The Herald, Sharon, Pa.

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
  • Affirmative action ruling challenges colleges seeking diversity

    The U.S. Supreme Court's support of Michigan's ban on race-based affirmative action in university admissions may spur colleges to find new ways to achieve diversity without using racial preferences.

    April 23, 2014

  • A 'wearable robot' helps her walk again

    Science is about facts, numbers, laws and formulas. To be really good at it, you need to spend a lot of time in school. But science is also about something more: dreaming big and helping people.

    April 23, 2014

  • Cuba is running out of condoms

    The newest item on Cuba's list of dwindling commodities is condoms, which are now reportedly in short supply. In response, the Cuban government has approved the sale of expired condoms.

    April 23, 2014

  • The waffle taco's biggest enemy isn't McDonald's. It's consumer habits.

    Gesturing to Taco Bell, Thompson said McDonald's had "not seen an impact relative to the most recent competitor that entered the [breakfast] space," and that new competition would only make McDonald's pursue breakfast more aggressively.

    April 23, 2014

  • Screen Shot 2014-04-22 at 4.42.47 PM.png VIDEO: Leopard attacks crowd in India

    A leopard caused panic in the city of Chandrapur when it sprung from the roof of a house and charged at rescue workers.

    April 22, 2014 1 Photo

  • The top 12 government programs ever

    Which federal programs and policies succeed in being cost-effective and targeting those who need them most? These two tests are obvious: After all, why would we spend taxpayers' money on a program that isn't worth what it costs or helps those who do not need help?

    April 22, 2014

  • In cuffs... 'Warlock' in West Virginia accused of sexual assault

    Police in West Virginia say a man claiming to be a “warlock” used promises of magical spells to lure children into committing sexual acts with him.

    April 22, 2014 1 Photo

  • Lindley, Tom.jpg Basketball stars may linger on campus a while longer

    The NBA seems serious about raising its minimum age, which could signal the end of the one-and-done era in college basketball.

    April 22, 2014 1 Photo

  • Cats outsmart the researchers

    I knew a lot had been written about dogs, and I assumed there must be at least a handful of studies on cats. But after weeks of scouring the scientific world for someone - anyone - who studied how cats think, all I was left with was this statement, laughed over the phone to me by one of the world's top animal cognition experts, a Hungarian scientist named Ádám Miklósi.

    April 22, 2014

  • McCain 1 House Republicans are more active on Twitter than Democrats

    Your representative in the House is almost certainly on Twitter. Your senator definitely is. But how are they using the social network? Are Democrats more active than Republicans, or vice versa? Who has the most followers on the Hill?

    April 22, 2014 1 Photo

  • 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

  • Can Hillary Clinton rock the cradle and the world?

    What's most interesting to contemplate is the effect becoming a grandmother will have on Hillary's ambition. It's one of life's unfairnesses that a woman's peak career years often coincide with her peak childbearing years.

    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