Toro's Running of the Bulls Market Blog

We Do as We Do, Not as We Say

We in the United States and the Western nations will see our stature diminish in international financial markets as we do not take the medicine we recommend to others when they are in the midst of a financial meltdown.

Sitting a few time zones away from the Davos gathering, former Malaysian Prime Minister Mahathir Mohamad spares a dry chuckle at the fall of the once mighty Western financial giants and masters of the universe.

“They were doing everything that [multilateral agencies] were counseling developing countries not to do to stay out of crisis,” he said about the parade of Western banks that have crumbled over the last six years due to heavy leveraging and bad assets. “They were greedy … and now people are having a big laugh.” ...

“They told us … there was a bubble [in asset and currency prices]. They told us not to increase borrowing. They told us to cut back government spending. Its advice they ignored in [their] own economies,” he said to an appreciative audience of Arab businessmen who have their own gripes about what they see as American and European hypocrisy, especially when it comes to foreign policy in the Middle East.

I certainly do not blame them for seeing us as hypocrites.

More Poverty But Still Poverty Reduction

The World Bank has adjusted its poverty line assumptions upwards, which has increased the estimate of the number of people living in absolute poverty.  However, the general conclusion that poverty has been in the decline remains.  Summary here.

• The old data suggested that the poverty count had fallen below one billion, but with the upward adjustment to the cost-of-living in developing countries we estimate that 1.4 billion people in the world are still poor by the standards of the poorest countries.
• 2.6 billion people consume less than $2 a day in 2005 prices.
• The % below $1.25 a day was halved, falling from 52% to 26% over 1981-2005.
• Number of poor fell by 500 million, from 1.9 billion to 1.4 billion.
• As in past estimates, we find that the composition of world poverty has changed noticeably over time. Numbers of poor have fallen in Asia, but risen elsewhere.
• Dramatic progress in East Asia. Looking back to the early 1980s, East Asia was the region with the highest incidence of poverty in the world, with almost 80% living below $1.25 a day in 1981. By 2005 this had fallen to 18%.
• There are 600 million fewer people living in poverty by this standard in China alone, though progress in China has been uneven over time.
• In the developing world outside China, the $1.25 poverty rate has fallen from 40% to 29% over 1981-2005, though not enough to bring down the total number of poor, which has stayed at around 1.2 billion.
• The poverty rate has fallen in South Asia from 60% to 40% between 1981 and 2005. But this has not been enough to bring down the number of poor.
• The poverty rate has fallen over 1981-2005 in Latin America and the Caribbean, and in the Middle East and North Africa, though not enough to bring down the number of poor.
• Rising incidence and number of poor in Eastern Europe and Central Asia, though with signs of progress since the late 1990s.
• $1.25 a day poverty rate for Africa has shown no sustained downward trend over the whole period; starting and ending the period at 50%. The number of poor has almost doubled in Africa over 1981-2005, from 200 million to 380 million.
• Africa’s poverty rate rose until the mid-1990s but fell after that. The $1.25 poverty rate fell from 58% in 1996 to 50% in 2005, though this was not sufficient to bring down the number of poor.
• The depth of poverty is greater in Africa than other regions. The mean consumption of the poor is lower than any region, at around 70 cents per day in 2005 (using the $1.25 line).
• [T[he Bank’s estimates suggest less progress in getting over the $2 per day hurdle. Indeed, we have seen no change in the number of people living below $2 per day at around 2.5 billion, between 1981 and 2005, although the number has fallen since the late 1990s (having risen prior to that).
• The number of people living between $1.25 and $2 has doubled from about 600 million to 1.2 billion between 1981 and 2005.

 

Via Johan Norberg

Muslims Positive about Globalization

From World Public Opinion

Contrary to the common assumption that Muslims view globalization as a threat to their society, a new poll of Muslim countries finds that globalization is generally viewed positively. The poll was conducted by WorldPublicOpinion.org in six nations with predominantly Muslim populations in different regions of the world including Egypt, Turkey, Azerbaijan, Iran, Indonesia, and the Palestinian Territories, plus the Muslim population of Nigeria.

Asked about "globalization, especially the increasing connections of our economy with others around the world," majorities in six of the seven nations polled say that it is "mostly good" for their country. Approval is highest among Egyptians and Nigerian Muslims (79% and 78% saying mostly good, respectively). Sixty-three percent of Azerbaijanis, 61 percent of both Iranians and Indonesians, and 58 percent of Palestinians see globalization as mostly good. While support in Turkey does not reach a majority, a plurality still calls globalization mostly good (39% to 28%). On average across all seven publics, 63 percent say that globalization is good for their own countries. Only 25 percent think it is mostly bad. ...



