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Thoughts from the Frontline

Every Central Bank for Itself

April 12, 2014

“Everybody has a plan until they get punched in the face.”

– Mike Tyson

For the last 25 days I’ve been traveling in Argentina and South Africa, two countries whose economies can only be described as fragile, though for very different reasons. Emerging-market countries face a significantly different set of challenges than the developed world does. These challenges are compounded by the rather indifferent policies of developed-world central banks, which are (even if somewhat understandably) entirely self-centered. Argentina has brought its problems upon itself, but South Africa can somewhat justifiably express frustration at the developed world, which, as one emerging-market central bank leader suggests, is engaged in a covert currency war, one where the casualties are the result of unintended consequences. But the effects are nonetheless real if you’re an emerging-market country.

While I will write a little more about my experience in South Africa at the end of this letter, first I want to cover the entire emerging-market landscape to give us some context. Full and fair disclosure requires that I give a great deal of credit to my rather brilliant young associate, Worth Wray, who’s helped me pull together a great deal of this letter while I am on the road in a very

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Comments

Ronald Nimmo

Today, 2:06 a.m.

You have mentioned what a beautiful city Cape Town is, but I have heard that large parts of it are so dangerous that a white person or even a middle class black person is almost as good as dead if they dare venture there.

craig francis

April 15, 3:12 a.m.

The emerging markets suffer from the Cantillion Effect, creating great wealth to the first tier recipients and little for the lower rungs.
When that flow reverses, as we see in the emerging markets today, there is the Reverse Cantillion effects, creating great poverty for those in the lowest rungs
When the money flow dries up,  Gresham’s Law meets its Minsky Moment.

samcnelson@aol.com

April 14, 10:30 p.m.

Great article, thanks a lot!

Denise Smart

April 14, 3:48 a.m.

John you said “round up a little science fiction on my iPad.” I highly recommend The Martian by Andy Weir. Excellent “hard” sci fi with an engaging plot. If you enjoy George Gilder you will love the scientific realism of the book.

stickerpoint@gmail.com

April 13, 7:58 a.m.

The problem is: leverage. This distort the stop-loss levels your CB friend is talking about, for example. Leverage distorts everything.

In trying to make a fortune, leverage will mean you end up losing one.

Dallas Kennedy

April 13, 5:20 a.m.

Excellent article. I’m not as optimistic about South Africa. Because of the tidal wave of “no-questions-asked” credit flooding into developing countries, many of them have slipped back into bad old habits (not that many developed countries can boast of their rectitude either). Another crisis or two is coming.

Peter@marketbroad.com

April 13, 12:40 a.m.

Your newsletters are always worth reading - but this time you have really excelled yourself!  This is by far the best analysis of the dilemma for the EM economies I’ve read.  Many thanks for the high quality of your work - better than most “paid-for” newsletters.

Craig Cheatum

April 12, 12:16 p.m.

I really learned a lot from this article.

Paul Sherriff

April 12, 12:14 p.m.

Hundreds of millions are ready to invest in exploring and developing the Karoo shales - the government just needs to issue the permits

Gas can go a long way to solving their enormous energy shortage problem - whilst growing employment and attracting huge investment

Hopefully sanity prevails soon