Sunday, September 1, 2013

An Emerging Market Crisis?

At first Prof Krugman had a rather reassuring view on the INR weakness even concluding "So at first examination this doesn’t look like as big a deal as some headlines are suggesting". He also had a good explanation for the current weakness of em assets: "We more or less know the story here. First, advanced countries plunged into a prolonged slump, leading to very low interest rates; capital flooded into emerging markets, causing currency appreciation (or, in the case of China, real appreciation via inflation). Then markets began to realize that they had overshot, and hints of recovery in advanced countries led to a rise in long-term rates, and down we went."

But here is a list of op-eds that are much less optimistic and that suggest further adjustments may be in the cards.

Back in July Trouble in emerging market paradise by Nouriel Roubini who concluded "These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. Some factors are cyclical, but others – state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle – are more structural. Thus, many emerging markets’ growth rates in the next decade may be lower than in the last – as may the outsize returns that investors realized from these economies’ financial assets (currencies, equities, bonds, and commodities).
Of course, some of the better-managed emerging-market economies will continue to experience rapid growth and asset outperformance. But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating."

A bumpy ride for emerging markets from Laura Tyson with a key message "when the Fed tightens monetary policy to manage macroeconomic conditions in the US, there are large unintended spillover effects on capital flows to emerging markets". Though EM are nowadays better equipped to weather the storm than in the past she mentions "some countries are at risk, especially those with large current-account deficits, large foreign capital inflows relative to the size of their financial markets, and low foreign-exchange reserves. Among the most vulnerable are Turkey, South Africa, Brazil, India, and Indonesia – a group that Morgan Stanley researchers have dubbed the “Fragile Five.""

The end of the emerging market party from Ricardo Hausmann who concludes "The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction: stable or lower export prices will reduce real growth and cause their currencies to stop appreciating or even weaken in real terms. No wonder the party is over."

Danny Leipziger on Brazil's growth imperative which states: "Brazil has lost its swagger. Growth estimates for this year put Latin America’s largest economy above only Venezuela and El Salvador in the region, and the outlook for next year is not much better. Brazil’s currency, the real, has fallen to its lowest level against the US dollar in more than four years, compelling the government to pump billions of dollars into the foreign-exchange futures market and raise interest rates to deter capital outflows – just a few years after imposing a new tax to deter inflows."

Abenomics for Asia by Yuriko Koike who concludes: "Sixteen years ago, the Asian financial crisis erupted, following the Thai government’s decision to float the baht in the face of speculative attacks. The response of governments to that crisis has shaped much of the region’s economic policymaking ever since. If Asia is to avoid another crisis on a similar scale, or lost decades of growth, its governments will need to embrace the type of all-encompassing reforms that Japan is undertaking. Abenomics, it seems, is for everyone."

The Global QE Exit crisis by Stephen S. Roach who concludes: "Where this stops, nobody knows. That was the case in Asia in the late 1990’s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980’s, there is no mistaking the message: imbalances are not sustainable, regardless of how hard central banks try to duck the consequences. Developing economies are now feeling the full force of the Fed’s moment of reckoning. They are guilty of failing to face up to their own rebalancing during the heady days of the QE sugar high."

And finally Brad DeLong commenting on Mrs Tyson's piece above sums it up nicely: "The fear is, as Rudy Dornbush used to put it, that India and other emerging markets are right now not North Atlantic but rather South American economies".

A case of multiple equilibria? One day half full and filling up and the next half empty and leaking fast.

Monday, May 6, 2013

Europe Now vs 1929

Paul Krugman notes "in Europe, recovery is now behind where it was at the same point of the Great Depression. Here’s European industrial production from the League of Nations starting in 1929 and Eurostat starting in 2007"

Tuesday, February 19, 2013

Bull Market Ahead?

After the run we've witnessed in equity markets since March 2009 Dr. Hussman provides a verty interesting market commentary where he explains: "Simply put, secular bull markets begin at valuations that are associated with subsequent 10-year market returns near 20% annually. By contrast, secular bear markets begin at valuations like we observe at present."
Visually based on the simple formula Shorthand 10-year total return estimate = 1.06 * (15/ShillerPE)^(1/10) – 1 + dividend yield(decimal).
Hussman explains further "Presently, the Shiller P/E is 22.7, with a dividend yield of 2.2%. Do the math. A plausible, and historically reliable estimate of 10-year nominal total returns here works out to only 1.06*(15/22.7)^(.10)-1+.022 = 3.9% annually".

Sunday, August 12, 2012

What's the middle class?

Interesting article on the difficulties of defining the middle class. Here is Brazil's according to different sources:

Using 10$ to 50$ PPP income per day here is how they look for different countries:

Tuesday, May 1, 2012


James Montier at GMO has an interesting white paper on margins arguing that "what goes up must come down".
Starting from the the equation that income=expenditures and decomposing each side further he comes to the following defintion of profits:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends
(explanations here)
He then shows that since roughly the peak in the market 2006/2007 the contribution to margins from the rising budget deficit has been substantial.

Watch those margins when budget deficit reduction measures are implemented.

Sunday, April 1, 2012


Hussman has a very interesting chart showing margins and subsquent 5 year earnings growth. Usually the higher the margins the lower the subsequent growth in earnings.

The most recent data show however that earnings have kept growing though margins were already very high. Buttonwood tries to explain why. Normally high margins and profits attract investments and competition and hence lower margins and profits. But currently investment is still low enabling companies to continue to earn unusually high profits. Hence the record high margins.

Here is a chart showing gross domestic investment and gdp indexed to 100 in December 2007. Investment has not yet recovered but it is catching up.

Beware the margin reversal.

Friday, February 24, 2012

Chinese Migration

A nice little video on Chinese migration from the economist.