Emerging Markets “Bubble” Tested
as Chinese Stocks Crack
Dear A-Letter Reader,
At least from my home here in Montreal, the emerging markets
“bubble” appears to be pricked.
Though it’s still too early to tell if this big rally off the October
lows is finally over for emerging markets, investors are glued to
the price action in Shanghai this summer for clues if this is a
correction or the “beginning of the end” for the asset class.
Leader of the Pack or the Biggest Bubble?
Over the last ten years no other global sector has outpaced the
MSCI Emerging Markets Index. In fact, major market stocks
have been a losing bet since 1996.
Indeed, advanced economy markets as defined by the MSCI
World Index and the MSCI EAFE Index (excluding USA) have
declined an average annualized 1.67% and 0.43%, respectively,
since 1999.
The MSCI Emerging Markets Index, however, is up 7.66% per
annum over the last ten years. The BRICS or Brazil, Russia,
India and China have rallied 12.82% per year since 1999.
Emerging Market Bulls Hold their Breath as Xinhua dips into
Bear Mode
Stocks in Shanghai have now declined 20% from their highs this
summer – defined as a bear market.
I don’t read too much into the “20% bear market or bull market
rule,” but it’s symbolic of the long awaited decline since Chinese
stocks hit a low last October. Shanghai equities are up 52% in
2009 and have surged a cumulative 128% since last fall.
Is Chinese Growth Solid?
The Chinese economy continues to grow this year mainly
because of massive government spending and reckless bank
credit growth.
The “easy money” has been flooding into domestic stocks and
real estate. Meanwhile, the Chinese central bank recently
warned about excessive credit.
I seriously doubt the Chinese growth miracle this year because I
can’t imagine where exports are going when more than 50% of
their sales head to the U.S. and Europe – both in savings mode.
Also, contrary to all the hoopla about renewed Chinese
commodities consumption, oil imports fell 2.9% the first six
months of 2009. This contradicts the recovery story already
incorrectly baked into stock prices everywhere since March.
China Leading the World’s Stock Markets (Or Not?)
Over the last three years we’ve seen a gradual shift in market
sentiment…investors are now riding the stock market cycle
based on the primary trends in Chinese equities at the expense
of New York. That kind of thing was unheard of five or ten years
ago.
There’s no arguing that China is a major force in global trade
and her voracious appetite for raw materials primes her massive
manufacturing engine.
Yet I find it pretty scary that we’ve grown increasingly reliant on
trends in China, which is still a Communist country masked by
distorted economic data. After all, the Chinese fudge their books
just like everyone else.
I can’t say with any certainty if this is the big correction we’ve
all been expecting. Major averages have not violated support
levels yet. Stocks worldwide also declined about 9% off their
highs from mid-June until mid-July before violently reversing.
The same might happen now. Watch China for clues for market
direction.
Sincerely,
Eric Roseman, Investment Director of The Sovereign Society
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were forbidden to own gold. That’s not the case anymore.
According to National Geographic Magazine, they are now
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Editor's Corner:
Arabs Now Fund the War on Terror
The Grim Reality of the Treasury Markets…
Ashish Advani
Editor of Exotic FX Alert
The June Net TIC (Treasury International Capital System) Data
came out this week…and I’ve got to be honest; I trembled in
fear when I peeled the data onion. Let me tell you why...
First, the total holdings of US Treasuries and Long Term Notes
by China fell by $25.1 billion. Our largest buyer of debt has not
only reduced the quantity of debt owned, but also reduced the
maturities from longer term holdings to shorter term (2, 3, and
5Yr) holdings.
But the total flow of Treasuries hasn’t slowed that much. So if
China isn’t buying…then who is?
Further peeling the onion reveals that the largest purchaser of
US Treasuries and Debt was (drum roll please.........) the United
Kingdom (UK).
Wait, WHAT???
If anyone’s having a worse time…if anyone’s prospects are more
grim and debt overhang more ominous than the US, it’s the UK.
I mean, they’re still mired deeply in recession, negative growth,
huge job losses, Housing bubble continuing to burst - And what
do they do? They increase their purchase of US Treasuries? That
just doesn’t add up…
So here’s the secret behind the conundrum – the UK (Bank of
England) isn’t actually buying all those Treasuries.
You see, when the US government parses the data on our side
of the pond, we lump all US Treasury purchases from any UK
source (Private citizens, local banks, foreigners with accounts in
the UK, etc.) into one convenient bucket.
Traditionally (And I know this from personal experience) the
Arabs and the Russians bank extensively and frequently with
institutions in London. Don't ask me why! They’ve done it for at
least the last half-century. London is their favorite banking
center.
And with Oil prices hovering around the $70 mark, there is
surplus cash being generated in the Arab and Russian world
again. And they need to park their cash surplus somewhere.
Hence the Arabs and Russians are investing in US Treasuries via
London. And to the untrained eye, the data appears to indicate
that the UK is buying US Treasuries.
Now the problem I have with this is two fold:
The first is that neither Russia nor the Arabs like the US. Neither
the Cold War nor the War on Terror (which many Arabs view as
the War on Muslims) will be easily forgotten. And if the
argument of dependence on foreign oil holds true, we are
becoming more reliant on the Arabs/Russians.
This Arab/Russian source of funding adds another layer of
complexity to the Federal Government’s ever widening deficit
problem…
Can you imagine what smoky back room deals will have to be
worked out…which aspects of the war on terrorists not pursued
– just to keep the money flowing and the deficits funded? For
example, hard decisions such as the use of drones to bomb
terrorist locations in Pakistan without Pakistan's permission…
these kinds of decisions might have to be reviewed.
Of course this is all hypothetical, but just in the last few months,
we’ve seen the kind of clout that China’s been able to exercise
thanks to their donations to the US government.
Secondly, and most importantly, the Oil prices have to stay at
the $70 mark or higher for this source of funding to continue. If
Oil prices fall, then this source of Treasury funding could very
well dry up. If Oil prices rise, the money flows and the deficit
gets funded.
But herein lies the conundrum I see –
If the Oil prices drop, we lose funding of the deficits. If Oil
prices rise or stay high, they’ll impede any growth efforts. And
in the midst of all this, if the Dollar continues to fall, we’ll see Oil
prices rise even further. And the dollar is destined to fall due to
the unending deficit spending that we have under the current
path.
In its effort to “creatively” solve the banking crisis and its
economic fallout, the US government has painted itself into an
even smaller corner…with its success based on even more
contingencies, dilemmas, conundrums and even more satisfied
creditors than ever before.
In retrospect, it might not be a bad time to consider diversifying
into foreign currencies…
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