By P. Gunasegaram
Experience has taught Tiger that when fund managers, especially hedge fund managers, speak loudly and boldly about events that are pretty difficult to predict, such as the impact of tapering on emerging markets, then its time to be careful – really careful. Because they may already have taken positions.
Tiger is by nature a suspicious animal. It does not pay to be too trusting whether in the real jungle or the corporate one, and especially the corporate one where there is only one god – profit, at the expense of almost everything else.
So when imbalanced reports come out from respectable news agencies such as Bloomberg and Reuters about how there is contagion in the emerging markets, then take note, for there may be something bigger than that behind the scenes – an agenda if you will.
When funds in unison speak about contagion and how “tapering” – we will explain the term later – will contribute to emerging market instability along with a host of so-called new developments which have been around for a while, we may be talking about orchestration instead.
In other words – and to be blunt – manipulation of the markets by influencing opinion to give the appearance of impending panic after they have taken short positions in these currencies and markets, that is betting they will fall.
Take a look at this Bloomberg report about contagion spreading in emerging markets. If the report were to be believed it will mean the end of emerging markets, no less, caused by “tapering” – that word again.
“A Bloomberg customized gauge tracking 20 emerging-market currencies fell to 89.82 today, the lowest level since April 2009. The index has tumbled 10% over the past 12 months, bigger than any annual decline since it slid 15% in 2008,” the report said.
The report did not say why the currencies slid 15% in 2008 but it was because of the world financial crisis triggered by the potential meltdown of the US economy. The US economy was in dire trouble but the emerging market currencies fell more! More on that later.
And there’s a pretty similar report in Reuters this time saying that emerging markets were as vulnerable as ever to contagion. Here’s the first paragraph of that one-sided report: “Emerging markets may be unrecognisable from the small and fragile economies that fell like dominoes 15 years ago, but they are just as vulnerable today to the same sort of indiscriminate selling when investor panic sets in.”
Just as vulnerable? Definitely not all of them. Most countries have several times the foreign exchange reserves they had in 1997/98 at the start of the financial crisis. Their economies are in far better shape and their exposure to foreign debt is much smaller in terms of proportions – facts not pointed out in the article.
To make more sense of what is happening out there, Tiger would like to take a little leap back in time to the world financial crisis of 2008.
Warren Buffett
The untrammelled and vicious pursuit of profit at all cost is what brought the world’s most advanced economies such as the US and those in Western Europe to their knees and to the very brink of collapse as the biggest banks and the bluest of blue chips worked to develop and then sell “financial weapons of mass destruction” as Warren Buffett called it.
In the US this was triggered by the amalgamation of sub-prime debt and selling these as diversified products with reduced risk at prime ratings to unsuspecting but often sophisticated buyers sometimes with insurance against default bought by arrangement with large insurance companies.
The rating agencies who are now so quick to downgrade the ratings of developed countries are the same ones which granted these sub-prime debt prime ratings directly helping to perpetuate the crisis in the US.
The very banks that developed such credit instruments in some cases actually took positions against them. When the house of cards collapsed, the US launched the most costly operations ever in an unprecedented rescue of its key financial and economic institutions.
As consumer confidence evaporated in the US and banks were teetering on the brink of collapse, the US also filled the system with liquidity – it issued tonnes of bonds, flooding the markets with money in a term called quantitative easing – there was QE1 and then QE2.
Now, some five years after QE started, the Federal Reserve, which conducts US monetary policy, believes it is time to “taper” off the issue of US government debt securities, currently running at some US$75 billion a month. Mind you, it is still issuing bonds but at a slower rate.
How does all this affect emerging markets, you may ask. Tiger’s answer: It’s all about perception and trading. Let’s head back to 2009, in the aftermath of the world financial crisis. Strangely, the US dollar did not collapse even though the country was in deep trouble but currencies of emerging markets fell more than the US dollar.
The warped logic was that if the US market went down, then the developing countries will be affected as well. But to think that they would be affected more is a bit of a stretch to say the least. Developing countries weren’t printing trillions of US dollars to save their hides.
It’s just that the US dollar is too big a currency to manipulate – not so those of many developing countries. Descend on them en masse, and their currencies are very vulnerable to concerted attacks by funds. That’s what probably happened then, Tiger surmises. But recall the currencies revived and strengthened against the greenback even as the funds collected their short-term gains.
In fact, printing of money in the US saw a resurgence of emerging markets as money from the US flowed out to these regions, seeing record gains and stronger currencies among them. But now, doomsayers say it is over. Is it?
Providence has given funds another opportunity to make some quick money. It seems tapering will cause a flow of funds back to the US and therefore weakening of markets and currencies here. But if the money goes to the US, where will it go? It has not happened yet – the decline in markets is in anticipation that it will.
So long as emerging markets have better economic prospects and growth here is stronger than in the US and developed markets, more money is likely to come here. But for developing countries, they must remember not to rely too much on short-term capital or borrowings from overseas.
Otherwise, they will be stressed when there are outflows or the currency depreciates because foreign loans will balloon in local currency terms. So long as they remain cognizant of this major lesson from the Asian financial crisis of 15 years ago, they are safe, vulture funds notwithstanding.
There is one major difference between 1998 and now – most emerging market countries are fundamentally stronger, and that’s a huge difference. Doomsayers will likely be proved wrong if the developing world keeps on track to achieve growth without undue dependence on foreign short term capital and foreign debt.
GRRRRR!
You must be logged in to post a comment.