Macquarie: Emerging Markets Are Not Facing a 1997-Style Crisis—They’re Facing Something Worse – Bloomberg Business 09-16-15

Salient to Investors:

Viktor Shvets and Chetan Seth at Macquarie said:

  • Emerging markets and economies are in a worse situation than in the 1997 Asian financial crisis because they now face far longer, more painful and insidious disease with limited or no cures or exits, punctuated by occasional significant flare-ups.
  • The effect of the 1997 crisis were mitigated by excessively loose monetary policies and China’s integration into global trade, which helped all markets recover quickly. However, this is not the environment facing economies in the next 5 to 10 years: long-term structural shifts, driven by the deflationary progress of the Third Industrial Revolution, is aggravated by overleveraging and overcapacity.
  • Turkey, South Africa, and Malaysia are at most risk, while China, the Philippines, and South Korea are at least risk. Brazil and Russia are at lessor risk but their low exposure to external debt could be undermined by slumping commodities and slowing trade.

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Back to Fundamentals in Emerging Markets – Project-Syndicate 08-13-15

Salient to Investors:

Dani Rodrik at Harvard said:

  • Emerging markets may be seen to be in deep trouble but do not deserve the doom-and-gloom treatment they are getting. Stronger economic headwinds ahead will make it easier to distinguish countries that have strengthened economic and political fundamentals from those that have relied on false narratives and fickle investor sentiment.
  • The 3 key growth fundamentals of developing economies are acquisition of worker skills and education, improvement of institutions and governance, and structural transformation from low-productivity to high-productivity activities. Countries that rely on steady, economy-wide accumulation of skills and improved governance may grow less fast but they are more stable and more likely to converge with advanced countries eventually.
  • China grew by filling factories with uneducated peasants, and so generated an instant boost in productivity. China’s political and institutional challenges are much greater than those of democratic India so offers much higher uncertainty for long-term investors.
  • India’s medium-term growth potential is well below that of China in recent decades because skill-intensive services absorb only a tiny portion of India’s largely unskilled labor force, so it will take many decades for overall productivity to rise significantly.
  • Brazil’s political crisis demonstrates democratic maturity as prosecutors are able to probe the highest ranks of Brazilian society and government without political interference – a sign of strength more than weakness.
  • Turkey’s corruption has gone untouched and so will cause greater long-term damage.


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Fareed Zakaria GPS – CNN 04-19-15

Salient to Investors:

Fareed Zakaria said:

  • Lee Kuan Yew said America will remain the world’s dominant power in the 21st century only if it is the dominant Pacific power.
  • Global stability will be shaped by how the US handles China.
  • Graham Allison at Harvard said that since 1500, war resulted in 11 of the 15 cases where a transition of power took place.
  • China is the second-largest economy, but first when measured by purchasing power parity: yet its IMF voting share is only equivalent to that of Holland and Belgium combined.
  • Washington should turn its energies, attentions, and effort to Asia.
  • Turkey will be an illiberal democracy for the foreseeable future. It is one of the strictest Internet sensors in the world and President Erdogan has called social media the worst menace to society. Erdogan has built a palace which is >30 times the size of the White House.

Henry Paulson said:

  • China will overtake the US as the world’s largest economy. China now builds more than half of the buildings on earth, consumes half the cement, half the coal, half the steel.
  • Xi Jinping wants and needs a good relationship with the US.
  • The US economy is growing but not quickly enough and with tremendous income disparity.
  • The greatest threat to US long-term pre-eminence is not China but our political inability to strengthen and revitalize our economy and competitiveness.

Larry Summers said:

  • The US economy is growing, but not creating jobs, while productivity is not rising anywhere near levels in the past. The cause is a global phenomenon of the industrial world, namely a surplus of savings due to increasing inequality, developing countries accumulating reserves, and people paying down debt versus much less demand and investment.
  • Despite record low interest rates and near-high non-employment we are investing less in infrastructure than in any time since WWII on a net basis.
  • Borrowing money at 1% or less on average to finance the federal government is not the real problem; which is not making investments that offer very high rates of return for our children – instead, we are deferring maintenance and leaving them with a large liability.
  • The US should raise the minimum wage and allow unions a way to organize, which has been unavailable due to the enforcement, or not, of labor laws for the last quarter century.
  • The fundamental objective should be to raise middle-class incomes.
  • The US federal deficit has gone from 11% of GDP to below 3% of GDP, lower relative to the economy than the average over the last 40 years.

Musta Akyol said power has corrupted the ruling party in Turkey – certainties to win the upcoming election – though President Erdogan is no Putin and Turkey will not impose Sharia law and become Saudi Arabia any time soon.

