Asian Crisis Redux?

[c1ue]

Re: Asian Crisis Redux?

Clearly I am not smart enough to understand why all this is being blamed on the US Federal Reserve. The question I have is just how "helpless" were these same central banks (and governments) when all that money was washing up on their beaches in years just past? I don't recall any howls of protest...in fact I can remember a certain smugness about the "lack of need" for foreign investment from some of these nations; Brazil in particular. India's impediments to foreign investment are the legitimate stuff of legend. Now that capital is leaving, this is a problem?

It is blamed on the Federal Reserve because it is true. The cheap money that's been thrown about to the TBTFs has unquestionably found its way to the EM. Now that Japan is double-down on the act, it is less so exclusively the Federal Reserve's fault, but Japan entrance more or less compensates for the EU's exit.

And sure, you're absolutely right that the initial hot money flows weren't really complained about. There were some complaints how those affected relative exchange rates, but by and large the 'slope up' benefits were taken without question.

Of course, there ain't no free lunch. Whether the finance minister in the past knew the likely future result, or didn't care, or didn't know - the almost inevitable result is going to be an eventual downturn when the spigots start tapering.

Using the spendthrift example above - it is absolutely possible that one of the posse is immensely disciplined. He/she takes the largesse and saves it, and also refuses to upgrade the lifestyle accustomed to.

It can happen, but in reality - rarely does. The same can be said for hot money flows.

[GRG55]

Re: Asian Crisis Redux?

iirc it was brazil's finance minister who uttered the phrase "currency wars" in public some time ago, and iirc brazil took various measures to try to stem or at least limit capital flows into the country. i guess, in retrospect, not enough.

I respectfully disagree.

It's the way that Brazil went about it that is their problem.

Brazil is a heavily resource and primary raw material production dependent economy. Investments in the fundamental businesses in this sort of economy are illiquid and difficult to exit. For example, foreign investment in the Brazil offshore oil production is very, very difficult to turn on dime and repatriate...instead it's there for the long haul whether it likes it or not. Brazil made the same set of classic resource economy policy errors we see over and over and over again everywhere:

1. It pursued a pro-cyclical policy of over-leveraging itself, both public and private sector, on the back of rising commodity prices...never expecting there could be a severe cyclical commodity downturn during a secular commodity "super-cycle". Brazil's Oil Minister's public musings a few years ago about joining OPEC and the comments from the Petrobras President about oil development being "a winning lottery ticket" (Here is a 2009 thread that jk started that is worth revisiting) are ample evidence of the level of "thinking" going on in Brasília at the time...and that ultimately shaped policy.

2. It actively started to discourage direct foreign investment in the productive economy, as part of a protection preference policy for the favoured indigenous companies like Petrobras, Vale and Embraer, and it's own enterpreneurs like Eike Batista, the poster child for the over-leveraged private sector (now caught "swimming naked" in Buffettspeak).

3. It actively promoted vanity projects and increased both government and corporate debt levels to new record highs on the "we'll repay it with endless future resource revenues". So where did the foreign "investment" get funnelled? And now that Brazil's oil imports are rising (hardly the path to joining OPEC) and many other resource prices have fallen, is it any wonder that the red-suspender brigade foreign bond traders are hitting the "shift-eject" key combo on their computers and quickly bailing out of Brazilian bonds? Do you think they could do that if they were equity partnered with Petrobras in the deepwater pre-salt?

[bpwoods]

Re: Asian Crisis Redux?

There is not a chance in hell that the US will become energy 'independent'. There are too many folk. Those folk use too much. Now if the US per person per day consumption of all fossils fuels (solid, liquid and gaseous) was to decline by 50%: you might be nearer the mark.

[GRG55]

Re: Asian Crisis Redux?

There is not a chance in hell that the US will become energy 'independent'. There are too many folk. Those folk use too much. Now if the US per person per day consumption of all fossils fuels (solid, liquid and gaseous) was to decline by 50%: you might be nearer the mark.

