Bad News for Emerging Markets

Hey… What’s wrong with the foreigners? They don’t seem to appreciate America’s magic tricks.

“US feels backlash over Fed initiative” says Friday’s Financial Times.

It may be our dollar…but it’s THEIR problem. The Fed’s new money doesn’t really do anything for the US economy. The banks take it. They hold it. If it goes anywhere at all it goes into the hedge funds and the banks’ own trading departments. Then, what are they going to do with it? US businesses don’t want to borrow. Consumers are reluctant to spend. Who wants to build a new shopping mall? Who wants to hire a new employee? The Fed is printing money like there was no tomorrow…who’s going to invest for the long term…when even tomorrow is in doubt?

The speculators borrow dollars at the lowest rates in three generations. What do they do with them? They invest them where they see growth – in the emerging markets.

Bloomberg explains:

Emerging-Market Stocks Advance on “Super-Goldilocks”

Nov. 5 (Bloomberg) – Emerging-market stocks climbed for a seventh day as Citigroup Inc. predicted a “super-Goldilocks” economy will send shares to record highs next year and investor Mark Mobius said the rally faces no risks any time soon.

The MSCI Emerging Markets Index will jump 30 percent to an all-time high in 2011, Citigroup strategist Geoffrey Dennis wrote in a Nov. 4 report. The Federal Reserve’s bond-purchase plan will fuel a global stock rally and emerging markets are the “bright spot,” Mobius, who oversees about $34 billion at Templeton Asset Management Ltd., said in an interview.

The MSCI emerging-markets index increased 0.5 percent to 1,156.32 at 8:50 a.m. in New York, bringing its gain this week to 4.6 percent. The 21-country benchmark gauge has advanced 17 percent this year, extending a record 75 percent rally in 2009.

This is not exactly good news. Consumer prices in these emerging economies go up…their currencies go up…their stock and other asset prices go up.

This has several effects that the emerging economies don’t like. It creates bubble-like conditions, raising their costs and making their products less competitive. Plus, it risks causing sell-offs and crashes when the foreign money leaves suddenly or over-capacity becomes a problem.

“China, Brazil and Germany criticized the Fed’s action,” reports the FT, “and a string of East Asian central banks said they were preparing measures to defend their economies…”

Then…in this morning’s Financial Times:

“Zoellick [head of the World Bank] seeks gold standard debate.”

It’s coming, dear reader…

Bill Bonner
for The Daily Reckoning