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Is another Asian financial crisis developing?


Guest ajc
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With the weakening of the Chinese yuan, the Turkish lira crisis, and now the Vietnamese currency getting impacted (https://www.bloomberg.com/view/articles/2018-08-09/vietnamese-dong-feels-the-ripples-of-china-s-yuan-rout), I'm wondering what the chances are of another 1997 Asian Financial Crisis or 1998 Russian one?

I mean, it's been a while since a major global economic crisis came out of an emerging region.

 

Anyway, if anyone's an expert, was around for past versions, or has some smart ideas, it'd be good to hear how they think a crisis could effect businesses or sectors in emerging/developed markets.

 

I'm guessing commodity prices would mostly fall because a bunch of economies import fewer raw materials while in recession.

They'd also likely buy fewer luxury goods.

In developed markets, I'm thinking lower commodity prices could result in an economic boost because input prices are lower.

 

Interested to hear how others handicap the probability of another large emerging market crisis happening, as well as how they think about it investment-wise.

Also, it should go without saying this thread is for investment ideas or your jokes about the hit the Vietnamese dong has taken.

Best save your political discussions for the appropriate section.

 

 

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Ajc, my current strategy is pretty simple. I am now getting more cautious with my overall portfolio. I am holding larger cash positions (selling on strength like we have seen the past month or so). This will allow me to take advantage of sell offs when they happen.

 

For the past 5 years i have been pretty much fully invested most of the time. No more.

 

I expect at some point in the not too distant future (the next year or two) i will get quite cautious and likely move my portfolio mostly to cash. I am watching the economic data out of the US closely for when it starts to turn down. Looks good right now but storm clouds might be forming. I will be happy to earn a little less while i sit amd wait for the next big down draft in stocks :-)

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Ajc, my current strategy is pretty simple. I am now getting more cautious with my overall portfolio. I am holding larger cash positions (selling on strength like we have seen the past month or so). This will allow me to take advantage of sell offs when they happen.

 

For the past 5 years i have been pretty much fully invested most of the time. No more.

 

I expect at some point in the not too distant future (the next year or two) i will get quite cautious and likely move my portfolio mostly to cash. I am watching the economic data out of the US closely for when it starts to turn down. Looks good right now but storm clouds might be forming. I will be happy to earn a little less while i sit amd wait for the next big down draft in stocks :-)

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-returns-in-2016/msg285229/#msg285229

http://www.cornerofberkshireandfairfax.ca/forum/strategies/what-do-folks-think-or-do-while-markets-are-at-highs/msg325599/#msg325599

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-current-cash-weighting/msg23739/#msg23739

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/all-the-negative-news/msg24148/#msg24148

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/big-warning-sign/msg22442/#msg22442

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/top-picks-for-the-new-year/msg13668/#msg13668

 

 

For someone that's been fully invested for 5 years you seem to post often about holding lots of cash and being worried about the macro picture. Pretty much all throughout your forum career from what I can see, in fact.

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The 98 russian crisis was different animal than the 97 Asian crisis. So I'll leave that one alone.

 

In the 97 Asian crisis the currency drops made big headlines but the crisis didn't happen because of the currency drops. The currency drops were more like a symptom of the disease rather than the origin. The crisis itself was pretty textbook. An investment bubble inflated with massive foreign investment and leverage. On top of that you've had a banking crisis due to under-capitalized banks making bad loans. I'd say a good recent comp would be Spain circa GFC.

 

Once the bubble popped everything was made worse by boneheaded austerity policies pushed on by the IMF and massive capital flight out of the countries.

 

Today we don't really have the ingredients for such a crisis in the EMs. The only thing that comes close would be China where there's a lot of leverage and you don't really know how good the banks are. But China has capital controls and massive firepower to stabilize its economy. On top of all that it doesn't have to deal with things like nonsense politics and the US Congress. So it can move quickly and decisively.

 

Now I'm not saying that you can't have a problem in China. But if you do it'll look very deferentially than the 97 crisis.

