June 1, 2009
For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession. Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”. In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy. In other words, he’s being a little more blunt about the situation than most commentators would care to be. Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over. If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab … in other words: the brokerages and asset managers who want your money. A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year. Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.
Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”. To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development. The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:
It is becoming increasingly clear that the story of the global economy is a tale of two worlds. In one, there is only gloom and doom, and in the other there is light and hope. In the traditional bastions of wealth and power — America, Europe and Japan — it is difficult to find much good news. But there is a new world out there — China, India, Indonesia, Brazil — in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future. This divergence, between the once rich and the once poor, might mark a turn in history.
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Compare the two worlds. On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP — a level last seen during World War II. With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while. And it’s probably more dynamic than Europe or Japan.
Meanwhile, emerging-market banks are largely healthy and profitable. (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!) The governments are in good fiscal shape. China’s strengths are well known — $2 trillion in reserves, a budget deficit that is less than 3 percent of GDP — but consider Brazil, which is now posting a current account surplus.
On May 31, The Economic Times reported similarly good news for emerging markets:
Growth potential and a long-term outlook for emerging markets remain structurally intact despite cyclically declining exports and capital outflows, a research report released on Sunday said.
According to Credit Suisse Research’s latest edition of Global Investor, looking forward to an eventual recovery from the current crisis, growth led by domestic factors in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years.
The Seeking Alpha website featured an article by David Hunkar, following a similar theme:
Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets.
On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:
As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game. The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster. Even better news: Some pros are finding they don’t have to pay a lot to own profitable “foreign” stocks. The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.
As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:
International stock markets have long taken their cues from the U.S., but as it became clear that emerging-market economies would hold up best and rebound first from the downturn, the U.S. has in some ways moved over to the passenger seat.
Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:
Daring to drink the water of the above funds could prove to be little more than a way to tap into Montezuma’s revenge. But history tells us that investors who discount the rewards are as prone to disappointment as those who dismiss the risks.
On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:
Don’t look now, but emerging markets have re-discovered their mojo. After declining more than 50 percent last year and leading global stocks into a freefall, emerging markets stocks now find themselves with a 35 percent year-to-date gain on average.
A website focused solely on this area of investments is Emerging Index.
So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets. Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink. The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country. That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations. By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this . . . I just might.
Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ). Any guesses as to how long I stick with it?
June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies. Suffice it to say: I am not a happy camper! I plan on unloading it.
DISCLAIMER: NOTHING CONTAINED ANYWHERE ON THIS SITE CONSTITUTES ANY INVESTING ADVICE OR RECOMMENDATION. ANY PURCHASES OR SALES OF SECURITIES ARE SOLELY AT THE DISCRETION OF THE READER.
Obama Unveils His Most Ambitious Plan
June 18, 2009
On Wednesday, June 18, President Obama released his anxiously-awaited, 88-page proposal to reform the financial regulatory system. An angry public, having seen its jobs and savings disappear as home values took a nosedive, has been ready to set upon the culprits responsible for the economic meltdown. Nevertheless, the lynch mobs don’t seem too anxious to string up former Federal Reserve Chairman, Alan Greenspan. Perhaps because he is so old, they might likely prefer to see him die a slow, painful death from some naturally-occurring degenerative disease. Meanwhile, a website, Greenspan’s Body Count, has been keeping track of the number of suicides resulting from the recent financial collapse. (The current total is 96.) As usual, President Obama has been encouraging us all to “look forward”. (Sound familiar? . . . as in: “Forget about war crimes prosecutions because some Democrats might also find themselves wearing orange jumpsuits.”)
In reacting to Obama’s new financial reform initiative, some critics have observed that the failure to oust those officials responsible for our current predicament, could set us up for a repeat experience. For example, The Hill quoted the assessment of Dean Baker, Co-director of the Center for Economic Policy and Research:
The Wall Street Journal‘s Smart Money magazine provided some similarly-skeptical criticisms of this plan:
Our government was kind enough to provide us with an Executive Summary of the financial reform proposal. Here is how that summary explains the “five key objectives” of the plan, along with the general recommendations for achieving those objectives:
So there you have it. Most commentators expect that the real fighting over this plan won’t begin until this fall, with healthcare reform taking center stage until that time. Regardless of whatever form this financial reform initiative takes by the time it is enacted, it will ultimately be seen by history as Barack Obama’s brainchild. If this plan turns out to be a disaster, it could overshadow whatever foreign policy accomplishments may lie ahead for this administration.