Pharos-Tribune

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 | Photo Reprints
Z_CNHI News Service
  • Lindley, Tom.jpg Expectations too high for a rehabbing Woods

    Tiger Woods finished near bottom last weekend at Royal Liverpool, drawing out his drought of major tournament wins. Despite the disappointing showing, Woods' return to form remains a matter of when, not if.

    July 22, 2014 1 Photo

  • 072214 Diamond Llama 1.jpg Llama on the loose corralled in Missouri town

    A llama on the lam cruised Main Street Tuesday before it mistook a resident’s fenced backyard for a place to grab a meal and freshen up.

    July 22, 2014 2 Photos

  • An oncologist uses scorpion venom to locate cancer cells

    Olson, a pediatric oncologist and research scientist in Seattle, has developed a compound he calls Tumor Paint. When injected into a cancer patient, it seems to light up all the malignant cells so surgeons can easily locate and excise them.

    July 22, 2014

  • Screen Shot 2014-07-22 at 2.00.42 PM.png VIDEO: Train collides with semi truck carrying lighter fluid

    A truck driver from Washington is fortunate to be alive after driving his semi onto a set of tracks near Somerset, Ky., and being struck by a locomotive, which ignited his load of charcoal lighter fluid.

    July 22, 2014 1 Photo

  • mama.jpg What we get wrong about millennials living at home

    If the media is to be believed, America is facing a major crisis. "Kids," some age 25, 26, or even 30 years old, are living out of their childhood bedrooms and basements at alarmingly high numbers. The hand-wringing overlooks one problem: It's all overblown.

    July 22, 2014 1 Photo

  • Wal-Mart to cut prices more aggressively in back-to-school push

    Wal-Mart Stores plans to cut prices more aggressively during this year's back-to-school season and will add inventory to its online store as the chain battles retailers for student spending.

    July 21, 2014

  • Hospitals let patients schedule ER visits

    Three times within a week, 34-year-old Michael Granillo went to the emergency room at Northridge Hospital Medical Center in Los Angeles because of intense back pain. Each time, Granillo, who didn't have insurance, stayed for less than an hour before leaving without being seen by a doctor.

    July 21, 2014

  • Starved Pennsylvania 7-year-old weighed only 25 pounds

    A 7-year-old Pennsylvania boy authorities described as being so underweight he looked like a human skeleton has been released from the hospital.

    July 21, 2014

  • Sparring justices find little disagreement at the opera

    Justice Ruth Bader Ginsburg revealed a different view of U.S. Supreme Court on Saturday when she described about her passion for opera, one she shares with Justice Antonin Scalia.

    July 21, 2014

  • Malaysians wonder 'Why us?' after second loss of airline jet

    It was all too familiar. Grieving families rushing to airport. The flashing television graphics of a plane's last radar appearance. The uncomfortable officials before a heavy thicket of microphones.
    For many Malaysians, the disappearance of Flight 370 in March has been a long trauma from which the nation has not yet recovered.

    July 18, 2014

Hyperlocal Search
Premier Guide
Find a business

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

The Pence administration continues to cut Indiana agency budgets despite a state surplus of $2 billion. Is this wise management of state funds?

Yes
No
Not sure
     View Results
Featured Ads
AP Video
Courts Conflicted Over Healthcare Law Holder Urges Bipartisanship on Immigration Raw: Truck, Train Crash Leads to Fireball US Airlines Cancel Israel Flights Obama Signs Workforce Training Law Crash Victims' Remains Reach Ukraine-held City Diplomatic Push Intensifies to End War in Gaza Obama Offers Condolences at Dutch Embassy Cat Fans Lap Up Feline Film Festival Raw: Lawmakers Scuffle in Ukraine's Parliament The Rock Finds His Inner 'Hercules' Michigan Plant's Goal: Flower and Die Raw: MH17 Passenger Remains in Kharkiv, Ukraine Raw: Israel Hits Gaza Targets, Destroys Mosques Veteran Creates Job During High Unemployment New Orleans Plans to Recycle Cigarette Butts
Parade
Magazine

Click HERE to read all your Parade favorites including Hollywood Wire, Celebrity interviews and photo galleries, Food recipes and cooking tips, Games and lots more.