I think one needs to make a distinction between "energy independent" (which the USA already is) and "petroleum energy independent" (which as you say is problematic to say the least)...

[Southernguy]

Re: Asian Crisis Redux?

"never expecting there could be a severe cyclical commodity downturn during a secular commodity "super-cycle"
What I don't see is the "severe cyclical commodity downturn".
I think at least agricultural commodities are structurally linked to oil prices both because oil (and fertilizers) are an essential input in their production and because they can substitute oil as bio fuels.
They have corrected some but at this time they are far higher than they were 10 years ago.

[GRG55]

Re: Asian Crisis Redux?

"never expecting there could be a severe cyclical commodity downturn during a secular commodity "super-cycle"
What I don't see is the "severe cyclical commodity downturn".
I think at least agricultural commodities are structurally linked to oil prices both because oil (and fertilizers) are an essential input in their production and because they can substitute oil as bio fuels.
They have corrected some but at this time they are far higher than they were 10 years ago.

Have a look at any of the broad based commodity index charts over the "long term". Here's a link to one. Click on the "max" time option and you will see what I mean about a cyclical decline within a secular rise. Also worth keeping in mind that these indices tend to have significant oil weightings, and oil hasn't really corrected. Yet.

(I am not a 'chartist', so accept that many believe that the secular trend commodity "super-cycle" is over. And you may well be correct. But a simple line drawn through the lows from the early 1999 low might suggest otherwise...)

http://finance.yahoo.com/echarts?s=^...rce=undefined;

[ProdigyofZen]

Re: Asian Crisis Redux?

It is blamed on the Federal Reserve because it is true. The cheap money that's been thrown about to the TBTFs has unquestionably found its way to the EM. Now that Japan is double-down on the act, it is less so exclusively the Federal Reserve's fault, but Japan entrance more or less compensates for the EU's exit.

And sure, you're absolutely right that the initial hot money flows weren't really complained about. There were some complaints how those affected relative exchange rates, but by and large the 'slope up' benefits were taken without question.

Of course, there ain't no free lunch. Whether the finance minister in the past knew the likely future result, or didn't care, or didn't know - the almost inevitable result is going to be an eventual downturn when the spigots start tapering.

Using the spendthrift example above - it is absolutely possible that one of the posse is immensely disciplined. He/she takes the largesse and saves it, and also refuses to upgrade the lifestyle accustomed to.

It can happen, but in reality - rarely does. The same can be said for hot money flows.

The funny thing is, after describing to people both in my firm and other "money managers" how it is extremely risky to be in EM debt now if US interest rates begin to rise instead of fall they brushed me off then, BUT now they are saying "we all saw it." It was obvious that EM assets would get hit I am being told now by everyone on the street.


I call BS, because most were not talking about it aside from a few select managers I know and the reason they were talking about it is because they are L/S equity managers talking their book by talking down debt. These same equity managers some how also think that rapidly rising interest rates in the US will benefit stocks at the expense of bonds.

How they come to that conclusion aside from what I hear "it means the economy is recovering which will help US stocks" I have no idea except to "talk their book" some more.

Here is a recent story.

I sat in a room with a bunch of internal hedge fund managers/asset managers for a very large select investment bank on May 14th 2013, as well as, large asset allocators.

One of the guys runs a EM local currency short duration debt fund and has since 1995 for the bank. Someone asked the question "what risk do you see to your portfolio in the next year"

He said "I see absolutely no risk to my portfolio in the year to come" that is verbatim what he said because I wrote it down.

Not being able to contain myself in the luncheon I said "you see no risk to your portfolio at ALL?" and he replied "no I do not see any risk to my portfolio or strategy"

I then countered, "well I do" and continued "what happens when all those US dollars flowing into EM countries reverse?" I then rephrased to make it easier for him to answer "what happens with all the capital that has been flowing into EM assets from QE since 2009 when interest rates begin to rise in the US?"