Asked whether international trade is good or bad for their country's economy, majorities in five of six nations polled say that it is good. Similar to answers on globalization, on average 64 percent think international trade is good for their country's economy, while 29 percent say it is bad. However individual nations vary. While Turks only have a plurality positive about globalization, they have a strong majority (72%) positive about trade. While Egyptians and Nigerian Muslims are the most positive about globalization, they are the most skeptical about trade--a bare plurality of Nigerians give it a positive rating (51% to 46%) while Egyptians are evenly divided. The most enthusiastic public is that of Azerbaijan, where 85 percent are positive. Palestinians and Indonesians are also quite positive (70% and 60% say mostly good).

Majorities or pluralities in five of six nations see international trade as good for their countries' companies, Nigerian Muslims being the only exception (though the Nigerian population as a whole is positive). Eighty percent of Azerbaijanis, 70 percent of Turks, 67 percent of Palestinians, and 52 percent of Egyptians see their national companies as benefiting from international trade. Among Indonesians a 49-percent plurality agreed, with 39 percent seeing trade's effects as bad. Among Nigerian Muslims, though, 59 percent see trade as adversely affecting Nigerian companies, and only 37 percent think the effects are good. Overall, on average 59 percent see trade as beneficial to their respective countries' companies.

Majorities in every population polled think trade is good for consumers, on average 63 percent. On this Nigerian Muslims lead the way, with 77 percent positive, followed by Azerbaijanis (67%), Turks (62%), Indonesians (59%), Palestinians (57%), and Egyptians (54%). Those who see trade as hurting consumers were most numerous in Egypt (46%) and Indonesia (32%).

Most think international trade is also good for their own standard of living--on average 56 percent hold this view, with 30 percent saying their standard of living is hurt by trade. The exception is Egypt where 56 percent say it is bad for their standard of living. Elsewhere, Azerbaijanis, Palestinians, and Turks are the most positive, at 65, 62, and 61 percent respectively. Fifty-four percent of Nigerian Muslims and 51 percent of Indonesians agree.

Logic of an Emerging Markets Short

I'm battling a cold today.  Ugh!  I hate being sick.  I'd rather be in the office.

I have written about my emerging markets short, which you can read here. I was asked to elaborate on my position in the comments section of yesterday's post.  I'll keep this brief because I'm feeling groggy.  (You always sound groggy. - ed.)

My short in emerging markets is not because I believe the economies of the developing countries are destined to collapse.  I have no idea if they will enter a recession or not.  They will slow, but perhaps not by much.

Rather, my short position is predicated on the idea that as the after-shocks of the housing crisis spread - yes, this is about falling home price, not subprime mortgages - and as fear permeates throughout financial markets, emerging markets will not be immune.  They too will experience a significant decline, which I believe is playing out now.

One only needs to look at the municipal bond market, where auctions for AAA-rated munis are failing.  Did you think a year ago that when the subprime market began rolling over, there would be no bids on AAA municipal bonds? 

A few years back when I began getting bearish on real estate assets, stocks and bonds, with spreads in the credit markets scraping all time lows and housing prices getting insane, I figured it was only a matter of time before the rotten edifice came crashing down.  However, I had no idea that collateral damage would hit the muni and cash markets, two of the supposedly safest markets around.

Now, we are seeing the contagion spread to emerging markets.  Stocks in developing countries are high beta markets where investors allocate money when animal spirits are running high.  When money is scared, it flees risky assets.  And despite all the progress made in the emerging markets, they are still riskier than the United States and Europe. 

I am very bullish long-term on the developing world.  However, that does not mean I should be in emerging market stocks all the time. It was right to be bullish on America when it was a developing economy 100 years ago, but you could still lose a lot of money - or make a lot of money if you were short - whenever the American market entered into one of its periodic declines.

I am short emerging markets by owning the ProShares UltraShort Emerging Markets ETF, ticker EEV. 

Whoa, like the markets, I'm fading again...

Emerging Markets Cracking

I added a bit to my short position in emerging markets today.  I have been writing about an emerging markets short here, here, here and here.  I wanted to add more, but the market ran away from me.  Plus, I feel that something major is going to happen soon, either to the upside driven by Fed or government action, or to the downside driven by Fed or government inaction.   

The MSCI Emerging Markets index broke through support at 1180.  (The Bloomberg does not show the wild dip over the previous few weeks so I believe this chart is off.)

Support is at 1100 then at 1000.

The economy is going into a recession and emerging markets are a high beta proxy on investors' appetite for risk.  Regardless of the growth rates and the current fundamentals, emerging markets will get whacked as developed markets crack.

I play this trade by purchasing ProShares UltraShort Emerging Markets ETF, ticker EEV, which inversely tracks the MSCI Emerging Markets index by 200%.

Emerging Markets - Hot! Hot! Hot!

Too hot perhaps?

The table below is one reason why I have a short position in emerging markets.

