4/15/2013 5:30 PM ET|
Most likely market-bust scenario
All that central bank cash sloshing through the global financial system is creating asset bubbles that have developing nations on edge -- and poised to hit the economic brakes.
It's the most likely scenario of all for a financial market bust this year or next, and I missed it.
I want to hit myself over the head with a 2-by-4.
This bust scenario is one that played out recently -- within the last two decades, anyway. And you can even see the beginnings of the bust in cash flows in global financial markets.
All you have to do is follow the money. The global central bank money, that is.
Remember, at the end of my April 8 column I gave a brief list of possible bust scenarios that weren't factored into the rally in U.S. stocks or into stock prices in general. Central banks could produce a spike in interest rates when they begin reducing the size of their balance sheets. The Bank of Japan could produce a yen panic. The eurozone could either break up in chaos or descend into a deep, deep recession. A run of bad loans in China could result in a government bailout of the banking sector.
All those are possible bust scenarios, I concluded, but the odds for any of them happening are relatively low.
But that list didn't include the most likely bust scenario of all -- one that actually seems to be increasing in probability now, although it is by no means guaranteed. It's actually a scenario that we know can happen, because it has happened before. And it's one that, from that experience, we know would be a big deal.
The important question to ask
I'm talking about a replay of the Asian currency crisis of 1997, only this time the crisis wouldn't be limited to Asia but would take in -- and could start in -- any or all of the world's developing markets.
I think I missed adding this scenario to my list of busts because I limited my thinking about central bank cash from the world's developed economies to the effect on those developed economies themselves. But that cash doesn't respect national boundaries. It can flow anywhere.
And the important question to ask is this: Where is all that developed-economy central bank cash going?
It's clearly not all going into developed economies. If it were, the U.S. recovery wouldn't be limping along and the eurozone economy would have grown in the fourth quarter of 2012 instead of shrinking by 0.6%.
Clearly a lot of it is going into developing economies including China, Indonesia, Thailand, Malaysia and the Philippines.
For example, China's reserves are marching upward again. The country's reserves climbed by $198 billion in the first quarter of 2013. That's the biggest jump since the second quarter of 2011. That increase is a sign, economists say, that China is again seeing big inflows of cash from outside its borders.
And the trend isn't limited to China. Indonesia, Thailand, Malaysia and the Philippines -- it's pretty much any place in the developing world that is growing faster and offering higher interest rates than the near 0% rates on offer in the developed world.
The upshot is not only an increase over cash inflows over those in 2012 but also an increase in 2013 of the rate of increase.
Prices head higher
Back in January, the World Bank was reporting that gross capital flows into developing economies had climbed in the fourth quarter of 2012 to $170 billion, close to a record. That was a significant rebound from dips in the second quarter of 2011 and the second quarter of 2012. In January, the World Bank also projected that capital flows to developing economies would increase in 2013 and 2014. Flows in January indeed climbed 0.8% from December levels.
But the World Bank's reporting took on a new urgency in March and April. Gross cash flows in January and February, the bank announced, were up 49% from the January/February period in 2012. For the entire first quarter, gross capital flows into developing economies increased 37% from the first quarter of 2012.
Back in October 2012, Citigroup reported that the timing of this increased cash flow into developing economies tracked closely with the launch of the Federal Reserve's new program of asset buying (Quantitative Easing 3, or something) in September. And that about 90% of the global total in these flows came from North America.
So far, the early numbers show money flowing back into Japan with the start of the Bank of Japan's more aggressive asset-buying program. But I'd be surprised if we don't start to see outflows from that country, too, as the program ages.
The effect of these cash flows has been, as you'd expect, rising asset prices in developing economies.
In February, real estate prices in China climbed in 62 of the 70 cities the government tracks. Prices in Beijing rose 5.9% from a year earlier; in Guangzhou, they were up 8.1%. The effect in smaller economies has been even greater. In Indonesia, for example, real estate prices in Jakarta are rising at a 30% to 40% rate and in second-tier cities at a 50% rate.
All this has led institutions such as the Asian Development Bank to warn that with near-zero interest rates, emerging markets could become swamped by cash inflows. (You can find the bank's January 2013 warning here (.pdf file).
And it has led countries such as China to impose new curbs on the real estate market, such as a new 20% tax on profits in a sale, as well as higher interest rates and down payments for purchases. In addition, China, South Korea and Taiwan have intervened in the currency markets in order to slow or reverse the appreciation of their own currencies.
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If you go to Washington, D.C., there is a plaque on the garage where Woodward and Bernstein met Deep Thoat. It's right out there on the sidewalk.
And Deep Throat said: "Follow the money."
