Impact of Currency Pressures

08/23/2013 1:00 pm EST


Jim Jubak

Founder and Editor,

The potential cutback in Fed bond buying has caused major pressure on emerging market currencies and MoneyShow's Jim Jubak explains the implications for investors.

As crises go, the Bernanke Bubble/emerging markets meltdown doesn't come close to layman or anything like that, but it is a major vent for the markets and it's still developing, so for the week ahead I'm going to try to tell you what to watch.

Okay, here's what's going on. When the fed and other central banks did their big quantitative easing programs, they produced a lot of money by buying treasuries and other bonds to put that into the market. Not all that stayed in the United States. In fact, a lot of it didn't because people were looking for higher rates, so in 2012, about 1,200,000,000,000 of that, in fact, went into emerging markets. Now the fed has said they're going to taper off this program. No one knows exactly when. Money is coming back to the United States and leaving the emerging markets. So far in 2013 we've had about, just using ETFs, electronically traded funds, as an example, we've had about 95,000,000,000 float into US stock ETFs and about 8,400,000,000 flow out of emerging markets, so that gives a sense that the cash flow has reversed. This is a problem because it also means that you've got money coming out of countries with big current account deficits. They need the inflow of foreign capital to balance it. Turkey needs about $5,000,000,000 a month, not getting it right now. That puts the pressure on currencies such as the Turkish lira, the Indian rupee, and the Indonesian rupiah. All these currencies are under pressure. They're sinking like a stone. Some of them are back to where they were in 2009. Some of them are back even further. As those currencies fall, it means that you've got a possibility of inflation in those countries because imported goods are more expensive.

One of the things, you've got a lot of companies that loaded up on US dollar denominated debt during the Bernanke Bubble because dollar denominated debt was cheaper. Now they're going to have to pay that debt back in more expensive dollars, so you've got central banks in India, Turkey, and Indonesia intervening and trying to keep their currency from sinking too far. On the other hand, if you're a net current account country running a deficit you don't have a whole lot of foreign exchange. You can't do it forever, so you're watching these central banks decide that they're going to raise interest rates as a way to prop up their currency, which, of course, then has the problem that probably slowed rates, they're going to slow growth, growth is already slowing, so you can see where this is all going. You can see that you've got currencies under attack, which means that stocks are going down; bonds are going down in price in these countries, which of course makes the currencies under attack more, the possibility of slower growth rate, which again makes the currencies less valuable. It makes the financial markets less, assets, drives down those prices. All this is sort of unwinding. It's a question of how far it goes since no one knows exactly when the fed is going to start to taper. It's very hard to pick a bottom, but you've seen tremendous swings. The Indian rupee has been 40 to a dollar. It's now up near 65, so all this is still unwinding. You're still seeing a lot of people just sort of just catching up to it and going oh okay now I'm going to start pulling my money out. We haven't yet seen the final capitulation in a lot of these markets. I think that's still to come.

Basically, right now when most people are at the beach in August, most people in the United States go to the beach in August, you've got this huge international crisis going on. Not a lot of people are focused on it. You need to take a look at your portfolio. It's always better in one of these crises to sell early rather than late. I think you're sort of middle of the crisis, so it's worth selling some stuff now if you think you've got stuff that's really, really exposed and I look at countries with big current account deficits for places to sell. South Africa, Brazil, Indonesia, India, and Turkey would be the five markets I think that are most exposed and the ones to watch in the week ahead.

This is Jim Jubak for the Video Network.

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