example, which is a big partner with the United States and a lot of their energy, but then they're also deeply involved in China. China is a big partner, and in Europe, they're one of the top leading agricultural producers. So everybody is linked in, and nobody gets out of this safely.

Exactly. Well, and take the commodities. As commodities continue to push down with a stronger dollar, look at the price of oil. Look at the price of gold. Look at what the dollar does.

The stronger the dollar gets, it's taking commodities out of the picture, and that leaves stocks at the upper level. That means we've got to start fundamentally analyzing these stocks around the globe, and that is going to push foreign stocks down.

The US I still think is the winner. And then when it's all said and done, you've got to be very, very careful right now with the three big continents, is what's going on.

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