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:
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…