Andy Xie’s latest is to urge emerging market nations to throw any notion of free market economics to the wind and simply protect themselves from speculative capital flows at all cost.
Emerging markets have already been swamped by capital, as their asset markets can likely attest. Yet it’s just beginning, says Mr. Xie:
Emerging economies need a fresh spray of capital controls and higher interest rates – because hot money inflows are about to go from boiling to molten
The Republican Party is likely to win control of the House in the November mid-term elections. With the Democrats in control of the Whitehouse and the Republicans, the House, no meaningful policy can be achieved to address the U.S.’s structural problems. The Fed will come under more pressure to stimulate the economy. As long as inflation remains low in the short term, the Fed has the excuse to stimulate more, even though it’s really driven to do so under political pressure.
The Fed will soon announce a scaling up of QE 2. The market estimates the range to be between US$ 500 to 1,500 billion. The dollar is expected to be highly volatile up to the Fed’s announcement. If the announced figure is over US$ 1 trillion, the dollar is likely to depreciate, and vice versa. While the currency volatility may decline somewhat after the announcement, it will return when the Fed signals more stimulus, because the monetary stimulus won’t solve the structural problems.
He’s already forecasting a third round of quantitative easing even:
First, emerging economies must stop hot money by any means. Forget about free market dogma. This is literally a life-and-death situation. In three months, the market may start to talk about QE 3 by the Fed. The hot money will likely double or triple from here. Financial markets like to say that government interventions are not effective in the end. This is nonsense. A sovereign country can do whatever it wishes, including throwing people in jail and confiscating foreign investment. The argument against it is that the market would punish you for this in future by denying you funding when you need it. Forget that. Russia gave foreign bondholders a deep haircut a decade ago. They are bending backwards to buy Russian bonds now. Besides, emerging economies don’t get money when they need it, like 10 years ago, even with high interest rates, and see money flooding in when they don’t need it like they do now.
Emerging economies, save yourselves!
He speaks more from the angle of economic policy within emerging markets, but for investors we feel there’s a practical angle to his words as well — we could easily have another year of surging demand for emerging market assets should Mr. Xie’s concerns be correct.
The enactment of strict capital controls are a risk for asset markets, but one has to gauge which asset markets are most at risk of being hit. Property markets are probably more likely to be targeted, given that affordability plays into governments’ considerations, as is happening in Hong Kong right now. Yet stocks? I think we are a very long way from governments in emerging markets being concerned about their stock market prices being too high.