Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Raymond Duray who wrote (33945)	5/20/2003 12:38:44 AM
From: elmatador	Respond to of 74559

Bush advisers write about emerging markets. We already know the likes of the American Enterprise Institute, Hoover and other assorted bunch of dinosaurs write about foreign policy and we know the results. Now a taste of their ideas about emerging markets. It appears the US is getting really desperate to keep hogging capital at the expense of the rest of the world. :-) The false optimists of the emerging markets By Desmond Lachman Published: May 19 2003 20:11 \| Last Updated: May 19 2003 20:11 Upon joining Salomon Brothers as their chief emerging market economic strategist in 1996, I was given a useful piece of advice from one of Salomon's seasoned, if cynical, emerging market bond traders. He told me that when the winds were strong, even turkeys would fly. I found that advice to be invaluable as I witnessed at close quarters a number of occasions when the winds were strong for emerging market debt, only to see those liquidity-induced rallies end badly as global liquidity conditions changed. The current remarkably strong rally in emerging market debt appears to be no exception. However, the precise timing of the inevitable bust in emerging market debt prices is a matter of debate, as it is so intimately related to the global liquidity cycle. Over the past six months, emerging market debt prices have rallied dramatically, making it among the best-performing asset classes over this period. From a low of 7.3 percentage points over US Treasuries immediately before the Brazilian presidential election last October, emerging market debt spreads as measured by the Salomon Emerging Market Bond Index have tightened to about 4.3 percentage points over US Treasuries at present. This is a level that was last seen in early 1998, a few months before the Russian debacle. As a result, Morning-star, the investment research firm, reports that over the past 12 months the average emerging market debt fund has provided investors with a 21 per cent rate of return. The remarkable tightening in emerging market debt spreads has occurred despite the fact that the fundamentals in the main emerging markets appear as shaky as ever. Brazil remains saddled with an unsustainably heavy domestic and external debt burden, while its economy has yet to show any real signs of growth; Venezuela and much of the Andean region remain plagued with political instability; the central European economies are all too dependent on the fortunes of the hapless German economy; Turkey's reform effort appears to be stalled while its relations with its chief benefactor appear strained; and the once high-riding Asian economies are now threatened by the spread of the epidemic of severe acute respiratory syndrome in China. Paradoxically, what is fuelling the rally in emerging market debt prices, at least in the near term, is the worsening of the global economic environment. That worsening allows global interest rates to decline and causes money to flee equity funds in general in favour of the safer haven of fixed income funds. In such an environment, fixed income money managers look hard for yield and begin to allocate increased sums to high-yielding asset classes such as emerging market debt. That sets in train a self-reinforcing cycle of higher emerging market debt prices that eventually sucks in even those who might be sceptical about the long-run credit fundamentals. From a long-run point of view, the worsening of the global economic environment is unambiguously bad for the emerging markets. Perhaps the most important reason for this is the fact that slower global growth is associated with lower commodity prices in general and with lower international oil prices in particular. This is especially bad for the economic performance of those countries still highly dependent on oil revenues, such as Ecuador, Mexico, Russia and Venezuela. Lower global growth is also associated with reduced opportunities for emerging markets to export to the more highly developed economies. This is particularly devastating for countries such as the Czech Republic, Hungary and Poland, which all export about 11 percentage points of their gross domestic product to Germany. It is also bad news for a country such as Mexico, which exports about a quarter of its GDP to the US. Another dire consequence is that foreign direct investment flows dry up. This is regrettable because FDI offers emerging markets a more stable flow of funds than the more ephemeral and shorter-term bond financing. Ascertaining the precise timing of the inevitable large correction in emerging market debt prices is tricky. It involves either determining when the global liquidity cycle will move into a tightening mode or else judging when the longer-run damage to emerging market fundamentals caused by the global slowdown outweighs the short-run benefits from increased global liquidity. But whatever the immediate cause of the bursting of the emerging market debt bubble, burst it most certainly will. The wind is sure to abate soon - and then the turkeys will come plummeting to earth. The writer is resident fellow of the American Enterprise