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In the 97 Asian crisis the currency drops made big headlines but the crisis didn't happen because of the currency drops. The currency drops were more like a symptom of the disease rather than the origin. The crisis itself was pretty textbook. An investment bubble inflated with massive foreign investment and leverage. On top of that you've had a banking crisis due to under-capitalized banks making bad loans. I'd say a good recent comp would be Spain circa GFC.

 

 

 

That's fair. I'd add though that a number of the analysts featured in Bloomberg and Reuters today were saying if the emerging markets narrative gets broken, a ton of capital will flow out. As you'd expect.

 

From the opinion piece above:

"State Bank of Vietnam may be forced to yield. In just one week in July, it sold more than $2 billion to banks to meet demand for the dollar, the Saigon Times reported. It’s unclear how much the central bank has shelled out since to prop up the dong. At this rate, it will quickly erode the $12 billion of foreign reserves painstakingly built up last year."

 

So I'm wondering if the question isn't whether China can steady itself, because as you mentioned there are reasons to think it can, but if China sneezes do large parts of emerging Asia and elsewhere go on to catch one hell of a cold.

As with DocSnowball, this is a curiosity to me more than anything else, but if I remember what I've read previously about 1997, once the foreign reserves of various ASEAN countries were used up is when the real fun began.

 

I guess that's perhaps starting to happen across a few places, so I'm wondering which countries and sectors are the most at risk.

Unfortunately this isn't my area, so who gets impacted the most by yuan depreciation or dollar appreciation as things stand, isn't yet obvious.

 

 

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I'm no expert on the crisis, but I'd also add that in the last EM "crisis" that we saw, 2015/2016, countries were less inclined to use reserves and allowed currencies to free-float and used policy tools like interest rates to address inflation.

 

Having free floating currencies and using policy tools like interest rates seem like it opens up the number of possible "positive" outcomes that avoids a crisis.

 

Free floating currencies are counter cyclical. Sure it makes dollar denominated debt of some companies/governments harder to repay, but it also makes export based companies more competitive on price and many EM economies are exports based. The net-effect, inclusive of second and third order consequences is hard to predict, but I'm generally in the camp that EM is better positioned to handle this kind of crisis now and free floating currencies ease a lot of the pressures encountered by trying to defend fixed exchange pegs.

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Every crisis is different, but the kicker here is the degree that China subsequently pulls back from trade with the west. It's not just disruption and a return back to the 'norm', it's also the 'norm' resetting to some other level. 

 

Our own thoughts are ultimately more trade between neighbouring asian nations, and less trade with the 'west; the same way that US trade is primarily between just Canada and Mexico. We anticipate a lot of recycling (steel, batteries, computers, etc); but timing, degree, & liklihood is anyone's guess.

 

We aren't doing anything specific other than raising the quality of our investments, & continually recovering our cash outlays as opportunity presents. T-Bills and house money (in O/G, Iron, Crypto) give us lots of flexibility accross both time & economic cycle. All we need do is wait for the newspaper article telling us XYZ is collapsing (GE?), & deploy accordingly.

 

SD

 

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In the 97 Asian crisis the currency drops made big headlines but the crisis didn't happen because of the currency drops. The currency drops were more like a symptom of the disease rather than the origin. The crisis itself was pretty textbook. An investment bubble inflated with massive foreign investment and leverage. On top of that you've had a banking crisis due to under-capitalized banks making bad loans. I'd say a good recent comp would be Spain circa GFC.

 

 

 

That's fair. I'd add though that a number of the analysts featured in Bloomberg and Reuters today were saying if the emerging markets narrative gets broken, a ton of capital will flow out. As you'd expect.

 

From the opinion piece above:

"State Bank of Vietnam may be forced to yield. In just one week in July, it sold more than $2 billion to banks to meet demand for the dollar, the Saigon Times reported. It’s unclear how much the central bank has shelled out since to prop up the dong. At this rate, it will quickly erode the $12 billion of foreign reserves painstakingly built up last year."

 

So I'm wondering if the question isn't whether China can steady itself, because as you mentioned there are reasons to think it can, but if China sneezes do large parts of emerging Asia and elsewhere go on to catch one hell of a cold.

