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Some Emerging Market Currencies

01/29/2014

A few years ago, I read a book about currency wars, which predicted competitive devaluations in currencies.  In other words, we would force the dollar lower in order to make our exports more reasonable to foreigners and their products more expensive to Americans.  Of course, this is a zero-sum game, in that our gain is somebody else’s loss.  Fortunately, this has not happened.

Something else is happening.  Some currencies are falling too rapidly, which can be a disaster.  People try to get rid of that currency, but sellers no longer want to accept that currency.  Sales immediately drop, and unemployment soon drops.

Currently, Wall Street is deeply concerned about “emerging markets.”  It is more accurate to say Wall Street is deeply concerned about the falling currencies of Turkey, South Africa, Argentina, Brazil, India, and a few others.  If the currency falls too fast, the price of imports soars.  If the nation is an importer of oil, the price of oil increases, leaving less money for other purchases, like food.  Even worse, if the nation is imports its food, mobs quickly take to the streets, and hyper-inflation breaks out.

Any devaluation must be slow and controlled.  Turkey and South Africa have apparently lost control of the Lira and the Rand.  Last night, Turkey increased interest rates 55%, and South Africa followed this morning.  Anybody with a floating interest rate loan took a big cut in spending money.  Lenders who made fixed rate loans now have big losses to report and will stop making new loans.  Four years ago, I suggested the best way to help friends in Greece was to send them a one-way ticket somewhere else.  If you have friends in Turkey, South Africa, Argentina or the rest, I’d offer the same advice today.

But, there is one big difference between these nations and Greece.  Each of them has their own currency, while Greece was part of the Euro Zone.  The probability of a systemic collapse is much, much smaller.  This  currency crisis will work itself out and is not cause for concern, except for the citizens of those countries.

Unfortunately, investors will react to the headlines, turn bearish, and leave the stock market for awhile.  Jim Cramer predicts a 6% drop in the stock market, before rallying to a new high, and that is quite reasonable.

3.1% of Europe’s GDP is trade with these “stressed” economies, compared to 2.4% of Japan’s GDP and only 1.3% of the U.S. economy.  We are relatively insulated, thankfully.

This currency crisis is a headwind to the U.S. stock market, probably producing the 5-10% correction I’ve been hoping for.    

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