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The Fed's Inflation Will Crush Emerging Markets

Phoenix Capital Research's picture




 

 

A final feature of the Fed’s decision to implement QE 4 will be greater inflationary pressures. This will result in lower economic growth (in real terms) as well as higher operational costs, which will eat into corporate profit margins.

 

As an example, consider Brazil.

 

As the largest exporter of most commodities in the world, few economies benefit from higher commodity prices like Brazil. However, in spite of this supposedly strong backdrop, Brazilian stocks actually peaked back in early 2011 and have been languishing ever since:

 

 

Few analysts understand that much of the boom in emerging markets over the last 10 years was the result of the Fed’s easy monetary policies post 2003. With money flooding the system and interest rates low, capital flowed into higher growth projects in the emerging market space. As a result, virtually every emerging market rallied strongly from 2003 until the 2008 Crash.

 

Indeed, Ruchir Sharma of Mortgan Stanley notes that only 50 countries grew their GDPs at a rate greater than 5% a year during the ‘80s and ‘90s. However, from 2003-2007, more than double this number (114) saw growth of greater than 5% per year. This is out of just 183 countries in the world.

 

You can this in Brazil’s action in the chart above as well as Russia’s in the chart below: both charts show explosive growth going into 2003 followed by pronounced weakness since 2008.

 

 

This era ended with a bang in 2008. And it’s not coming back. The Fed and other Central Banks continue to flood the system with money, but they’re not pushing economic growth anymore. Instead, what we’re seeing is higher inflation, which is resulting in higher costs of loving and occasional outbreaks of civil unrest.

 

With QE 4 and QE 3 now in effect we’re going to be seeing more of this as the below articles show:

 

Farmworkers demanding higher wages in South Africa’s biggest table grape-growing region resumed protests today in the absence of new talks between the government, labor unions and the main farmers organization.

 

About 150 people protested peacefully near a shanty town outside Worcester in the Western Cape province, demanding that the minimum wage be increased to 150 rand a day ($16.92) from 70 rand. In Stofland, on the outskirts of De Doorns, about 50 people marched through the streets of the settlement singing songs and carrying banners of the United Democratic Front, a civil rights group.

 

http://www.bloomberg.com/news/2012-12-04/south-african-farmworkers-resume-protests-over-higher-wages.html

 

Spreading protests and escalating demands from Indonesia's labor groups could delay or even derail spending on the country's overburdened infrastructure, industry leaders warned.

 

Jakarta's governor agreed to increase the minimum wage in the capital by 44% this week. As other regions are expected to follow suit, the populist move could trigger higher wages and inflation and discourage investment in Southeast Asia's largest economy, say some analysts and executives. Unions say workers deserve higher wages, better benefits and better job protection as the country's economy blossoms.

 

http://online.wsj.com/article/SB10001424127887324352004578136521801067406.html?mod=googlenews_wsj

 

Nearly half of the bus drivers from China who were involved in a dispute over salaries on Monday did not show up for work on Tuesday morning.

 

SMRT said 88 of the 171 drivers who refused to work on Monday did not report for work again on Tuesday.

 

SMRT said it takes a serious view of the bus service delays that were brought about by the irresponsible behavior of the bus drivers who did not report for work as scheduled.

 

It said SMRT's priority is to ensure that bus services are restored to normal as soon as possible.

 

http://www.channelnewsasia.com/stories/singaporelocalnews/view/1239610/1/.html

 

There is no indication this trend will be ending. Once wages begin to rise aggressively is when inflation really begins to take hold in the system. This process has begun and will accelerate in the coming months.