As with DocSnowball, this is a curiosity to me more than anything else, but if I remember what I've read previously about 1997, once the foreign reserves of various ASEAN countries were used up is when the real fun began.

 

I guess that's perhaps starting to happen across a few places, so I'm wondering which countries and sectors are the most at risk.

Unfortunately this isn't my area, so who gets impacted the most by yuan depreciation or dollar appreciation as things stand, isn't yet obvious.

In 97 a lot of Asian countries had their currencies pegged to the dollar and no capital controls. They've exhausted their foreign reserves by foolishly trying to defend their pegs. Right now things are different. The currencies are mostly free flowing and with the exceptions of a few basket cases (looking at you Indonesia) the economies are more robust. Their financial systems look alright as well.

 

In the case of Vietnam. It has capital controls in place. If they choose to really enforce them then they probably won't be doing the dong any favours but it'll stabilize things.

 

I don't think there's much to worry about the yuan loosing some ground. This is what you'd expect the currency to do given this whole tariffs business we have going on. Not some great calamity.

 

I also think it's fair to assume that if China sneezes the ASEAN will catch a cold. But based on how things stand that cold will look more like a regular recession would look rather than a crisis, contagion, or any of the scary words.

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I don’t see a crisis in Asia either, but I could well see the trade issues affecting the sentiment and leading to outflows. Most countries are somewhat dependent on capital inflows and when it goes the other way, the currencies and stock market tend to suffer, Happens every couple of years (last in late 2015j and is really nothing special. It’s part of the EM cycle.

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Ajc, my current strategy is pretty simple. I am now getting more cautious with my overall portfolio. I am holding larger cash positions (selling on strength like we have seen the past month or so). This will allow me to take advantage of sell offs when they happen.

 

For the past 5 years i have been pretty much fully invested most of the time. No more.

 

I expect at some point in the not too distant future (the next year or two) i will get quite cautious and likely move my portfolio mostly to cash. I am watching the economic data out of the US closely for when it starts to turn down. Looks good right now but storm clouds might be forming. I will be happy to earn a little less while i sit amd wait for the next big down draft in stocks :-)

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-returns-in-2016/msg285229/#msg285229

http://www.cornerofberkshireandfairfax.ca/forum/strategies/what-do-folks-think-or-do-while-markets-are-at-highs/msg325599/#msg325599

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-current-cash-weighting/msg23739/#msg23739

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/all-the-negative-news/msg24148/#msg24148

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/big-warning-sign/msg22442/#msg22442

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/top-picks-for-the-new-year/msg13668/#msg13668

 

 

For someone that's been fully invested for 5 years you seem to post often about holding lots of cash and being worried about the macro picture. Pretty much all throughout your forum career from what I can see, in fact.

 

Alwaysinvert, thanks for the trip down memory lane :-) In broad bresh strokes, i had large cash positions in 2010-12. My concern was that we would slip back in to Great recession part 2. Fortunately i changed strategies about 5 years ago and have been close to fully invested since. The one big exception was a few months after Trump was elected; i moved to 100% cash for a short period of time as i was quite concerned with what he was saying and doing. Fortunately (after deciding Trump would not be blowing up the world) i moved back to fully invested. And yes, earlier this year i expressed concerns regarding higher rates and the winding down of QE. I did raise some cash but returned to 100% fully invested too quickly. I am slowly learning that i need to keep a higher cash balance and to be much more patient when putting my cash to work.

 

And, yes, it can be quite difficult to follow how a person is actually invested based on their posts as the trail will be incomplete (as it is missing important information). Best of luck :-)

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Gents,

 

How about China and its internal mountain of debt, shadow banks, real estate construction folly [whole empty "ghost" cities] etc.?

 

Some numbers here: [source : Forbes: Worlds largest companies & Wikipedia: Contries by GDP].

 

China:

 

Major banks - total assets:

 

ICBC USD 4,210.9 B

China Construction Bank USD 3,631.6 B

Agricultural Bank of China USD 3,439.3 B

 

Total : USD 11,281.8 B

 

China GDP : USD 12.014.6

 

USA:

 

Major banks - total assets:

 

JPM : 2,609.8

BAC : 2,328.5 B

WFC : 1,915.4

C : 1,922,1

 

Total USD 8,775.8 B

 

US GDP : USD 19,390.6 B

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Some qualifiers:

 

- According to Peter Lynch, everyone on this thread already spent more time on macro than they should.

