-- Posted Thursday, 5 September 2013 | | Disqus
MACRO INSIGHTS - SEPTEMBER 2013
Excerpted from the upcoming October Global Macro Tipping Points at GordonTLong.com
Shock waves are washing ashore across Asia and the emerging markets and have already destabilized sovereign capital flows. It is eerily reminiscent of the Asian Crisis of 1997. Many are quick to point out that this time it is different because.... These are words that always cost investors the most!
The Euro Crisis started in the peripheral countries (PIIGS) and eventually spread to the EU core. A potential global crisis has begun in the "FAULTY FIVE" peripheral countries (BIITS) and has already spread to the global core as currency reserves, often held in US Treasuries, are sold (forcing up global yields) to fight falling currencies, rising interest rates and capital flight.
Yes it may be different this time with better abilities to absorb the shock waves. A combination of flexible exchange rates, strong international reserves, better monetary regimes, and a shift away from foreign-currency debt are certainly helping. However, years of political paralysis and postponed structural reforms in the BIITS have created serious destabilizing vulnerabilities.
"FAULTY FIVE"
Brazil, India, Indonesia, Turkey and South Africa (BIITS) all have something very important in common, they are all peripherals to their major markets! Additionally, and maybe not by coincidence they also all have large Debt to GDP ratios and significant negative Current Accounts.
BRICS elements (Brazil , India and South Africa) hit hard.
Being a peripheral does not mean causation, but it does mean additional time and cost. When money and credit tightens, time and cost matter. Labor arbitrage can surmount this differential but it is removed when pricing pressures mount and those higher on the value-add ladder have more pricing power.
DEBT MATTERS
Sovereign Debt doesn't matter, until in matters.
It matters when current accounts go negative.
Large current-account deficits are a problem as are real exchange rate appreciations. These are well understood as key macro predictors. Going forward expect net external debt to additionally become more critical.
Watch for Japan to teach us this lesson as the shock waves echo back towards the core.
According to economic theory, the major determinants of capital flows to emerging-market economies are:
- Real growth-rate differentials,
- Interest-rate differentials, and
- Global risk aversion.
All of these have changed negatively since the talk of "TAPER" began.
The Internet may be making the world smaller,
Globalization may be removing borders,
But sometimes distance simply matters!
Remember, culture differences still vary by distance.
Read the full story in this month's Global Macro Tipping Points at GordonTLong.com
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Gordon T Long
Publisher & Editor
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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments.
© Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.
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