There’s some serious money moving around the globe at the moment.
Nearly $1trn has left emerging markets in the last 13 months, according to a report in today’s Financial Times.
That’s confirmation of what we already know: in a deflationary world (or fears of a deflationary world) money flees ‘risk assets’ like commodities and emerging markets and flows toward the global ‘core’, which is mostly US-dollar denominated stocks and bonds.
There’s a lot more unwinding of these capital flows on tap, as well. Nearly $2trn flowed into the 19 largest emerging markets between 2009 and 2014, according to NN Investment Partners. That was a lot of money borrowed at cheap interest rates in the developed world (US, Europe, UK, Japan) and invested/speculated in ‘hot’ markets like Australia, Brazil and China.
The outflow of capital from emerging-market economies is exactly the sort of economic event that leads to a political crisis. See also, Thailand and Turkey. In the meantime, get used to hearing the name Stephen D Williamson. He’s a vice president at the St Louis Federal Reserve. And he just blew the whistle on quantitative easing (QE).
Williamson published a research paper which concluded the Fed’s QE policy is a failure. Well, maybe those aren’t his exact words. But his conclusions also confirm what we’ve known all along: QE spurs asset inflation (S&P 500 up 215% since 2009), but not real GDP growth (never exceeding 2.5% in the QE era).
He wrote that, “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed – inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation”.
It used to be that the goal of a central bank was to promote price stability through sound money. It shows you how far down the rabbit hole we are that Fed researchers openly state the goal is to produce inflation. And that the Fed is failing in that mission and confusing investors!
Add the two stories together and what do you get? The flight of global capital back into ‘core assets’ and whatever is left of good collateral. And then? Well, if you’re an investor in the ‘core’ – if you’re in the UK, the US, or Europe – note that the phenomenon is at work here too. Wealth tied up in financial assets is fickle, and largely at the mercy of central bank policies.
But more urgently: what is inflated up can come down quickly. That goes for UK and US stock prices as much as it does emerging markets. We’ve been writing about preparing for a bank run. But maybe it’s time to add preparing for a margin call on the whole leveraged global financial system.
If that sounds familiar, it’s because it already happened in 2008. The question is whether it can happen again. Or, as some Capital & Conflict readers are suggesting, the only way to prevent that margin call from destroying a lot of wealth is a draconian series of financial edicts that severely limit your financial freedom.
Not cheerful news. But if you’re preparing for a worst case scenario, you might as well be honest about how bad it could get. The answer: pretty bad.
Category: Economics