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The next global economy-wrecking bubble could come in emerging markets. I just finished reading John Cassidy’s book How Markets Fail, which is mainly about bubbles, such as the 2002-2007 mainly U.S.-based but also global credit bubble. So excuse me if all of a sudden I am looking for bubbles everywhere.
But, in truth, I had written about the glut of investment in emerging markets before, and the possibility that it is creating bubble-like conditions. So it can’t be all Cassidy-inspired paranoia.
But, a global investment bubble, focused in countries that only ten or twenty years ago were still considered economically irrelevant?
One of Cassidy’s points in his analysis of the U.S. real estate bubble is that the true believers in unstoppable home prices always said that the U.S. housing market had never declined on a national level, and that any drop offs in home prices had been regional, isolated to certain U.S. areas that for one reason or another had seen peak-and-valley dynamics. No one wanted to believe this could happen countrywide. It did, of course, after hundreds of thousands of subprime mortgages were written.
This leads me to wonder if there’s an analogy on offer here. Everyone knows there are risks in emerging markets (even the big ones, China, India, Brazil, Russia), especially political risks. But I wonder if there is enough thought given to the global risks being created by all the money pouring into emerging markets, independent of country or region-specific risks. In other words, are the value of emerging market-based investments being pumped up beyond reason everywhere, because of the enthusiasm for the potential upside in these places?
I’m no economic expert. But others, including “Dr. Doom,” have made a similar point (the following is from a May Bloomberg story):
Nouriel Roubini, the New York University professor who predicted the global financial crisis, said the Brazilian, Chinese and Indian economies may be overheating and developing asset bubbles.
The outlook for Brazil’s economy is “very positive,” though the crisis in the euro zone countries and a slow “u- shaped” recovery globally could dent the country’s growth, Roubini said today at an event in Sao Paulo.
“In Brazil, like in many other emerging market economies, there is now evidence of overheating of the economy,” Roubini said.
And there’s data already out there showing that the money flowing out of stocks in Europe and the United States is being pumped into emerging markets, according to the Financial Times today (one of the ramifications of this is that the value of emerging market currencies is being pumped up):
Investors are piling into emerging market equities even as they are pulling out of stocks in the sluggish developed world. According to EPFR, equity funds saw a net outflow of $3.16bn globally in the week to July 21 but emerging market equity funds posted a $1.5bn inflow.
Of course, here are plenty of reasons to believe that emerging markets merit all the investment and attention they have received. continue »