Are emerging markets the future?
An old saw goes that Brazil is the country of the future and always will be. Certainly the past 10 years have seen significant growth in many emerging markets. Investors are now standing on their heads trying to find ways to put money to work there.
But history tells us that investment booms can lead to financial busts. When investors take an interest, capital flows in leading to currency appreciation, commodity price increases, and domestic credit expansion. Banks lend more and more on looser and looser terms because asset prices are rising. When the investment tide turns, prices fall, a banking crisis ensues, private debt turns into public debt, and the economy goes through a painful adjustment.
Sound familiar? This is exactly what happened here when the “global savings glut” caused our domestic institutions to go collectively insane. Fan and Fred, the Fed, the ratings agencies, the brokers, AIG—they fooled themselves into thinking that “it couldn’t happen here.” But the dynamics this time are similar to the Latin American crisis of the late ‘70s.
That ended in a string of sovereign defaults. Hopefully the US won’t join the new party.
Douglas R. Tengdin, CFA
Chief Investment Officer
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