David Brooks at The New York Times said:

  • Marco Rubio is the best of the Republican presidential candidates – creative and intellectually smart. Scott Walker is very practical and very sharp and, unlike all of his competitors, was a governor.
  • We underestimate international trends and electoral tastes. Tough people are winning, including Netanyahu and Merkel.
  • 53 percent of the electorate will probably be women.
  • Politicians who have a deep inner voice, like Abraham Lincoln, are few. Most are busy all the time, lack an inner voice, and are all me, me, me.  The age we live in selects out those with an inner life.

Jeffrey Sachs said:

  • 2015 is our last chance to act on climate change. The earth is warming – 2014 was the hottest year in instrument record – and the climate is becoming more unstable.
  • The population of 800 million people in 1750 has increased to over 7 billion today, while each person now uses ten times the resources.
  • Technology can accelerate the disaster or solve it. While solar is clean and much less expensive, the fossil fuel industry is now much more productive.
  • If China and India continue to completely depend on coal then it does not matter what you and I do.

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O’Neill Says Emerging-Market Selloff Creates Buying Opportunity – Bloomberg 02-04-14

Salient to Investors:

Jim O’Neill said:

  • We are closer to a buying opportunity in emerging-market stocks than to joining in the panic.
  • While some places in the emerging world have real problems, to herald an emerging-market crisis is ridiculous. Ukraine, Thailand, Argentina and Turkey have some serious issues.
  • The Fed decision to taper is amplifying the selloff in emerging-market assets. Tapering is more problematic for emerging economics but affects everywhere, but is not to be confused with individual emerging countries having genuine problems.

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Markets punish South America’s Bad and Ugly economies – BBC News 02-02-14

Salient to Investors:

Investors are abandoning emerging economies, good and bad, for the US.

Morgan Stanley said Brazil, Indonesia, India, South Africa and Turkey are the Fragile Five – all with large deficits, slowing growth and vulnerable currencies.

Argentina is generally credited with starting the general panic after playing fast and loose with its deficit and letting inflation take hold: government attempts to control the economy on a micro-level have been a failure. The Index of Economic Freedom says state interference has grown substantially since 2003, accelerating the erosion of economic freedom, while the judicial system has become more vulnerable to political interference, and corruption is prevalent.

Venezuela and Argentina have been economically mismanaged and are suffering as the great Chinese commodity cycle takes a downward path.

Brazil is unattractive. Elizabeth Johnson cites a fair amount of government intervention, and inflation is very high at 6%, though the Brazil Central Bank has taken tough action and put up interest rates. Johnson said fiscal adjustment is going to be difficult in an election year. However, Johnson said Brazil’s exports are too big to ignore, particularly agriculture, even with the commodity cycle on a downswing.

Brazil is the world’s biggest exporter of sugar, coffee, and beef and close to being the biggest in soya, chicken and corn – with this dominance a fall in the currency is only good news for exporters.

Brazil’s fall this year has been just 2% and appears manageable. Johnson says strategic foreign investors have not been disturbed by the last week’s panic as foreign direct investment has held up reasonably well, while investors in oil and gas, the agricultural sector, in tractor and car manufacturing, and wind power show no sign of concern.

Peter West at Poalim Asset Mgmt lists Mexico, Peru, Colombia and Chile as “good” emerging economies. he puts Mexico at the top of the list because it has been implementing reforms and because of NAFTA,  80% of its exports go to the US and will share in the recovery there.

Peru, Colombia and Chile have all benefitted from the commodity boom and are now being equally punished by the collapse – particularly in the copper price. West says they have done their homework, with inflation under control and some degree of fiscal discipline, and will separate from the Fragile Five, when the dust settles.

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China Is Cooling Off – Jim Rogers On The Markets 01-27-14

Salient to Investors:

Jim Rogers said:

Underlying situation worsening with interest rates going higher in most countries, including Turkey, Indonesia and India as cheap money ends and money gets printed. China is cooling off.

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Slump-Watchers Dump Yield Curve for 1970s Tool: Cutting Research – Bloomberg 11-26-13

Salient to Investors:

Ellen Zentner at Morgan Stanley said:

  • The Fed’s near-zero interest rate and QE is holding down US bond rates, meaning the US Treasury yield curve would struggle to invert, crimping its effectiveness as an indicator of business cycles.
  • Yield curve inversion signals investors are betting on weaker economic growth – recessions have followed 6 of the 8 times that has happened since 1960, and no US recession in the period was not preceded by an inverted curve.
  • The upturn in the Duncan Leading Indicator since Q2, 2009 confirmed the end of the last recession and its subsequent gain over the past 17 quarters indicates the risk of an economic slump in 2014 remains low. The DLI looks at components that react to cyclical demand, such as household spending, and compares them with economic growth. Since 1970, the DLI has indicated imminent downturns by an average of four quarters. A 1985 FRB of San Francisco study found it a more reliable indicator of business cycle peaks than other tools.

