Newsweek Nov 5th 2010
http://www.thedailybeast.com/newsweek/2010/11/05/tasker-the-coming-emerging-markets-bubble.html
Emerging markets used to be known as markets you couldn’t emerge from in an emergency. History is littered with examples of financial disasters in young fast-growing countries, from the Argentinian default of the 1890s to the Asian crisis of the mid-1990s.
In fact it is hard to think of an emerging economy that hasn’t experienced at least one devastating boom-bust cycle on its path to development. The US is no exception. British investors who bought into the great growth story of the nineteenth century – the American railway industry – ended up with ruinous losses.
This time, though, it’s different. Really, really different. We know this because Western financial institutions keep saying so. Almost with one voice, they are advising us to pour our savings into the stocks and bonds now being issued on a massive scale by the emerging world – and being underwritten, distributed and traded by those very same Western financial institutions.
So far investors are following the script. In the first nine months of this year, the inflow into mutual funds investing in emerging market bonds was four times its previous annual record. In the case of funds investing in stocks, $50bn of investors’ cash flowed into into emerging markets, whereas developed countries such as the US Japan and Europe saw outflows of $80bn.
The overall numbers are eyebrow-singeing. In China alone the flow of “hot money” is expected by stockbroker CLSA to exceed one trillion dollars this quarter. No surprise that China is now exporting its real estate bubble to locations as distant as Australia and that gaming revenues at the Macau casinos are through the roof.
Such is the hunger for all things emerging and exotic that the Mexican government has just issued a one hundred year bond at an interest rate of just six percent. If you have the one hundred years of fortitude necessary for that, you might want to consider extending your time horizon further. Brazilian and Hong Kong real estate developers are amongst the companies that have recently issued perpetual bonds – thereby giving you the opportunity to lend them your money for ever.
The immediate trigger for the feeding frenzy is another round of quantitative easing in the US. Just the prospect of more money-printing has reduced the value of the dollar and sent a tsunami of liquidity racing across the global financial system. Critics of Federal Reserve policy maintain that the effects of QE on the US economy are dubious that it will not work at all or alternatively work too well, creating hyper-inflation. Some of these concerns are fair, but even so QE could well be a geopolitical masterstroke. It strikes at the heart of the growth strategies of China and other rising powers, forcing them to to reconfigure their economic systems or risk disaster.
For countries following the Asian developmental model, undervalued currencies and abnormally low interest rates have been crucial to their success. By privileging exports and capital investment at the expense of households and consumption, they have industrialized at warp speed. Pleas and threats from trading partners about the need for global rebalancing have got nowhere. The policy elites in these countries see no reason to giving up a winning hand and risk instability and perhaps their own legitimacy. Hence the stalemate and rancour at the G20 and other global gatherings.
The latest round of QE raises the stakes enormously. Pouring excess liquidity of this scale into economies that are already growing rapidly is like drenching a fire with gasoline. The result will be even bigger asset bubbles or inflation or both.
The normal response to such a threat would be a sharp tightening in monetary policy. But that would cause currencies to rise or in China’s case necessitate a substantial revaluation. Export competitiveness would be lost; real estate prices would dive; new sources of domestic growth would have to be brought on stream. Tough problems, which is why governments have preferred to avoid them.
Until now, that is, when the alternatives may be worse. Asset bubbles of significant size do serious damage. Holland was a superpower until the tulip mania. Japan has yet to recover from its 1980s blow-out. It took a world war to pull the US out of the malaise of the 1930s. Inflation is equally destructive, as China’s own post-war experience proves.
QE exposes the internal contradictions of the Asian developmental model and makes life a lot harder for countries who base their success on it. Financial bubbles make life uncomfortable for investors too. If you’re out of the market, you’ll suffer pangs of regret all the way up. If you’re in, far worse torments await you on the way down.
In other words, all concept of political risk has gone out the window. As with the dotcom boom of the late nineties, investors are living in the big now, extrapolating current conditions out into the far future and ignoring the lessons of history.
of suddenly males life a lot more difficult for the of the Asian developmental model
The overall numbers are eyebrow-singeing. In China alone the flow of “hot money” is expected by stockbroker CLSA to exceed one trillion dollars this quarter. No surprise that China is now exporting its real estate bubble to locations as distant as Australia or that gaming revenues at the Macau casinos are through the roof.