It’s been a bad time for emerging markets; we’ve been reporting on growth slowdowns in China, Brazil and India along with trouble in South Africa and Turkey. As the Federal Reserve begins to signal a shift in its cheap money policy and rates start to rise in the US, bad news in the emerging markets mixes with rising rates at home to create the potential for a massive economic storm. Investors are dumping emerging market stocks, currencies and bonds, and we are seeing big market shifts as a result. Bloomberg:
“These are pre-quake tremors: something big is coming,” Stephen Jen, the co-founder of hedge fund SLJ Macro Partners LLP, said in a phone interview from London on June 12. “There’s tremendous deceleration in emerging markets. You may see crisis-like price actions without having a crisis.”
This is going to be bad news for, among others, Egypt, where the economy is already weak. We think other shaky places (Argentina comes to mind) could also suffer some pain.We’ve been pointing for some time to signs that the punditry had overestimated the ‘rise of the rest’ and that the emerging markets and the BRICS weren’t quite ready to take center stage in driving the world economy. The case for investing in the US (costs flat, dollar likely to rise as the fed slowly tightens policy, none of the uncertainty and sluggishness the EU faces with the eurozone mess, energy plentiful and cheap) is a strong one these days.A lot of people, including some senior policymakers in places like Beijing, misread the financial crisis of 2008-9 as somehow signaling the failure of liberal capitalism and the end of American economic dynamism. What they missed was that the modern liberal system is more than 300 years old (the Dutch started it back in the 1600s before the British took it over and then handed it off to the Americans) and those 300 years have seen one economic crisis and financial panic after another from the bubble in Dutch tulips to the bubble in American houses. Bubbles are part of the system, not a sign that the system is dead.Our suggestion: even policy makers, national strategists and global investors should study the history of the world system. History may be a ‘liberal art’, despised by ‘quants’ and by theoreticians, but if you don’t know much about it you are likely to make one expensive and painful mistake after another.