At what figure would some of you think we had a deficit problem 20 trillion? At what interest rate over the next 5 years do you think we will pay to finance that debt,does that matter? We have no plans on actual deficit reduction from the left only revenues and reduction of the rate of increase in spending.Government pensions next problem on the horizon is my bet,Obama care coming in way more expensive than thought,un-employment numbers really not showing the REAL unemployed just those still elligible for benefits,disability claims rising,food stamp partisapation rising,welfare rising.To me things don't look to rosey.
It matters not whether it's China, the US, or some third World hole in the wall, we are all connected. When the Big Boys fall, the rest will follow. Jimmy will say he didn't see that coming either. They will say you didn't see it coming either. They are wrong.
I am 57 years old and have a nice nest egg for retirement-50% Pimco bonds,27% cash,10% in a pretty good reit and the rest in the market.I personally am very afraid of the U.S. government debt.Cash is actually losing money for me in fees-but I am very very tempted to put it all in Cash right now and preserve my money and just wait for 5 more years to retire and make sure I'm completely debt free till then.I will not be purchasing anything until I am more confident in the direction this county is going,so My little bit of purchasing power will not help this economy for a while.
Buy American. Ya Pound on the table! Ya, what a great setiment.
Then be honest. If you go to the store to buy a broom. You see two brooms, both look nice, both move the dust from one side of the floor to the other. One costs $15 the other $10. Which one do you buy? Do you look to see which one was produced by over paid union labor, and with expensie solar energy, and which one was made in Mexico? Do you? The honest answers is no you don't look. OR if you do look you say "Look that Greedy American Company wants to over charge me!".
Of course the scenerio above would never happen. Why? Because of the truth of what I have said above. You will not buy the $15 broom, and as a result the companies that would make the $15 broom are either out of business and the union jobs lost, or they are making the broom in Mexico and that is the only broom on the shelf in the store. Not to mention that that American business which is allowed to go overseas still has marketing people employed, distribution people employed, engineers employment, etc in the Unitied States. Make it against the law for the firm to manufacture overseas and lose ALL the JOBS.
If you frothers actual meant buy American the story might be different, but you don't mean it. And you should not mean it. Buy the most cost effective product and quit your frothing..
Go ahead and give reality a thumbs down and then live the lower standard of living you reap.
Who is John Galt?
My vote is interest rates. We paid less interest last year than we did in 2007 on the debt, although the debt is what, 75% higher. because of the FED holding rates down. We could get there several ways, including inflation, with central banks seeing which one can print the most. A lot of that money hasn't hit the street and sits in the big banks.
The next bubble, the debt bubble, as soon as rates go up. No one doubts we will hit 20 trillion soon. Will the Fed still be printing and have a 5 trillion dollar balance sheet? Printing stopped and we are starting to refinance the debt at what rate? 5% or higher?
Most people don't realize that if we paid what the 30 year norm is we would be paying more than double the interest on our debt now. Probably in the 750-800 Billion range. We paid about 360 billion in 2012.
Gigantathon, this is the mental disorder of the left. They want something so it is reality.
You say the deficit will be a disaster. then left's response is not reasoned, it is not fact loaded, it is .... "no it won't". Why? Because they want it to not be a problem. Problem solved.
You say the left has no deficit reduction plan. Even to a leftist this does not sound like a good idea, so what do they say? Yes we do. Problem solved.
I could go on. There will not be one rebuttal posted. There will not be one leftist who will explain what normalized interest rates of 5% on a most assuredly 20 trillion and soon to be 25 trillion dollar Obama debt will mean to the budget and the nation. There will not be on leftist who will tell you Obama's plan to reduce the deficit, and how to handle his 25 trillion in debt. Why? Becaue they can't. The facts are the facts. But a leftist will call you and I names, and then say there is no problem.
JohnQ: Both of your comments are emotional statements that do not deal with reality. On the far out chance you are serious, I offer:
1) "the only way were going to get jobs is if they rich can turn a profit on them" Well, duuuh! Why in the flying f do you think we risk our money by investing in profitable companies? Do you REALLY believe that if a company posted it's corporate statement saying they were in business to hire people and foster "world peace" we would risk our money? Clearly we are not investing under that fairy dust;
2) "if we leave them an avenue like free trade where they can hire cheaper labor they will" Of course we will. And, if you are recommending the U.S.S.A. current totalitarian 'gubmnt' close off that "avenue" we will simply move ALL/ the remainder of our operations offshore (as I did in November) and take advantage of the foreign countries tax breaks when dealing with the U.S.S.A.
The ONLY "avenue" is to drop corporate tax rates, eliminate 95% of ridiculous regulations and return profitibility to doing business in the U.S.S.A. Then, and only then will corporations start hiring in the U.S.S.A. again.
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