- At the same time, there hasn't been a gut-wrenching, international economic crisis for a decade. Even with tariff actions, the global economy is chugging along nicely. Maybe too nicely.

- The material below is from a socialist-leaning channel, so take it with salt. Then again, that doesn't mean the logic can't be accurate.

 

Yilmaz Akyuz is chief economist at the South Center in Geneva.

 

Before that, he was the director of the division on globalization and development strategies at the United Nations Conference on Trade and Development.

He was also head of the team preparing the trade and development report, and UNCTAD coordinator of research support to developing countries (the Group-of-24) in the IMF and the World Bank on international monetary and financial issues.

 

His critique of systemic emerging market risk seems reasonable. Here's a summary he gave of it, while promoting his book. The intro is by former Bank of International Settlements secretary general, Peter Dittus:

 

 

I'll leave the macro now and head back to my usual program. No point going way down this rabbit hole. Appreciate y'alls perspectives.

 

 

 

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This thread is likely relevant if one is looking at Altius, Brookfield Asset Management etc

 

Hard to say if this is just noise, as most of the times, it is.

Looked up an old file on the 1997 Asian crisis and 1998 Russian default that followed.

After the fact, many voices heard to explain why it happened but it seems that most, prospectively, felt that a Russian default was not in the cards (nuclear power etc).

 

Around that time, LCTM was thriving. It was composed of very bright people using advanced risk management tools and yet they did not see how noise could become contagion and how a relatively ordinary flight to safety movement could bring its demise. After the fact, they described a "perfect storm"...Also, mostly after the fact, many expressed views that the LCTM flaws were obvious (leverage and investments in relatively esoteric and illiquid securities (like Danish mortgage bonds :)...). The point of this post is that it may be very hard to know when noise becomes contagion and the contagion phase is when you "see" hidden risks that were there all along. LCTM looks now like a blip on the chart but, then, was felt to be significant enough to cause larger systemic issues and to necessitate a Wall Street banks consortium bailout brokered by the maestro.

 

Surprises will come "but timing, degree, & liklihood is anyone's guess."

 

How about China?

 

Not an expert but interesting to note that debt intensity (unit of GDP generated per unit of debt) has been coming down rapidly and has joined the downward trend and level of more "advanced" economies. China has achieved this "milestone" way before its planned transformation from a capital intensive model to a domestic consumer model. Add to that that debt and GDP numbers may not be reliable and GDP there is not really an output measure but ends up where it ought to be. One can question how the "West" deals with failures and transitions but, for China, this is history in the making and I doubt that dealing with inevitable failures to come will be easy.

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Gents,

 

How about China and its internal mountain of debt, shadow banks, real estate construction folly [whole empty "ghost" cities] etc.?

 

Some numbers here: [source : Forbes: Worlds largest companies & Wikipedia: Contries by GDP].

 

China:

 

Major banks - total assets:

 

ICBC USD 4,210.9 B

China Construction Bank USD 3,631.6 B

Agricultural Bank of China USD 3,439.3 B

 

Total : USD 11,281.8 B

 

China GDP : USD 12.014.6

 

USA:

 

Major banks - total assets:

 

JPM : 2,609.8

BAC : 2,328.5 B

WFC : 1,915.4

C : 1,922,1

 

Total USD 8,775.8 B

 

US GDP : USD 19,390.6 B

I'd say that's cherry picking some numbers.

 

China's non-financial debt us 256% of GDP. This compares with the US at 251, UK at 283, the euro area at 258 and close to you, Denmark at 264. That's not a small number but it's not apocalyptic either.

 

Does thins mean that China can't run into some financial system problems at some point? Not at all. In fact they probably will. Everybody does. But as I've said previously they are better equipped to deal with a situation like that. So it's more likely that they'll avoid a full blown crisis.

 

Now because of this situation should people line up to invest in Chinese banks? I don't know. But as sure as hell I'm not.

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