Emerging Markets Are In Trouble

Emerging markets are in all sorts of trouble, and with the oil price preparing for another Middle Eastern war, centred this time in Syria, their problems are about to get worse. A collapsing currency combined with a rising US dollar oil price is a big tax on economic growth, and it comes at precisely the wrong time for the global economy.

But we do feel slightly assuaged that UK Prime Minister David Cameron tells us that the coming conflict is not actually about the Middle East or even Syria, and Gareth Evan’s opinion piece in today’s Financial Review also provides comfort when he explains that a strong moral case justifies war even though international law doesn’t.

That’s good to know.

What’s also handy to know (especially for these power hungry warmongers) is that the last place where there was an overwhelming moral justification to wage war (based on the suspicion of the presence of chemical weapons, which were never found) was Iraq.

And how’s that going? Yesterday, explosions killed 80 people in Bagdad as sectarian violence continues a decade after the West felt morally compelled to improve the prospects of a country that, among other wicked deeds, threatened to price their oil in euros. 

The Associated Press tells us that:

A relentless wave of killing has left thousands dead since April in the country’s worst spate of bloodshed since 2008. The surge in violence raises fears that Iraq is hurtling back toward the widespread sectarian killing that peaked in 2006 and 2007, when the country was teetering on the edge of civil war.

Whenever a Middle Eastern conflict comes up, it’s always about oil and ‘strategic’ influence. Chemical weapons are just a pretext. And sure enough, the price of oil is on the rise again, despite lacklustre global economic growth.

The chart below shows the price of Brent crude over the past three months. In US dollar terms, it’s up around 15% from the lows of June.

In Aussie dollars the price of Brent crude is up nearly 25% over the same time frame, while priced in rupees, the fast collapsing Indian currency, Brent is up nearly 40% from the low point reached in April.

Sharply rising oil prices are a problem not only for India, but many emerging nations suffering from a currency falling against the US dollar. Brazil, Turkey, Indonesia, and Thailand, just to name a few countries, have all just had a major oil tax dumped on them.

Given emerging markets now represent around 50% of global economic growth, this is a big deal.

But you’d be mistaken if you think the prospect of war and subsequent rising oil prices are the reason behind the world potentially slipping into recession. It’s a process that is underway regardless of what’s happening in Syria.

Capital began leaving the periphery of emerging markets and returning to the core US market months ago. As we showed in Tuesday’s Markets and Money, emerging stock markets topped out at the end of 2012/early 2013.

Whenever problems arise at the periphery, it’s usually a signal that the same problems are heading towards the core. It happened with sub-prime property in the US, it happened with troubles in Iceland, Greece and Ireland in Europe.

Now that the problems are on a global scale, you’re seeing these emerging market canaries dropping off like, well, canaries in a gassy coalmine.

Our discussion of emerging markets earlier this week brought a thoughtful response from a long time reader (see below). While we don’t necessarily agree with all of it, it is worth contemplating the various issues raised.

Our reader argues that emerging markets will suffer much more than the US in any crisis, and we agree that will certainly be the case as long as the US dollar remains as the core currency of the global economy.

But if the world does slip back into recession, who is the spender of last resort this time? Developed economies like the US and UK have considerably more debt than they did in 2007, when the last crisis was on the horizon.

Will the market continue to absorb another big increase in government debt and spending, or will such a response this time send bond yields soaring, tightening global liquidity even further?

We don’t know of course. It’s all guesswork. For all we know, there might be another couple of years of debt fuelled ‘growth’ ahead of us. Perhaps it’s just our personal bias in viewing the whole system as unsustainable that makes us view its demise as a given.

Anyway, we guess the point is that when the system does break down, there will be no winners. Our reader writes: 

The countries that have funded the US’s current account deficits (especially Japan and China) are the ones with the real problem. They have to pour capital into the US (eg by buying US Treasury securities) because the only way to avoid a domestic financial crisis is to have a substantial current account surplus. Those countries do not have capitalistic (ie profit-focused) economies, because their systems are built on cultural traditions that are radically different to those in Western societies.

Having various forms of ‘cronyist’ / nationalistic financial systems, they cannot afford to have their major financial institutions having to borrow in international markets – which they would have to do unless they suppressed domestic demand by exporting a significant amount of their income (eg to the US).

It is wrong to view QE in the US (or elsewhere) as simply about maintaining (unsustainable) economic growth in the US. It is about a clash of civilizations which is like the Cold War – but no one mentions it. It has been going on for decades.

If capital flows to the US are now drying up, I would strongly suspect that countries that had previously supported those flows (eg Japan / China / emerging economies) are encountering systemic financial problems – so they are unable to find capital to invest, rather than because there is no desire to maintain ongoing current account surpluses.

Demand may thus dry up in the US leading to a recession – but the consequences will be much worse for countries whose financial systems will experience crises unless there is strong US demand to allow them to enjoy current account surpluses.

Well, we should find out pretty soon which of the emerging nations are most at risk. Capital flight followed by an oil price shock is not easy for a financial system to deal with.

But ominously for the US, there are around US$11 trillion in international ‘reserves’ held mostly by emerging market economies, a large portion of which are US Treasuries. In a real crisis, they can sell these reserves to defend their currencies. And in a real crisis, the US would be issuing Treasuries hand over fist trying to avert a recession.

But if the US’s traditional customers (the emerging economies) are selling at the same time, then higher interest rates will be the result.

Higher interest rates might not necessarily signal inflation. Rather, it will warn of a growing lack of trust in the ability of governments to control their finances. What’s surprising though is that it would have taken so long for the market to finally realise it. 


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From the Archives…

Richard Fisher’s ‘Super Easy’ Fed

23-08-2013 – Nick Hubble

US Stocks and the Timeless Wisdom of Izzy Stone

22-08-2013 – Chris Mayer

Bankers Profit at the Expense of the Broader Community

21-08-2013 – Vern Gowdie

A Bond Market Tantrum

20-08-2013 – Nick Hubble

Australia’s Economy: Complex, Fragile or Centralised?

19-08-2013 – Nick Hubble

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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12 Comments on "Emerging Markets Are In Trouble"

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“Gareth Evan’s opinion piece in today’s Financial Review also provides comfort when he explains that a strong moral case justifies war even though international law doesn’t.”

Humanitarian bombing eh.

If I did such a thing I would know I was guilty of murder. Where are the politicians in our country who are not complicit with murder? Where are your voices?

Gareth Evans is a criminal, one belonging to a criminal syndicate funded by the usual foundations call the ICG. He will pay for his lying on Rwanda, former Yugoslavia, Sudan, Libya and elsewhere before this Syrian conspiracy. He cannot claim plausible deniability. So too Bob Carr. In Australian Law we have the UN Act of 1946, and these people flagrantly breach it. In Carr’s case even when we are about to have the Chair of the Security Council. http://news.yahoo.com/australia-backs-action-against-syria-without-u-n-030905666.html Come the day, come the trial, come the moral suasion for future generations. At Carr’s trial there will be a forensic… Read more »
I don’t believe in capital punishment either Ross. But I certainly do understand your anger. I know we are all best to control our anger. I was guilty young man once. I never slept well and life was a burden. And then I changed course. I understood how forgiveable I was and that I had some power I had to do some good. And that power grows. People that pursue ends through destructive means do not realise that the end is being displayed in the means. Worldly power grows too. Often for long time periods as individuals form groups and… Read more »
Lachlan, the Confucian idea of truth, in statecraft, is making a comeback. Even the normally gutless Papal See came out againnst any attack on Syria unless proof is conclusive and weighed by a wide group of those other than those prosecuting the Syrians. It matters that that truth idea has supporters and it includes theologians and religious scholars. There is no truth in liberalism, or fascism, or socialism. No utopian better world’s for me. I wouldn’t enjoy the doing of retribution either. There was this guy called Edward Lansdale. A legend in his own lunchtime. Did the OSS war hero… Read more »
It is interesting to reflect on the reasons for the situation in Syria, inasmuch as it is nothing new. As far back as Elizabeth 1st, Britain and other nations have used, when all else fails, moral outrage to further their argument for military action. The real reason being business interests, when the ‘natives’ rebelled in would go the Gunboats to enforce the might of the colonists. The American War Of Independence, Cotton, Tea, Tobacco, Timber etc were the real reasons and not just, ‘no taxation without representation’, as is commonly stated. Early still was Cortez, of Spain and the Conquistadors… Read more »
slewie the pi-rat

link to UK atomic MILF* debat:

[look! a squirrel!]?

slewienomics & the EMs: as previously developed here, when the USD Index goes from ~73 to ~83, the US is ‘exporting inflation’.
here’s the interactive chart: http://quotes.ino.com/chart/?s=NYBOT_DX and if you play w/ the time-frame you get a decent idea of what i’m TRYING to say.

also, when Japan went fiatNADO, this [coincidentally?] supported the U$D and tanked the Precious Metals at the same time.
*MILF = Military-Indstrial Lender(s) of Fiat

slewie the pi-rat

and i see Russia has just called for an ‘urgent’ meeting of the UN P5 atomic MILFs.

probably just to make idle threats to the US, GB & Fr. regarding The Snowden Files…


shortchanged, I would recommend former NSW parliamentarian Andrew Tink’s book on Tommy Townsend (Lord Sydney). It covers the American independence, Canada, continental wars and much more with a fly on the wall feel to it given Tommy was much in opposition.


Thanks for the link slewie, and also to Ross, I shall try to get a copy.

Since we all know the outcome of the Commons debate, I suppose that is that, except for the elephant in the room, the US. It would be folly indeed for the US to go it alone but that’s just what they might do, hoping to drag others along with them. Let the Syrians sought out their own problems, its of their own making after all, and we are not the worlds police, even though some would like us to be.

slewie the pi-rat

thx, shortchanged!
i attempted to put the link up at the beginning of the televised session, but wasn’t able to get the post up, then.


SC, an American elephant or a supranational elephant? Or a murderous camel, ha! I am not sure any particular person will receive official justice either. Some might. However the masses will see some truths they have been too frightened or too busy to face. And maybe there will be blame, revenge and wholesale retribution for different groups.

“In a real crisis, they can sell these reserves to defend their currencies.” I don’t see how China can use their reserves to defend its currency! China sells goods to America. America pays China in US dollars. China buys Treasuries with those US dollars. China prints the equivalent in yuan which is used to pay for the goods. This is how the currency peg works. If China is selling US Treasuries then those dollars are not going back into China but are being used to buy something else in the international markets. If you were worried about “a growing lack… Read more »
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