Emerging markets have been either the best or second best performing asset class over the past five years. 

Now, that does not mean it cannot be over six or seven or eight years.  Markets can do anything. 

However, reversion to the mean is a powerful force in financial markets.  Usually, the top performing asset class over a time period often lags thereafter. 

There are structural long-term reasons to be bullish emerging markets. However, a slowing economy, extended valuations, dramatic out-performance, and stress in the credit markets are all reasons to be wary of high beta asset classes, of which emerging markets remains one. 

Taking a Short Position in Emerging Markets

Last week, I wrote that I was considering a short position in emerging markets.  Today, I took a quarter position and purchased the ProShares UltraShort Emerging Markets ETF, ticker EEV.

Shorting frothy markets is very dangerous.  Do not do so based on what you read on this blog.  Do so based on your own research and your own risk/reward profile. Shorting frothy markets can lead to large losses in a short period of time.

The MSCI Emerging Market index can fall all the way to 1100 and still be in an uptrend.  Thus, I will use that approximate price target as a trigger point to either add more or cover, though I may do either before then.

If the position moves against me, I'll be quick to cover, even selling tomorrow if need be.

Waiting on Emerging Markets

I am waiting for the opportune time to short emerging markets.  Now is not the time.  It may be time in a week or a month or a year, I don't know, but it is not right now.

I have three rules about shorting - valuations are high, conditions are deteriorating or will do so soon, and the technicals are weakening.  If you are investing on the long side, the latter two are not necessary if you are patient as valuations will bail you out eventually.  That is not necessarily the case, however, when shorting.

For emerging markets, the first condition is definitely present. The second will become prevalent soon as I do not believe emerging markets are decoupling.  But I'm not so sure about the third.

My vehicle of choice on the short side is to buy the ProShares UltraShort Emerging Markets ETF, ticker EEV, which inversely tracks the MSCI Emerging Markets index by a factor of two.  Currently, the MSCI Emerging Markets index shows no signs of slowing.

One can get a better understanding of the action in a broad index by looking at its components.  If the components of an index are breaking down while the index continues to rise, the rally is becoming narrower and less healthy.

Fifty-five percent of the MSCI Emerging Markets index is made up of four countries - China (16% of the index), Korea (16%), Brazil (12%) and Taiwan (11%).  The markets of each country are as follows

China

China had perhaps its most meaningful correction since it began its ascent a few years ago.  It may be just a dip in a long-term uptrend or it may be the beginning of a top.  However, in the near-term, the market is very oversold, and at the very least, will bounce to work off the oversold condition. A test will come when the Shanghai index approaches its 50-day moving average (the blue line).

Korea

Korea may be in the process of forming a top.  However, it bounced off the 200-day moving average (the red line) and is approaching the 50-day still while in an oversold condition, suggesting that Korea is likely to power through resistance, which bodes well for the MSCI Emerging Markets index.

Brazil

Bullish is the only word to describe Brazil as it sits at its all-time highs.  Brazil shows no technical signs of slowing.

Taiwan

Taiwan is most worrisome as it looks most like the market that is topping. However, it is deeply oversold and will bounce.  The question is whether it will hit new highs or roll over as it approaches old highs.

Thus, Brazil is very bullish, China is bullish but must be watched while both Korea and especially Taiwan may be topping.

Four other emerging nations make up 28% of the MSCI Emerging Markets index - Russia (9%), India (7%), South Africa (7%) and Mexico (5%).  The graphs of each nation are as follows

Russia

India

South Africa

Mexico

The uptrends are in tact for the first three while there are questions about Mexico, which may be topping or may be consolidating.

I think the risk/reward profile for emerging markets is very poor now.  Yes, they are high growth stories,  but so was America in the 19th century but it also experienced many booms and busts.  Today's emerging markets will be no different, especially when so much of the capital driving the emerging markets higher is flighty hot money.

However, at the moment, the technical picture is strong.  If it rolls over tomorrow, then the conditions to short will have improved.  But until it does, it pays to wait.

Shorting Emerging Markets

I think the top is in and it is time to start shorting the emerging markets. 

The central premise is that the world cannot and will not decouple from the United States.  If the American economy is slowing or going to go into a recession, the reverberations will be felt around the world.

Not only is America slowing, Japan is as well.  And Europe may be also slowing.   I believe both Japan and Europe will follow the United States.

US equity markets are discounting a recession.  The stock market is a notoriously poor predictor of recessions, however, and frankly, I have no idea if we are going into a recession or not.  But I do know that risk is rising in the financial system, and even if we escape a recession, the secondary and tertiary after-shocks in American asset markets which are occurring now will be felt around the world.  The idea that the emerging markets can escape the spreading contagion is nonsense, in my opinion.

