If you haven't read our rants this week, do it now. Jack and I both drilled into the not-so-subliminal message in the Bank of International Settlements' recent paper:
Now, while Jack is locking in even MORE profit for his Black Swan Forex members today, let me elaborate on a point I brushed across at the end of my Thursday tirade ...
I asked Germany a lot of questions because I realize there is a laundry list of items that could lead to a new fracture in that thing they call a monetary union. More specifically, I wondered if such a fracture would be what shook the status quo sentiment to its core and turned the "central bank as sole market driver" theme on its head.
But then I wondered if maybe something else would matter before the eurozone felt another quake.
And we've wondered it before. If memory serves, it was probably back around the announcement or installation of the Federal Reserve's QE3.
Then, as now, we wondered if the waves of "money" flowing from developed-market central banks, namely the Fed, would detabilize emerging economies.
Why would one wonder such a thing?
Because emerging economies don't have the ability to absorb hot money inflows the way developed economies do. And because emerging economies don't have the ability, and flexibility, to "stimulate" their economies to anywhere near the extent the Fed, BOJ, ECB and BOE do.
It's quite the dilemma.
But in the latter part of last year, when we were talking about this potential, it never gained any traction. In hindsight, it was one of those times when being early just meant being wrong.
But I recall this idea today because we're beginning to see indications that might suggest the destabilizing forces have crossed a threshhold, a level whereby economies will begin to suffer and undershoot expectations as they react to the global monetary binge.
I also mentioned this week that China came out as clearly worried about the potential for hot money inflows to impede their economic management processes. Basically, if inflation returns it will make the job of stabilizing and restoring normal growth levels quite a bit harder for the central planners.
And now we learn that Chinese money creation is rising, and so are delinquent loans, at a time when China remains quite dependant on a steady banking system. Of course, that banking system faces several risks that I talked about on March 28th.
But perhaps we look past China, for now. After all, they're running down a path similar to developing markets who have been able to delay the inevitable for a long while. Instead, let's ask: how are other emerging markets doing in this environment?
Overnight four countries either made a form of rate cut or talked about an urgent need to cut rates: Sri Lanka, Thailand, South Korea and Vietnam. An important number is also making its rounds with that bit of news: 511. There have been 511 -- five hundred and eleven -- moves to reduce interest rates in countries around the globe since 2007. At what number can they stop after achieving success? At what number do they stop after admitting failure?
Call me crazy, but the too-sexy-for-their-shirts and too-important-to-fail developed-market central banks probably won't admit failure even if it smacks them in the face.
It certainly has been quite the year, where moves by the BOJ and the ECB and the RBA have incited many more much smaller economies to undergo rate cuts in hopes of staying competitive and supporting growth.
And speaking of the BOJ, much of what we know about first-quarter growth around the world does not take into account the massive monetary scheme the BOJ just began. The second quarter may be very different. Just keep this in mind when you're deciding if betting on the central bank asset appreciation horse makes sense.
And if you want an investing idea to take from these discussion today, consider South Korea. The iShares MSCI South Korea Index Fund (EWY) gapped down more than 3% today after the SK rate cut. That takes is back below an intermediate uptrend line, suggesting a third wave (C) could take EWY down to the $40 range (a nearly 30% drop from current levels):