Q: Is it possible though that things continue like they have for the last six-months for another six to nine-months – a nice, cozy liquidity spiral, keeps taking asset prices higher, crude inches to USD 100 per barrel, all markets head to old highs and nothing gets pricked for another 2-3 quarters?
A: It can happen as Lord John Maynard Keynes said that markets can remain illogical for longer than most people can remain solvent. That is probably true that there is no logic to these market moves whatsoever. They are all based on liquidity as far as I can see and eventually they will reverse pretty dramatically. But whether they reverse next week or next month or in three to six months’ times is impossible to judge.
But the prospect of this gentle slide continuing and effectively markets who have pegged themselves to US dollar, suffering further and further liquidity insertions, which push their asset prices higher, which always seem good at that time but eventually causes them to take very drastic action to try and stop the capital inflows, that prospect is growing.
It’s going to be extremely bad news for emerging markets if that is what happens because all I can see happening just now is that bubbles are getting bigger in emerging markets. What we are faced with is a prospect of increased volatile as a direct result of this weakening dollar. It is great while people are participating and real asset and prices are going up.
Of course when the reverse happens, instead of getting a 5 or 10%, it’s more likely of 50-60% and that is eventually what scares people away from a structural overweight of emerging markets and that is the danger that is lying on the horizon. We are being guided too much by all of the perception of dollar weakness and all the liquidity around the world that is searching for positive home and where they see that positive at the moment is emerging markets who cannot handle money inflows.
Q: In the near-term what do you think is going to see the most frenetic upmove – emerging market equities, commodities or could it be developed market equities as well?
A: I don’t think its going to be the developed market equities but if its emerging market equities, then it is also commodities. The two are just completely correlated at the moment. As somebody pointed out to me recently, if you map the Australian dollar and US dollar exchange rate on the top of the Brazilian Bovespa, you have got a 100% correlation this year.
There is absolutely no reason that should be the case but that is exactly what is happening. People were taking a bet when emerging markets led by the myth that China keep growing faster than anyone else in the world and that translating into a bet on commodities and commodity currencies.
Everything in that universe is correlated. Unfortunately when that correlation breaks down and a reversal takes place, they will all sell-off. So at the moment what we can have is a melt up in emerging markets and commodities but the laggard being developed country equities. When the reversal takes place where you want to be is in developed country equities because they won’t sell-off as badly.
Q: Is it possible though that things continue like they have for the last six-months for another six to nine-months – a nice, cozy liquidity spiral, keeps taking asset prices higher, crude inches to USD 100 per barrel, all markets head to old highs and nothing gets pricked for another 2-3 quarters?
A: It can happen as Lord John Maynard Keynes said that markets can remain illogical for longer than most people can remain solvent. That is probably true that there is no logic to these market moves whatsoever. They are all based on liquidity as far as I can see and eventually they will reverse pretty dramatically. But whether they reverse next week or next month or in three to six months’ times is impossible to judge.
But the prospect of this gentle slide continuing and effectively markets who have pegged themselves to US dollar, suffering further and further liquidity insertions, which push their asset prices higher, which always seem good at that time but eventually causes them to take very drastic action to try and stop the capital inflows, that prospect is growing.
It’s going to be extremely bad news for emerging markets if that is what happens because all I can see happening just now is that bubbles are getting bigger in emerging markets. What we are faced with is a prospect of increased volatile as a direct result of this weakening dollar. It is great while people are participating and real asset and prices are going up.
Of course when the reverse happens, instead of getting a 5 or 10%, it’s more likely of 50-60% and that is eventually what scares people away from a structural overweight of emerging markets and that is the danger that is lying on the horizon. We are being guided too much by all of the perception of dollar weakness and all the liquidity around the world that is searching for positive home and where they see that positive at the moment is emerging markets who cannot handle money inflows.
Q: In the near-term what do you think is going to see the most frenetic upmove – emerging market equities, commodities or could it be developed market equities as well?
A: I don’t think its going to be the developed market equities but if its emerging market equities, then it is also commodities. The two are just completely correlated at the moment. As somebody pointed out to me recently, if you map the Australian dollar and US dollar exchange rate on the top of the Brazilian Bovespa, you have got a 100% correlation this year.
There is absolutely no reason that should be the case but that is exactly what is happening. People were taking a bet when emerging markets led by the myth that China keep growing faster than anyone else in the world and that translating into a bet on commodities and commodity currencies.
Everything in that universe is correlated. Unfortunately when that correlation breaks down and a reversal takes place, they will all sell-off. So at the moment what we can have is a melt up in emerging markets and commodities but the laggard being developed country equities. When the reversal takes place where you want to be is in developed country equities because they won’t sell-off as badly