 

This concludes this article. If you’d like more information on inflation and protecting yourself from it, we feature a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a FREE copy of this report at:

http://gainspainscapital.com/gpc-inflation/

 

Best Regards,

Graham Summers

 

PS. We also On that note, feature a FREE report concerning the threat of a European Banking Collapse. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

This report is 100% FREE. You can pick up a copy today at:

http://gainspainscapital.com/eu-report/

 

 

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Mon, 12/31/2012 - 20:00 | 3111039 max2205
max2205's picture

Resolution: no reading you

Mon, 12/31/2012 - 20:47 | 3110835 WhiteNight123129
WhiteNight123129's picture

Short RADL3 BZ (Raia Drogasil), this one is a fluke company. Mediocre company IPOed with an Armindo Fraga flip with a book value at 2.4 R$ per share before IPO. The R$ 2.4 was only due to private Equity injection from Armindo Fraga prior to IPO, otherwise negative book value. The COmpany is IPOed at R$24 per share and then gets acquired only 10 months after at a crazy merger ratio. 9 months after the closing of the merger, no synergies to show for from the merger, trailing 12 Month earnings down actually to R$ 0.35, same quarter YoY down so merger is dilutive!. The deconsolidated numbers of the acquired company RAIA3 show a ridiculous EBIT margin at 0.4%. It is a short. This company is merely a drugstore with poor profitability, horrible working capital management which is touted as a growth story while the growth was 100% funded from external capital. When the stock stops being overvalued at 66 times earnings game over for acquisition program using shares.  If the next few quarters continue to fail to show an expanding margin post merger (i.e. no synergies) the stock will crack. I think that some analysts are going to ask the company if it should take a write-down on goodwill during teh conference call, that should be fun to listen to their answer... :-)

 

Mon, 12/31/2012 - 17:45 | 3110654 Jack Sheet
Jack Sheet's picture

This concludes this comment.

Mon, 12/31/2012 - 17:33 | 3110599 El Diablo Rojo
El Diablo Rojo's picture

Graham, please have someone from Phoenix Capital proofread your articles.  Sloppy.

Mon, 12/31/2012 - 20:19 | 3111093 spinone
spinone's picture

Higher cost of loving.  LOL

Mon, 12/31/2012 - 17:24 | 3110572 RebelDevil
RebelDevil's picture

When I saw the tittle for this article, I was like "No shit."
To say QE4 is going to create harmful inflation is a duh statement!

Mon, 12/31/2012 - 17:13 | 3110506 lasvegaspersona
lasvegaspersona's picture

It will be interesting to watch as credit remains low but the Fed monetizes every peice of paper in the system....marked to whatever

Mon, 12/31/2012 - 17:09 | 3110475 lasvegaspersona
lasvegaspersona's picture

a higher cost of loving?  unacceptable...Irefuse to pay more than the current price of loving....how much is that again?

I can put up with the civil unrest however.

Mon, 12/31/2012 - 17:03 | 3110438 Snakeeyes
Snakeeyes's picture

You mean like the staggering increase in gold, silver, oil, gas, corn, wheat, house and milk prices over the past 6 months? Even though the core PCE rose only 1.70%?

http://confoundedinterest.wordpress.com/2012/12/31/no-inflation-housing-...

Mon, 12/31/2012 - 18:19 | 3110767 cynicalskeptic
cynicalskeptic's picture

I can understand the rib roast that was going for over $50 (the good sized ones were approaching $100) but BACON at over $7 a package......  WTF?      

One way to solve the obesity problem in the US.   

Mon, 12/31/2012 - 19:01 | 3110868 pursueliberty
pursueliberty's picture

You haven't seen shit when it comes to beef prices yet.  2012 drought will result in much higher beef prices towards the end of summer 2013.  Can't feed the cows, kill them, flood market, less cows next year for slaughter.  That small rib roast will be $60+.

 

We've cut out a lot of our beef consumption.  When spring hits I'm mending fences and going to cross fence a section big enough for a couple of cows.  We have chicken solved.  Bacon prices have gone full retard.  One of my preferred brands is up 22% from 2010 price.  I'm buying a cheaper/thinner off brand now, but I caught it on sale a couple months ago 2/1 came out to right at $2.25#, which isn't bad, but I like thick cut.

Mon, 12/31/2012 - 22:26 | 3111321 infiniti
infiniti's picture

You could save yourself an enormous amount of trouble by just buying a few futures contracts. LCQ3 is the August 2013 ticker for Live Cattle, each contract gives you $52,000 nominal exposure to cattle.

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