He said "I own local currency debt and if US dollars flow out well I own their currency debt so it won't hurt my bonds"

I countered "But when one is exchanging currency one side of the currency has to go down while the other goes up in value, this would imply that the dollar would rise and the Brazilian real would fall for example, hurting your local currency debt"

There was no reason to go any further, he didn't see it.

That call on May 14th was pretty prescient at the time although I didn't know Bernanke was going to come out May 22nd and say they were going to taper QE.
But I submit: http://www.reuters.com/article/2013/...0EH3IL20130607

The particular fund I am discussing was down -2.4% through June. Now you have to consider that they own short duration debt, meaning all the local currency debt they own is less than 1 year. They don't own anything with a debt maturity more then 12 months out and they still lost money.

The longer duration anything more than 1 year is down 9% +. They don't hedge their local currency exposure.

[ProdigyofZen]

Re: Asian Crisis Redux?

Have a look at any of the broad based commodity index charts over the "long term". Here's a link to one. Click on the "max" time option and you will see what I mean about a cyclical decline within a secular rise. Also worth keeping in mind that these indices tend to have significant oil weightings, and oil hasn't really corrected. Yet.

http://finance.yahoo.com/echarts?s=^...rce=undefined;

One strategy I use for equities is to watch commodity prices that correlate to some of the highest input costs to certain US equities.

For example with corn plummeting I surmised that this would help Pilgrims Pride PPC as corn is one of their highest costs to feed the chickens. With their recent earnings I was proven correct. PPC went from 12 to over 18, not bad.

I did the same with coffee and Starbucks. I noticed coffee prices falling off a cliff earlier this year and bet that Starbucks would have higher than anticipated earnings. Starbucks went from mid 50's to over 70 dollars a share.

Both these companies have room to run as those prices continue to fall and margins expand barring a cliff dive in September from tapering. This is a relationship to keep in mind going forward.

You could also always do a pairs trade of shorting corn/long pilgrims pride etc but I wouldnt recommend it at this stage because there are a ton of hands behind the short corn trade.

An optimist sees opportunity in every disaster and a pessimist sees danger in every opportunity.

[Morgasbord]

Re: Asian Crisis Redux?

So, potentially "good news" for medical tourists?

[jwr]

Re: Asian Crisis Redux?

Can someone explain why the "hot money" flows into EM's over the last four years didn't translate into higher GDP growth or buoyed stock prices? Since the end of 2009 the EM's percent of global GDP growth has been in a distinct downtrend and is now being passed by the developed world. EEM has been flat during that time. Even since the announcement of QE2 on Nov 3, 2010 to May 1 of this year (pre-taper talk) returns from EM countries have been -10 to -30% with Thailand (and a few others?) being the rare exception. Even EMB (bonds) wasn't that impressive. It looks like EM equities have just tracked commodity prices, both of which have been anything but hot. If someone just took a cursory glance at investment returns over the last several years I believe they'd be inclined to say that the hot money flowed into the S&P and the Russell 2K.

[Slimprofits]

Re: Asian Crisis Redux?

One of the guys runs a EM local currency short duration debt fund and has since 1995 for the bank. Someone asked the question "what risk do you see to your portfolio in the next year"

He said "I see absolutely no risk to my portfolio in the year to come" that is verbatim what he said because I wrote it down.

This is fantastic, thanks for sharing it.

[ProdigyofZen]

Re: Asian Crisis Redux?

Can someone explain why the "hot money" flows into EM's over the last four years didn't translate into higher GDP growth or buoyed stock prices? Since the end of 2009 the EM's percent of global GDP growth has been in a distinct downtrend and is now being passed by the developed world. EEM has been flat during that time. Even since the announcement of QE2 on Nov 3, 2010 to May 1 of this year (pre-taper talk) returns from EM countries have been -10 to -30% with Thailand (and a few others?) being the rare exception. Even EMB (bonds) wasn't that impressive. It looks like EM equities have just tracked commodity prices, both of which have been anything but hot. If someone just took a cursory glance at investment returns over the last several years I believe they'd be inclined to say that the hot money flowed into the S&P and the Russell 2K.

