The Fed's Inflation Will Crush Emerging Markets
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.
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.
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.
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.
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