TV media financial experts love to tout emerging market stocks and Exchange Traded Funds. In the long run after 2021, I would agree, especially when you consider demographics. Most of these nations like Brazil and Australia rely on commodities to grow their economy. However, if you look at a chart of the CRB(commodity)Index, it stood over 450 in September 2008 and today, it is under 300. Ouch!
This is not a paper burn. It is more like falling in the bath tub with hard surfaces all around you on a slippery floor. Not good.
If your central export is under pressure, you got a problem that will affect many other areas in your economy.Your unemployment will rise, your tax revenues will shrink, your expansion plans will be put on hold or cancelled. You will be voted out of office if democratic or chased out like in any Arab quarter. None of the above is going to add to global GDP. In addition, there are other related consequences that also effect emerging markets and together could be the new focal point for an economic earthquake.
10 Steps to a Crisis
1) The Fed's QE easing pushes inflation higher in emerging market nations which slows their overall economy.
2) QE pushes emerging market currencies higher which also slows their economy.
3) Because they are exporting less commodities and at the same time receiving lower prices, their foreign exchange reserves fall which can lead to a host of problems, including a currency collapse.
4) Falling commodity prices are great for old industrialized nations like the US and Europe which could foster a continuation of policies which led to lower prices which in turn, cause a continuation of hardship to emerging market nations.
5) China now exports more to emerging market nations than anyone else, however with emerging market economies slowing, they will import less. China will sell less. The global GDP shrinks.
6) China imports the most commodities, but the interrelated slowdown will result in less demand by China. Lower imports with lower prices means less for emerging market nations.
7) Together, a vicious cycle evolves where falling commodity prices and lower demand lead to still lower prices and lower demand. This is a deflation spiral.
8) With declining foreign exchange reserves, emerging market nations will have to lower their demand which leads to lower imports. In addition, these nations will no longer have excess reserves to buy US Treasuries which will cause interest rates to rise. When you consider that the Fed now buys 63% of treasury notes, who will buy the rest? This could lead to the phoniness between the Fed and the US Treasury being exposed. The Founding Fathers in allowing the first US National Bank would not let them do this phony technique.
9) Long-term rates will climb which will hurt housing and all related aspects in our economy like corporate borrowing costs.
10) Higher rates will cause our deficits to explode beyond the already much to high levels. Consider this: If housing rates on a $200,000 mortgage were to rise three points from 3.5% to 6.5%, the new higher cost of $660 per month would equal the actual monthly cost at 3.5%.
Like I have stated many times, the Fed has no exit strategy. End the Fed!
Liars and Crooks: Sebastian told you last week that many big banks were caught manipulation electric costs. This week he adds Goldman Sachs which are under investigation for "rents." These are fees paid by the London Exchange to store certain commodities like aluminium. Apparently, Goldman delays in delivering the aluminium that they held to companies like Coors which use the product in beer cans. They do this to capture higher prices beside the rent that they collect. If a citizen commits a felony, he goes to jail. I believe that if a company repeatedly commits crimes, they should be put out of business! Adious, Goldman!
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