Clearly there is money flowing into US markets.

But what are you referring to here? The BRIC countries have not experienced equity growth but their bond prices have appreciated. A lot of the flow went into bonds as a "reach for yield" not into BRIC equities.

Some of the best performing markets from 2010 to 2013 Q1 were Thailand, Philippines, Indonesia, Malaysian equity markets. That is where the rest of the money went.

[Southernguy]

Re: Asian Crisis Redux?

Have a look at any of the broad based commodity index charts over the "long term". Here's a link to one. Click on the "max" time option and you will see what I mean about a cyclical decline within a secular rise. Also worth keeping in mind that these indices tend to have significant oil weightings, and oil hasn't really corrected. Yet.

(I am not a 'chartist', so accept that many believe that the secular trend commodity "super-cycle" is over. And you may well be correct. But a simple line drawn through the lows from the early 1999 low might suggest otherwise...)

http://finance.yahoo.com/echarts?s=^...rce=undefined;

Well; I agree that the commodities supercycle is not over, further, I think, in accordance with PCO theory that we shall not have "cheap" commodities again. That's why I think commodity exporting EM nations may have economic trouble in the future, but not catastrophic as it used to be in the past. Particularly in LA the second half of XX century was full of critical economic-political episodes due to external restriction.
I drawed to long time charts: one is raw agri commodities vs. oil. The coincidence last 8 years is (to me) amazing. The other, just for the fun is the same but with gold factored in. I did a sum operation to let graphs begin more or less at the same point. Hope you can see them and find of interest.
agri comm and oil.jpgagri comm and oil.jpg

[Southernguy]

Re: Asian Crisis Redux?

Hot money flowed big also in real estate markets. In Uruguay (small example, yes) land prices grew ten fold between 2003 and 2012.
Urban RE prices multiplied as well.
And I am sure it was not an exception.
AS to GDP growth maybe the rate of same has slowed, but growth itself continues to be much faster in EM's than in developed countries.
Of course al EMs are not equal. China is the steadiest fastest growth example.
Argentina and Uruguay have experienced about 50% growth from 1998 to 2012. Not extraordinary, but much better than historic rate.
Low interest rates and high commodities prices are the first reason.

[jwr]

Re: Asian Crisis Redux?

Clearly there is money flowing into US markets.

But what are you referring to here? The BRIC countries have not experienced equity growth but their bond prices have appreciated. A lot of the flow went into bonds as a "reach for yield" not into BRIC equities.

Some of the best performing markets from 2010 to 2013 Q1 were Thailand, Philippines, Indonesia, Malaysian equity markets. That is where the rest of the money went.

I'm just asking if so much hot money went into EM's why wasn't it reflected in equity prices in general. I don't see how the four countries you list here are indicative of anything different than what has been in the past. I mean by that that over the last 20 years or so (maybe longer just going by memory here) there has been a different country every year (Turkey topped the list twice) lead the world in equity returns. Usually they are emerging markets and usually they are enormous gains and I'm pretty sure these one year gains are enough to make them very good gains over any 3 year period that includes them. Anyway, EEM down 10% in the time frame I mentioned in my OP. The BRIC's have been crushed down anywhere from 20-30% in USD terms. Anything I punch up is the same result. Small caps, regional, dividend oriented, doesn't matter and I just don't see how cherry picking individual countries indicates a Fed-induced hot money flow. As far as EM bonds go EMB was up about 5% sans interest and EMLC was flat. TLT crushed both of them price wise. I'm just saying that I don't see it on my radar screen and granted my radar screen is probably not that great so that's why I'm asking.