Free trade and the EM crisis

There is more at stake than currency declines in EM countries which have bad current account deficits. The poor EM environment will have spill-over for trade and this will hurt the world. Trade growth has fallen below global growth in the last year. Capital flows have declined significantly since the Financial Crisis. Trade agreements around the globe have stalled and a recent survey of the G20 shows that there has been a 23% increase in protectionist measures since 2009. The growth in protectionism is even higher when you move beyond the G20. It is not clear that the Trans-Pacific Partnership (TPP) will be agreed to by the US and Asia. 

Now we have currency devaluations which will make imports more expensive. Exports for these countries will be cheaper but devaluation usually hurt growth in the short-run as central banks raise rates to protect from further currency slides. Tightening monetary policy, capital controls, currency uncertainty, and growth disruptions all spell the same thing for trade, less good and services moving around the world. 

Who is going to be an advocate for global trade? Where is the policy coordination? The global markets needs leadership and it is not clear who is going to provide it. 

Buy-rent shift will take a bite out of housing market

Any softness in the housing market has been explained away by the cold weather throughout the US. No one is going out in the cold to make major purchases, but a more interesting dynamic is the shift between buying and renting costs. It is now cheaper to rent. It does not seem to an issue that has been the focus of many. The recent Business Week chart is an exception.

"Beijing Consensus" will be put to the test

After the Asian crisis, the "Washington Consensus" policy choice was rejected by many emerging market countries. The free and open markets with floating exchanges and no capital controls was viewed as a recipe for disaster. Sudden stops would be possible and hot money would rule the choices available to central bankers. Emerging markets moved to a new "Beijing Consensus" of "stable" but more authoritarian controlling governments with policies of high export growth. Financial repression internally would keep investment growth high and capital controls would limit hot money flows. 

This new consensus is going to be put to a test in 2014 with slower growth in many emerging markets. The slower growth will lead to more unstable politics which can add a much higher level of market uncertainty. We do not know what will be the longer-term policy choices of Argentina, Ukraine, Turkey, and India to name just a few. The central bank policy of raising short rates will start to cut internal growth which will lead people into the streets. Then what? 

Gloom and doom in 2014 - one graph

Bloomberg - Business Week and Mark Glassman produced a nice graphic on the gloom and doom we may face in 2014. It compares the possible impact with the likelihood of the event happening. Makes you think we are in a scary for world. The first month of the year has not been something that I would like to see repeat this year.

Notice that most of these events are not related to the policy choices we spend so much time dissecting.