Sunday, May 2, 2010

Aging Tigers Continued...

As I said, Greece was Chapter 1. The PIIG problem has become like an inverse of the Asian Crisis. Part of the “rich” world is collapsing, so investors are fleeing to “safety” in emerging markets. Difference is, unlike the Asian Crisis, this one isn’t contained. Neither was subprime.

Consider the balance sheets of many of these so-called rich countries; impossible social welfare promises and impossible debt levels against a backdrop of malignant demographics and political regimes with little hope of healing these infirmities. Does this sound like true wealth and power to you? Who would make a loan to such enterprises? The “deficits don’t matter” clan stupidly egged many of these developed nations to keep kicking the can down the road. Well those countries have now run out of road, and lack the moolah to do more paving.

What might we see? The more open emerging markets becoming (at least) temporary safe havens, both their bonds and perhaps especially their currencies. Some of these countries will probably move to block these inflows, triggering even more volatility.

Going forward, I think we’ll see more pointed and widespread questioning of all this illusory wealth. Emerging markets may not exactly be the answer, but their youth, relative lack of debt, and room for growth are going to force some serious reassessments. Investors are bound to conclude it’s wiser to invest in a bratty “emerging” nation than risk losing your shirt respecting an elder “developed” one.

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