Shock Waves Shaking The 'BIITS'

By: Gordon Long | Wed, Sep 4, 2013
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Excerpted from the upcoming October Global Macro Tipping Points at GordonTLong.com


 

Released 09/04/13

Shock Waves Shaking The BIITS

Shock waves are washing ashore across Asia and the emerging markets and have already destabilized sovereign capital flows. It is eerily reminiscent of the Asian Crisis of 1997. Many are quick to point out that this time it is different because.... These are words that always cost investors the most!

The Euro Crisis started in the peripheral countries (PIIGS) and eventually spread to the EU core. A potential global crisis has begun in the "FAULTY FIVE" peripheral countries (BIITS) and has already spread to the global core as currency reserves, often held in US Treasuries, are sold (forcing up global yields) to fight falling currencies, rising interest rates and capital flight.

Yes it may be different this time with better abilities to absorb the shock waves. A combination of flexible exchange rates, strong international reserves, better monetary regimes, and a shift away from foreign-currency debt are certainly helping. However, years of political paralysis and postponed structural reforms in the BIITS have created serious destabilizing vulnerabilities.


"Faulty Five"

Brazil, India, Indonesia, Turkey and South Africa (BIITS) all have something very important in common, they are all peripherals to their major markets! Additionally, and maybe not by coincidence they also all have large Debt to GDP ratios and significant negative Current Accounts.

Shock Waves Hit Peripheral Countries

BRICS elements (Brazil , India and SouthAfrica) hit hard!

Erosian of Pricing Power

Being a peripheral does not mean causation, but it does mean additional time and cost. When money and credit tightens, time and cost matter. Labor arbitrage can surmount this differential but it is removed when pricing pressures mount and those higher on the value-add ladder have more pricing power.


Debt Matters

Sovereign Debt doesn't matter, until in matters.
It matters when current accounts go negative.

Shock Waves Shaking The BIITS

Large current-account deficits are a problem as are real exchange rate appreciations. These are well understood as key macro predictors. Going forward expect net external debt to additionally become more critical.

Watch for Japan to teach us this lesson as the shock waves echo back towards the core.

According to economic theory, the major determinants of capital flows to emerging-market economies are:

  1. Real growth-rate differentials,
  2. Interest-rate differentials, and
  3. Global risk aversion.

All of these have changed negatively since the talk of "TAPER" began.

Rupee fell 20% This Year

The Internet may be making the world smaller,
Globalization may be removing borders,
But sometimes distance simplymatters!
Remember, culture differences still vary by distance.

 


Read the full story in this month's Global Macro Tipping Points at GordonTLong.com
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Videos featuring Axel Merk, Gordon T Long and Ty Andros discussing these Global Currency issues are now available - here and here

 


 

Gordon Long

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

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