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Jul. 23 2010 - 10:21 am | 212 views | 0 recommendations | 3 comments

An emerging emerging markets bubble?

Cover of "How Markets Fail: The Logic of ...

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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.

Countries like China, India, and Brazil (not to mention Mexico, Chile, Indonesia, Russia, etc.) all are seeing strong growth in their middle classes, big expansions in their consumer bases, and increasingly stable government policies, etc. Many of these countries are rich in the commodities that the developed world still needs, and that emerging giants like China are themselves devouring.

But that doesn’t rule out a bubble forming. Bubbles begin on solid ground, but then standards, oversight and judgment fail as the herd-mind takes over.

Finally, perhaps it is my Americas-centric experience and P.O.V. but it does strike me as a bit suspicious when rumors start to fly of Brazilian companies listing on the Hong Kong stock exchange. My sense is that the listing of Brazilian shares in Hong Kong seems to present a case of investors being chased in a cash-rich place where the information regarding the stocks and underlying companies will be harder to come by.

And in the history of bubbles (like the Latin America debt bubble of the 1980s, or Argentina’s debt bubble in 2001), these sorts of triangulations, and the role of “third country” investors, is well-documented. Also from Bloomberg:

Hong Kong Exchanges & Clearing Ltd. is currently in talks with more than one Brazilian company over potential listing, according Lawrence Fok, the bourse’s chief marketing officer.

“There is a natural resources company from Brazil which may be interested in doing a secondary listing in Hong Kong,” Fok said at a meeting in Tokyo, citing Hong Kong Exchanges’ Chairman Ronald Arculli …

The operator of Asia’s third-biggest stock market has held talks with Brazil’s bourse over potential listing of Brazilian companies in Hong Kong and Hong Kong companies in the South American country, Arculli said on June 22. The Hong Kong Exchange is aiming to attract new international listings, particularly in the metals, mining and energy industries, according to the exchange’s 2010 to 2012 strategic plan.


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  1. collapse expand

    Do the vast majority of humans give a rusty rat’s ass if every stock in the world goes belly up? How many of us are heavily invested there?

    I know about pension funds, and it was a terrible mistake to let Wall Street see a penny of them.

    • collapse expand

      I am sympathetic to your P.O.V. brianwood, however, I wonder where would pension funds go, for returns on the money that finances people’s retirement, if it wasn’t Wall Street?

      I don’t mean my question to be a jab. It’s just a basic problem that money doesn’t like to sit around … it could all go into treasury bonds I suppose, but then retirees and pensioners would have to be satisfied with the lifestyle that gets them. But your point is a valid one. If we all saved modestly and invested humbly, and our pension funds did the same, then everyone would be at least O.K.

      But have a look at CalPERS, the nation’s biggest pension fund, and see what they’re invested in, and I bet you’ll be displeased.

      In response to another comment. See in context »
  2. collapse expand

    It is my vocation to be displeased. I’m in a constantly choleric state. That’s because I bought the American history taught me in school, and I’ve been righting myself ever since.

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    Readers, thanks for your eyeball time, please send tips, corrections, complaints, rants, etc. My email is ballve [at] gmail.com. I was born in Buenos Aires and raised there and in Atlanta, Mexico City and Caracas. I've written and reported on Latin America for almost a dozen years. I started out as an Associated Press reporter and editor in the agency’s Brazil and Caribbean bureaus. In 2007 I co-founded El Sol de San Telmo, a community newspaper in Buenos Aires. I am now a contributing editor for the nonprofit New America Media, Americas correspondent for Amsterdam-based Research World magazine (publication of the international association of market and public opinion researchers), and a 2010-2011 Lemann Fellow at the Columbia University School of International and Public Affairs (SIPA).

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