Paul Mortimer-Lee at BNP Paribas said:

  • Arguments that QE can choke consumption could apply to any easing of monetary policy and the Fed’s 3 rounds of asset buying have added 1.5 percent to US consumption.
  • QE cannot both stimulate and deters excess investment
  • Market distortions are often needed to help the economy
  • QE may have had a limited effect on activity, but it has helped to fend off deflation.

Ralph Solveen and Bernd Weidensteiner at Commerzbank said Japan’s stagnation does not provide a template for the euro area because prices fell in Japan not because of a weak economy but because their level stayed elevated during the preceding boom and needed to be corrected, whereas there was no such jump in prices in the euro area, where inflation is likely to grow at an annual rate of 1 percent, excepting peripheral economies like Greece and Spain, where a price correction is now under way.

Bank of America said Ukraine, Turkey and South Africa are the emerging markets most vulnerable to Fed tapering, while China and South Korea should be the most resilient. Ukraine and Turkey suffer from high external debt and a lack of reserves, while South Africa is weakened by its current account deficit. South Korea benefits from low inflation volatility and a strong fiscal position, and China has a current account surplus and large currency reserves.

Bank of America said a 1% shock to US growth would have the most durable impact on Mexico but provide a pickup for South Korea, add 0.2 percent to expansion in Turkey and India, and a modest and short-term effect on China.

Anja K. Leist at the University of Luxembourg, Philipp Hessel at the London School of Economics and Mauricio Avendano at Harvard School of Public Health found that men aged 45 to 49 and women aged 25 to 44 in 11 European countries who suffered through an economic slump showed worse cognitive functions 25 years later.

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‘Dr. Doom’ Roubini: U.S. Growth Picture Is Sub-par – BloombergTV 09-06-13

Salient to Investors:

Nouriel Roubini at NYU said:

There has been a global recovery in the last year with the US recovery and reduced tail risks of a eurozone breakup and a hard landing in China.

The US economy recovery is very fragile, with barely 2% GDP growth expected in Q3, and the improvement in the labor market is partially due to a lower participation rate. US government spending is still falling, a fiscal drag, capital spending is weak, housing is softening, flat consumption in July, and net exports are worsening.

The Fed may taper in September but with the 10-year T-yield close to 3% so any further tightening will hurt the interest rate sectors like housing and capital spending. Any Fed tapering in September should be accompanied by a very dovish statement: a hawkish statement would push 10-yr T-yields well above 3% and choke the economic recovery.

The Eurozone is improving but the problems in the periphery remain unresolved: 5 of the 7 peripherals remain in recession. While the tail risks of a Greek exit and Italy and Spain losing market access have been significantly reduced, the fundamentals problems of the periphery have not been not resolved:  low potential growth because of slow reform, public debts well above 100% of GDP for Italy, Spain and other peripherals that will keep on rising, problems of competitiveness. and some improvement in current accounts that are cyclical due t the recession and not structural.

Italy government could collapse if Berlusconi’s threat to pull the plug on the government unless he gets a pardon or avoids prison is not a bluff, the government will collapse and there will be elections before year-end and the chances of a government lasting more than a year and structural reforms both of which the country needs are relatively low.

The Greek government could fall within 6 months. Portugal and Spain have political uncertainties. Europe has austerity fatigue in the periphery and bailout fatigue in the core.

If attack on Syria is surgical and last only a few days then the further effect on oil prices will be moderated: if the conflict escalates then oil prices would be longer and more persistent and significantly damaging for all oil importing countries.

Emerging markets have had the double whammy of Fed tapering and rise in bond yields and the slowdown of China which has led to a fall if not the end of the commodity super cycle.  India, Indonesia, Turkey, South Africa, Brazil all have current account deficits, fiscal deficits, falling growth, inflation above targets, and social and political problems and elections within the next 12 to 18 months, and ugly policy choices. However, most of these countries are in better shape than in previous emerging market crises in the past decade crises with more flexible exchange rates, war chest of reserves and less currency miss-match so do not expect a repeat of the massive yen crisis of 10-15 years ago.

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El-Erian Says Emerging Market Woes to Create U.S. Headwinds – Bloomberg 08-29-13

Salient to Investors:

Mohamed El-Erian at Pimco said:

  • Weakening emerging-market growth and spiraling currencies risk creating headwinds for a recovering US economy. Longer-term, we should care due to the feedback loop to the US.
  • We will see a tightening of financial conditions to markets, with growth more challenged and the ability of US companies to get top-line growth from emerging markets less going forward.
  • For many emerging nations, capital is flowing out and putting them under tremendous pressure. Some countries learned the lessons from the previous crisis and have self-insured tremendously, but others maintained twin deficits, whose growth dynamics are low and have limited reserves – e.g. Turkey.
  • The Fed will probably reduce its Treasury purchases rather than mortgage bonds.

