The Washington Times-Herald

Z_CNHI News Service

September 25, 2013

Beware of emerging market currencies

You know the old one-liner jokes that start with “You know you’re in trouble when … .” Now we can add one from the world of finance: You know you’re in trouble when the Greek stock market beats your stock market.

From the end of 2012 through the middle of August, all four BRIC countries (Brazil, Russia, India and China) could claim this dubious distinction. In U.S. dollar terms, Brazil’s stock market was down 29.9 percent, Russia’s market was down 14 percent, India’s market had fallen 21.4 percent and China’s market had dropped 7.1 percent.

During that same period, the Greek stock market posted a 1 percent return. The point here is all about the BRICs, the recent darlings of the investment world, and how they have fallen.

In large part, global consumption drove the incredible growth in these four countries — along with many others around the globe — during the past 15 years.

The thirst for energy and gadgets exploded during the late 1990s and early 2000s, giving raw material providers and cheap labor countries an incredible boost to their economies and their markets.

Yes, the 2008 financial crisis briefly hit these emerging countries, but then the central banks of the world took over. As they flooded the world with cheap capital, providers of raw materials and cheap labor got their second wind. It seemed for a couple of years, from 2009 through 2011, these countries would be able to take a pass on the fallout from the greatest financial upheaval since the 1930s. Until now.

The feeling was that a rise of economic activity in these young, developing nations could offset a drop in activity in the aging countries of the world. This view held for a while, but then reality hit. It turns out that, while these youthful economies do have legitimate domestic consumption and growth, most of their outsized gains are reliant on selling to those stodgy, old, Western economies (as well as Japan) that are now limping along.

Without the U.S., the European community and Japan buying more and more, the BRICs had to devise their own plan for creating growth, which typically involved extending a lot of credit on easy terms. We all know how this story ends — with lots of bad loans and questionable assets on bank books.

As the Fed lowered interest rates to basically zero, the hot money went looking around the world for better returns. Money poured into emerging market countries looking for higher rates. This also drove their currencies higher and created challenges as to what to do with all the money. As is often the case, not all of it was deployed wisely.

We are now seeing a preview of what happens when it goes the other way. In the past few months, with just the hint that the Fed “might” begin tapering the amount of QE (bond buying), the hot money has been leaving emerging countries like rats leaving the ship. Currencies in India, Brazil, Indonesia and many others fell like a rock. Of course, the Fed says that is not their problem, but if it spirals out of control it will become our problem.

The same buyers who poured into these emerging market currencies are now quickly rushing out. This leaves developing countries with few options and all of them are bad. They could raise interest rates (attracting more carry trade buyers), but that would slow or choke their economic growth. They could buy their own currencies in bulk to prop up prices, but they’d deplete their currency reserves. Or they could do nothing (allowing the free market to figure it out), which likely would put emerging market currencies into a free fall and create high inflation. This is truly one of those “between a rock-and-a-hard-place” scenarios.

The global economy is teetering in a precarious position. All it will take is one major crisis to trigger a chain of events that spirals out of control. The collapse of emerging market currencies, much like what happened in 1997, could be it. You could call this being hit by a BRIC. Beware. The one positive consequence for us, as I’ve been saying for a while now, is a bullish outlook for the dollar. 

Nick Massey is a financial adviser and columnist for the Edmond Sun in Edmond, Okla. You can reach him through nickmassey.com.

1
Text Only
Z_CNHI News Service
  • Do your genes make you procrastinate?

    Procrastinators, in my experience, like nothing better than explaining away their procrastination: General busyness, fear of failure, and simple laziness are just a handful of the excuses and theories often tossed around. Now researchers from the University of Colorado Boulder have added another option to the list: genetics.

    April 21, 2014

  • Do White Castle prices tell us anything about the minimum wage?

    The paper looked at how many delicious steamed sliders the minimum wage has been able to purchase over time. The point is that as it notes, in 1981, the $3.35 minimum could buy a whole dozen. Today, at $7.25, it could purchase just 10.

    April 21, 2014

  • VIDEO: Moose charges snowmobile, flees after warning shot

    While snowmobiling in New England, Bob and Janis Powell of Maine were charged by a moose and caught the entire attack on camera.

    April 21, 2014

  • Screen shot 2014-04-18 at 4.44.15 PM.png Paint, doodle and sketch: 3 apps for art lovers

    In the absence of a palette of watercolors and a sketchpad, these three apps can fill in as your art supplies of choice.

    April 18, 2014 1 Photo

  • Smartphone kill switches are coming

    Smartphones need kill switches. It's a relatively easy solution to the pricey (and irritating) problem of smartphone theft. But who would have thought that the big carriers would team up with Apple, Google, Microsoft, Nokia, Samsung and lots of other manufacturers to voluntarily begin adding the technology by July 2015? The cooperative spirit! It makes so much sense!

    April 18, 2014

  • Why do wolves howl?

    Of all the myths that dog the wolf, none is more widely accepted than the idea that wolves howl at the moon. Images of wolves with their heads upturned, singing at the night sky, are as unquestioned as a goldfish's three-second memory or a dog's color-blindness (both also myths).

    April 18, 2014

  • Biggest student loan profits come from grad students

    This week, the Congressional Budget Office projected that the federal government would earn roughly $127 billion from student lending during the next 10 years.

    April 18, 2014

  • quake.jpg Pennsylvania won’t take action following Ohio ruling on quakes, fracking

    Pennsylvania officials plan no action despite new Ohio rules on drilling that affect a seismically active area near the state line.

    April 18, 2014 1 Photo

  • taylor.armerding.jpg Warren's populist pitch on student loans is off key

    Sen. Elizabeth Warren's populist rhetoric pumps up students about their loan burdens, but she conveniently neglects to mention the real problem - the exorbitant cost of college - much less how she's benefitted from those high prices.

    April 18, 2014 1 Photo

  • VIDEO: Boston bomb scare defendant appears in court

    The man accused of carrying a backpack containing a rice cooker near the Boston Marathon finish line on the anniversary of the bombings was arraigned Wednesday. He's being held on $100,000 bail.

    April 17, 2014

Featured Ads
AP Video
Facebook
Clicker Ticker
Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide