The next bubbles are probably coming in oil…commodities, and – many experts believe – in emerging markets.
We see the hot air flowing into the oil market, for example. Barron’s reports that $260 billion has gone into indexed commodity strategies – up from only $13 billion at the end of 2003.
And looking at a chart of the NASDAQ, 1990-2000, we find it looks familiar. Yes, dear reader, the oil market 1998-2008 looks a lot like the dotcom market (traded on the NASDAQ) eight years before.
Of course, many are the reasons why you might think oil will get more and more expensive. But so were the reasons that you might have expected the dotcoms to keep going up. And prices of Miami condos to keep going up. And tulip bulbs.
‘Oil is different,’ we can hear you saying. The economy can’t function without it. More and more people are buying it. The Nigerians are blowing up pipelines. Production has peaked out. T. Boone Pickens says it’s going up. The Chinese are hoarding for the Olympics, and so forth.
Maybe so. But human beings err, said Rosmini. The more reasons they have to believe something…the more they tend to believe it to excess. And the sadder they are when their beliefs are proven incorrect.
As to emerging markets, Alan Abelson, in Barron’s, believes they are in bubble-mode too. “Decoupling” is hooey, he believes. When the world economy heads down, they’ll go down with it.
But many emerging markets are already down – big time. Shanghai is off 50%. Vietnam even more. Are they bubbles that have burst…and can’t be reflated? Or are they still bubbles-to-be…waiting for the next gush of hot air?
Today’s paper tells us that Vietnam has done something extraordinary. It has banned gold imports in order to try to reduce its trade gap. Vietnam has an inflation rate of 25%. So, the Vietnamese try to protect themselves in the way people always have – by trading paper currency for gold. So great was this traffic that Vietnam became the world’s largest market for gold – bigger than China or India. And so great was pressure on the Vietnamese economy and its currency, that government officials moved decisively to make the situation worse – by banning gold imports.
Still, colleague Manraaj Singh, for example, thinks Vietnam is a buy:
“Vietnam’s Ho Chi Minh City share index continues to be a leader this year. Once it led on the way up, this year it’s been leading global markets on the charge down. The index fell every on trading day in May and in early June as well. It’s now down by 60 per cent since the beginning of the year.
“…Which begs a simple question: are we stark raving bonkers to still be in love with Vietnam?
“At the end of May, inflation in the country hit 25 per cent – the highest level since 1993.
“And then there is the trade deficit. It is expected to be above $15 billion for the first five months of this year. That’s a considerable increase on the 2007 deficit of $12 billion.”
But the Bank of Vietnam is serious about fighting inflation, he says. It raised rates from 12% to 14% last week – still more than 10% below the level of CPI.
“That was the second interest rate rise in just three weeks and makes the highest in Asia. Investors were looking for a sign that the government was serious about tackling inflation and they got one.
“Better yet, the government has indicated that it may raise rates even further in order to bring inflation down to single-digit figures by the end of next year.
“In Vietnam, food accounts for almost 43 per cent of the consumer price index. And the rise in food prices has been a global phenomenon. The global rise in rice prices this year has had a huge impact on Asian countries. In the Philippines, armed soldiers were required to guard the countries rice supplies.
“Even here in London, the Chinese restaurant across from our office has put a 30p ‘temporary surcharge’ on all its rice dishes. …
“But Vietnam’s finance minister, Vu Van Ninh, says that the country now has sufficient supplies to avoid further price increases, while still exporting 4.5m tonnes of rice this year. So we should see a sharp drop in food inflation in Vietnam this year.
“Just look at the other great bugbear that has spooked international investors – Vietnam’s soaring trade deficit. It isn’t anywhere nearly as dire as it sounds either. Far from it…
“Vietnam’s biggest import items are machinery and equipment (‘M&E’), construction materials and refined fuel. These are all items that are vital to the development of an emerging economy. Most of them still have to be imported, but that’s changing fast. A lot of these capital goods are being used to build-up domestic manufacturing capacity – factories and infrastructure. It won’t be long before it is able to locally produce a lot of what it now imports. Take steel, for example. Vietnam is a net importer of steel today, but it’s expected to have enough pr, but it will soon have sufficient production capacity to satisfy domestic consumption.
“There’s a world of difference between a country that has a trade deficit because it is importing equipment and material to build factories, power plants and roads, like Vietnam is doing; and one that has a deficit because it is addicted to imported Sony Playstations, iPods and cheap sneakers.
“Again, we’ve seen global markets reeling under the impact of surging energy prices. But what very few people realise is that Vietnam is actually self-sufficient in terms of crude oil production. What’s been missing is a domestic oil refinery. So the country has actually had to export 100 per cent of its crude oil and then re-import it as refined fuel. That’s been a major contributor to its trade deficit and it’s also been a major driver of inflation. But the country’s first oil refinery is going to come on-stream in 2009 – and that should have a massive impact on both inflation and trade deficit.
“Vietnam’s government is obviously on a steep financial learning curve – remember that this is still a Communist country – but they’re learning fast. And, crucially, they’ve shown that they’ve got the will to act.”
Markets and Money