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Thoughts from the Frontline

A Scary Story for Emerging Markets

October 25, 2014

The consequences of the coming bull market in the US dollar, which I’ve been predicting for a number of years, go far beyond suppression of commodity prices (which in general is a good thing for consumers – but could at some point threaten the US shale-oil boom). The all-too-predictable effects of a rising dollar on emerging markets that have been propped up by hot inflows and the dollar carry trade will spread far beyond the emerging markets themselves. This is another key aspect of the not-so-coincidental consequences that we will be exploring in our series on what I feel is a sea change in the global economic environment.

I’ve been wrapped up constantly in conferences and symposia the last four days and knew I would want to concentrate on the people and topics I would be exposed to, so I asked my able associate Worth Wray to write this week’s letter on a topic he is very passionate about: the potential train wreck in emerging markets. I’ll have a few comments at the end, but let’s jump right into Worth’s essay.

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Comments

Bruce Lawrence

Oct. 27, 5:56 a.m.

“I’ve been wrapped up constantly in conferences and symposia the last four days and knew I would want to concentrate on the people and topics I would be exposed to, so I asked my able associate Worth Wray to write this week’s letter on a topic he is very passionate about”
Good idea John, because Worth hasn’t been busy at all. Other than getting married and having a honeymoon. LOL
Letter looks great just digging in.
Bruce Lawrence

robert konczal

Oct. 27, 2:49 a.m.

I do not disagree that the outlined events may come to pass, however the article assumes that the Fed will stay fixed in its policy of winding down QE.

If the world economy goes into a funk, it will have local effects in the US. It is clear that the Federal powers believe that QE is the tool to help out our economy, so they will be willing to push that button one more time.

In my view, it all comes down to timing… When capital flow reversal happens quickly, will the Fed’s countermanding action happen rapidly and forcefully enough to forestall it?

My bet is ‘no’.  Once a herd changes it’s fundamental direction, it is hard to redirect it back to it’s prior path. But be careful… we live in an investment climate where investors (and those that program the trading computers) are conditioned to be servile to Central Banker Jawboning (CBJ). That conditioning must be broken for the effects outlined in the article to take effect.

Thomas Wolf

Oct. 26, 5:01 p.m.

Sea change?  After reading this scary story, sea sick seems more appropriate. I’m sufficiently frightened I think it’s time to turn into a pumpkin. Good night. Maybe I’ll feel (dollar) stronger in the morning.

cturk519@comcast.net

Oct. 26, 2:24 p.m.

John, I have been reading you for 7 years but never commented.  Wonderful insights from you each week and Worth is a valuable addition to your team. Well done and I look forward to your thoughts always.  With the rise in dollar you expect, I would appreciate your thoughts on the future of gold equities which I never touched until 1 year ago and fear my timing is not so good.

neville.r@mweb.co.za

Oct. 26, 7:48 a.m.

That’s a scary one John. Especially since I am living in one of your 3 high risk EM’s, namely South Africa with its polygamous, ancestor worshipping, kleptomaniac Great Leader. Hopefully my mainly International and commodity portfolio will take the strain, but tax increases have already been mooted to support government profligacy.