Harvard University’s Jeremy Frankel hints that 2012-2019 should be very negative for emerging economies, saying “it is now time for a third “sudden stop” of capital flows to emerging markets“. A contrarian perspective, but some very interesting points of view…
According to his article, he gives three main reasons for his confident call:
1. Cycles
Emerging-market crises seem to come in a 15-year cycle. The international debt crisis that erupted in mid-1982 began in Mexico, and then spread to the rest of Latin America and beyond. The East Asian crisis came 15 years later, hitting Thailand in mid-1997, and spreading from there to the rest of the region and beyond. We are now another 15 years down the road. So is 2012 the year for another emerging-markets crisis?
2. History repeats itself: capital flow cycles every seven years?
For emerging markets, the first seven-year phase of plentiful capital flows occurred in 1975-1981, with the recycling of petrodollars in the form of loans to developing countries. The international debt crisis that began in Mexico in 1982 catalyzed the seven lean years, known in Latin America as the “lost decade.” The turnaround year, 1989, was marked by the first issue of Brady bonds (dollar-denominated bonds issued by Latin American countries), which helped the region to get past the crisis.
The second cycle of seven fat years was the period of record capital flows to emerging markets in 1990-1996. Following the East Asia crisis of 1997 came seven years of capital drought. The third cycle of inflows occurred in 2004-2011, persisting even through the global financial crisis. If history repeats itself, it is now time for a third “sudden stop” of capital flows to emerging markets.
3. Young traders have no memory: this time is not different
… 15 years is how long it takes for individual loan officers and hedge-fund traders to be promoted out of their jobs. Today’s young crop of asset pickers knows that there was a crisis in Turkey in 2001, but they did not experience it first hand. They think that perhaps this time is different.
Our comment: It seems that Mr. Frankel have made these predictions early on in 2007, saying that “the next emerging markets crisis is 5 years away” (full Bloomberg article below)… if he ends up right, it could be considered one of the best calls of the century. Let’s hope he is wrong…
let's hope he is RIGHT!
brasil precisa urgentemente de uma crise pra baixar os preços, custe o que custar. a situação atual não se sustenta por mais tempo desse jeito
The Brazilian government will try it's best to keep the economy going, at whatever cost. The PT party is a populist party and will not do what is needed to reduce inflation, and roll back some prices. This will come from abroad, and when it happens it will be painfull.
somebody managed to explain to lula da silva that gdp is measured by consumption of goods and services. he got the message and it shows. debt of individuals and businesses is creeping up. sooner or later there will be a reckoning.
"Let´s hope he is wrong…". NOT! Your blog (and frendly blogs) are all about CRASH, CRISIS, "RUN TO THE HILLS"… Unfortunately, it seems you are not a group of bullish investors, but a bunch of market spectators.
You are in denial.
That is called reality. The Brazilians are being deceived by a corrupt and populist government.
Every economy has cycles so it's natural that is going to have a decline but by always being a party popper you are missing a lot of parties… :)))
Investment and bubble are synonymy tell me any country that never have corruption and bubbles and I prove you wrong, bubbles are part of the speculation and with FED and ECB creating money like magic plus using leverage on steroids is like the party can never be over. you are chasing the bubbles but not chasing the bubble creator.
It’s funny, apparently there is a professor at Harvard who thinks the BRICs are dependent on investment flows from the developed world, instead of the other way around. Can someone please buy Professor Frankel a subscription to, well, any daily newspaper? Even a Murdoch paper would probably do.
One crisis came 15 years after another, therefore… “Emerging-market crises seem to come in a 15-year cycle”??? WTF? This is utterly stupid. The fact that one event comes x years after another implies exactly nothing about a cycle.
In the second part, about capital flows, at least you have three instances of capital flow reversal at regular intervals, which does suggest a pattern. But the default hypothesis is that the apparent pattern is an accident. It is superstition to go from three instances to “if history repeats itself…” Try thinking in terms of cause and effect. *Why* did capital flows stop in each of the three instances cited? Is there a *reason* why the same thing would happen again now? Are the same forces operative?
It is amazing that professors actually get paid for this.