The economic tide has been going out for quite a while, but the pace has just quickened in emerging markets – big time. Things have become quite unsteady and no one knows whether the current instability will trigger something broader in the developed economies. China is slowing. Japan has horns locked with China economically and increasingly politically. Europe is catching its breath before another wave rolls through.
All because the Fed has indicated that it is modestly reducing the amount of money it will pour into world markets. The addict is feeling withdrawal pains.
Those who have argued that the US market was rallying because of fundamental political issues and not because of the QE party created by the Federal Reserve are clearly wrong. Cotton candy and unicorn dreams underlie much of this market. Proceed with caution.
(From The Telegraph)
The report said they may need capital controls to navigate the storm – or technically to overcome the “Impossible Trinity” of monetary autonomy, a stable exchange rate and free flows of funds. William Browder from Hermitage says that is exactly where the crisis is leading, and it will be sobering for investors to learn that their money is locked up – already the case in Cyprus, and starting in Egypt. The chain-reaction becomes self-fulfilling. “People will start asking themselves which country is next,” he said.
Emerging markets are now half the global economy, so we are in uncharted waters. Roughly $4 trillion of foreign funds swept into emerging markets after the Lehman crisis, much of it by then “momentum money” late to the party. The IMF says $470bn is directly linked to money printing by the Fed . “We don’t know how much of this is going to come out again, or how quickly,” said an official from the Fund.
One country after another is now having to tighten into weakness. The longer this goes on, and the wider it spreads, the greater the risk that it will metamorphose into a global deflationary shock.