65 percent of economists expects the Fed to taper at its September meeting.

Stocks in Southeast Asia are falling at the fastest pace in 12 years relative to global equities.

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What’s Good for U.S.-China-Japan Hurts Emerging Markets – Bloomberg 07-09-13

Salient to Investors:

Fed tapering, China’s credit squeeze, and Japan’s reflation ultimately prime the three biggest economies for less volatile and longer-lasting expansions, but near-term, emerging markets, commodity producers, and economies that need cheap cash or weaker currencies, including the euro area, could suffer.

Stephen Jen at SLJ Macro Partners said that parts of the world are moving, creating frictions and divergence, and more volatility for financial markets.

The IMF says the gap between developed-and emerging-market growth rates will remain close to the narrowest in a decade, at 3.8 percent in 2013, while a slowdown for emerging markets will slow global growth to 3.1 percent in 2013.

Morgan Stanley says the new environment leaves emerging countries like Brazil, Mexico, South Africa, Turkey and Ukraine, vulnerable to a sudden stop in which capital flows are thrown into reverse.

Holger Schmieding at Berenberg Bank said we are seeing significant progress in the global economy, so people need not worry because the gradual return to a more balanced global growth should be good rather than bad for almost everyone in the medium term.

Jim Paulsen at Wells Capital Mgmt says the “good” yield rise reflects mounting confidence by the Fed and investors in the US economy – since 1967, whenever the 10-yr bond yield has been below 6 percent, any increase typically has been associated with improving sentiment. Paulsen said higher interest rates should not materially impact economic activity, and the stock market may continue to provide favorable results.

Blackrock said tapering is actually healthy given that an expansion in the Fed’s balance sheet beyond $3 trillion has failed to spur much growth in credit or the economy. Peter Fisher at BlackRock says emerging markets again may suffer, as the weaker yen is drawing investment away from these countries and toward Japanese equities.

Stephen King at HSBC said the UK, Russia and the euro area periphery may suffer from unwanted yield increases as it will make it costlier for governments to finance their debt and for consumers and companies to access credit. King said a sudden spike in bond yields might send some economies off the rails altogether, and the US could suffer a backlash if trade dries up as a result.

Michael Saunders at Citigroup said less US-led stimulus could hurt economies that took advantage of easy money to run up current-account deficits and borrowing imbalances. Outside of China and the Middle East, emerging economies have aggregate current-account shortfalls of 2 percent of GDP, the highest since the late 1990s. Saunders said many emerging-market countries face the long-absent challenge of rising capital needs with worsening fundamentals at a time when global-liquidity conditions may not be easing further.

Nomura said China, Hong Kong and India are in a high-risk danger zone if a pullback by the Fed prompts investors to punish Asian countries that have weak economic fundamentals and are too slow to reform.

Oxford Analytica says Hungary and Poland are at risk because foreign investors have large holdings of local-currency debt, while Turkey is especially vulnerable because of its reliance on foreign cash to finance its large current-account deficit at a time when political tensions are rising.

HSBC and Goldman Sachs say China will grow 7.4 percent in 2013.

Shane Oliver at AMP Capital Investors said China may be trying to make economic performance more consistent and so avoid the mistake the US and Europe made in not tackling excesses before they sparked crises.

Julian Callow at Barclays said China accounts for one-sixth of global output, but a domestically driven Chinese slowdown would be much more significant than this implies, given China’s role as a major importer of commodities and capital goods, and in supporting business confidence across Asia. Callow says China accounted for 43 percent of worldwide growth from 2007 to 2012. Callow says cheaper commodity prices would be good for advanced nations but would hurt producers.

Deutsche Bank says China accounted for a quarter of worldwide demand for major raw materials in recent years. Bank of America Merrill Lynch says Chinese purchases of copper, coal, iron ore and oil are closely connected to loan-growth conditions and so are at risk if the credit crunch continues.

Larry Hatheway at UBS says companies and countries that produce materials for transportation, power and property development will be particularly hit. Over 80 percent of exports to China from Russia, Brazil, Australia, Canada and Indonesia are for domestic use. Hatheway says a slowing China would have a disproportionate impact on commodity producers and chunks of emerging markets.

Takuji Okubo at Japan Macro Advisors says Abenomics is essential and seems to be on the right track.

Lena Komileva at G+ Economics said Japan is exporting deflation risk to Europe, increasing competitive pressures when much of Europe is suffering chronic growth deficiency.

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