As risk premiums rise, investors will pull back around the world, and will especially do so from emerging markets as emerging markets are the highest beta markets.  Currently, spreads on emerging market bonds are 270 bps, up less than 100 bps off their lows several months ago.  In 2002, spreads were 1000 bps.   We may not hit a 10% premium over Treasuries again, but I am very, very confident that the peak of this cycle is not 2.7%.

I have three criteria for shorting - the asset is expensive, fundamentals are deteriorating and technicals are rolling over.  For the first two, I am very confident.  For the third, I am less so as the MSCI Emerging Markets index may still be in a bull market. 

However, the 50-day moving average has been broken and we can fall to the 1000-1050 range and still be in an uptrend.  Thus, even if one shorts here, one can still crank out 15%-20% on the short side before covering at support if one is wrong about a bear market.  But if one is right, then the gains are much greater because emerging markets will fall much farther.

I think they will fall much farther.  I am just unsure from what level. 

What gives me comfort on the short side is that when I scroll through the charts of national indices, many appear to be breaking down.

In the developed world, virtually every chart I look at is in trouble.  The US, Canada, the UK, Germany, France, Spain, Switzerland, Italy, Ireland, the Netherlands, Belgium, Denmark, Sweden, Austria, Greece and Japan all appear to have topped.  Only Finland looks like it is heading higher.

Ireland

If the developed world is slowing or going into a recession and its markets are breaking down, I highly doubt emerging markets will keep rocking.

I see many charts rolling over in the emerging markets, including Mexico, Brazil, Chile, Peru, Argentina, Hungary, Romania, Slovenia, Bulgaria, China and Taiwan, whereas Egypt, Saudi Arabia, Tunisia and Nigeria appear to be in uptrends.  Most others are consolidating or maybe topping. 

China could be experiencing a bull market sell-off, as it has five times since it started its ascent in mid-2005, ranging from -12% to -21.5%.   The current correction has been a decline of 22%.  This sell-off, however, pails compared to the 500% the Shanghai index has gained from the bottom on June 6, 2005 to the most recent top on October 16. 

Similarly, Brazil is up 600% from the bottom in 2002, Mexico 400%, Chile 240%, Peru 1500%, Bulgaria 1600%, Romania 1100%, and so on.

Thus, when emerging markets eventually crash - and they will - it will be a long descent to the bottom.

During the Asian crisis of 1997 and 1998, the MSCI Emerging Markets index fell from a multi-year high of 571 on July 9, 1997 to 236 on September 10, 1998, a decline of 58%.  And the market never appreciably rebounded once it fell off its highs.  It fell 16% from July to September 1997 before rebounding a few percent, then fell another 26% into January.  It bounced 25% into April before collapsing 47% to its ultimate bottom in September.  Currently, the index has fallen 12%.

Shorting now is tricky.  In the graph above, the MSCI Emerging Markets index appears to still be in an uptrend.  However, it was also in an uptrend from 1995 to the top in July 1997.  It broke the lower band of the uptrend around 480 in October of that year. A similar strategy would be to short the index once it breaks through the lower band of the uptrend at 1000.

I will be entering a short position in the near future.  I intend to buy the ProShares UltraShort Emerging Markets ETF, ticker EEV.  I may also buy the ProShares UltraShort China ETF, ticker FXP.

It goes without saying that you should enter any position based on your own research and risk profile.  Shorting frothy markets is always a dangerous exercise, especially when you do so on the advice of an anonymous blogger.

What Types of Growth in the Developing World?

From Dani Rodrik

Income per head in a landlocked African country stands at a fraction of levels it had reached in the 1970s, with only the last few years seeing some decent economic growth. What kind of a growth strategy should this country follow? A strategy that focuses on expanding employment opportunities in the rural areas where most of the poor live? Should it consist of expanding their capabilities, by investing directly in education and health? Or should it focus on wherever the economic activities that will provide sustainable sources of income growth into the future lie, even if these may be in mostly urban areas and likely to foster greater inequality in the short-run?

These are the unexpected questions which a meeting with the World Bank raised, as we were discussing growth diagnostics and binding constraints for the country in question.  When my colleagues and I pushed for a growth strategy that focused, well, on growth, the reaction from the World Bank staff present was skeptical. It was prop-poor growth they wanted. And even greater concern was expressed by a member of "civil society" participating in our discussion through video-conference. Growth should be social growth, which means investing in people, he argued.

Here is how I see it.  Having a growth strategy that focuses on growth proper--and on removing the most binding constraints on it--does not mean that you don't care about poverty or inequity. It just means that you recognize different targets require different strategies. I recognize that a growth policy may not necessarily achieve significant poverty reduction in the short-run. That is why there is always room for social policy. Growth policy is not social policy--at least not necessarily in the short to medium-run (although in the long-run it probably is the most effective social policy we can think of). But it is indispensable to generate a sustainable increase in the economy's resources and long-run living standards.