- Janet Yellen's belief is that emerging markets "do not pose a substantial risk to the U.S. economic outlook."
- The worldwide emergence of shadow economies and how they will affect the markets in the future.
- Worldwide commodity scams are influenced by "easy" money.
A strong economic thesis relies on decision making, not only looking at a domestic market, but also identifying emerging markets and how they're interconnected with each other. The trend of buying on dips may not work anymore and it may be a disastrous decision for financial institutions and individual investors to follow through.
There's a thought process in how these global markets have changed and merged into a collective consciousness with one single unifying voice. Any growth relies on the printing of money between interconnected global markets. Bank of England's governor Mark Carney gave evidence to the treasury committee by stating that housing activity was rising, but still at historic norms. Six months ago, Mark Carney also stated that there's no question that housing prices were rising faster than earnings and that we shouldn't be concerned about it. In June 2014, Carney's tone changed. He let England's bank committee know that "there's a limit to our tolerance." He stated, "History shows that the British people do everything they can to pay their mortgages. That means cutting back deeply on other expenditures when the unexpected happens, potentially slowing the economy sharply." The tone of the Fed and governors is changing more rapidly than anticipated.
If Yellen believes that emerging markets will grow because of their internal growth and rising expectations of employment, she may get a rude awakening. Wall Street and economists have no clue in terms of measuring shadow economies or how dominant they've become. It's like saying shadow economies exist to benefit the masses rather than the few. That capital goes toward productivity and jobs. If Wall Street believes that emerging markets will address their financial vulnerabilities by adopting good domestic policies to ensure sustainable growth to benefit the poor, then maybe the poor in America could join forces with them and start singing hallelujah. What financial institutions have done is over-invest in emerging markets driven by high commodity price gains. A good example is the Qingdao-based Decheng Mining Ltd. fraud in China. Traders in China used the same stockpiles of metal to secure multiple loans. Now, banks are struggling to gauge the amount of loans they've made and how much they'll lose. A trader at a large commodity firm said that the liability may be $4.5 billion. No individual bank, albeit, if it's in China, Indonesia, or Hong Kong, will disclose the exposure.
Emerging markets' development and progression of shadow markets have streamed into their political system and even though they're corrupt, they can undermine the severity of any economic corruption. Easy money corrupts politicians as much as they do to shadow markets. China's stockpiles of iron ore and copper are massive. Traders are using them as loan collateral. Therefore, the risk repeats itself hundreds of times instead of once because of the loans they're receiving. A year ago, Chinese finance minister Lou Jiwei suggested that the government is prepared for slower growth. "We don't think 6.5% or 7% will be a problem," stated Lou. The next day, Chinese industrial output rose 8.9% and the global markets rocketed. For whatever reason, Jiwei played his hand and many people lost money because of it. Even the bulls that turned to bears that day lost money. For the bulls, that was unforgivable. China's National Bureau Director Ma Jiantang threatened any companies or officials who commit data fraud and exaggerate economic results. What is interesting is that he also indicated that many government officials want to get ahead. It seems like their threat was rather benign. What dominates China's statistics is money, not accuracy. The Chinese government later acknowledged that export numbers have been inflated to hide speculative "hot money flow." Perhaps we all know what that means? China's whole statistical chain is broken from top to bottom.
Indonesia's corruption is widespread, both in the government and business sector. What easy money does to emerging markets is spread corruption at a quicker rate. Shadow markets get even bigger and less transparent. Many of Indonesia's big corporations lobby members of parliament who then accept bribes in exchange for granting projects. It's the acceleration of shadow markets that have bankers worried and how money flows in and out of emerging markets quicker than the previous generation. Easy money is not an altruistic doctrine for emerging markets to provide jobs and higher wages to their people. In fact, it works opposite. It is there to hoard, manipulate and obfuscate economic data to get more easy money. The shadow markets are the lifeblood of emerging markets. They are the direct beneficiaries of easy money. In five years, these markets will dominate and play a key role in the disparity, wealth and production of goods, which will force American corporations to not only deal with them, but partner with them. This is why how high the DIA, SPY, DGT, Nasdaq, etc. will rise is a mute point. For Yellen to focus singularly on American jobs and higher wages in order for the consumer to spend is now a direct divergence to where easy money is really flowing to these emerging markets. Unfortunately, that isn't jobs, it's called hoarding money.
In the past year, South Africa's currency, the South African rand, lost 20% of its value largely due to the withdraw of stimulus in the U.S. The situation is worsening and the reserve bank is forced to hike interest rates in order to support the currency, allowing consumer spending to slow considerably. South Africa's shadow market is in its highest level since the final years of apartheid. The shadow market is fueling high levels of disparity between jobs and wages. State patronage is still the framework to advance within society.
Investors need to know that there are reasons why Italy is including drugs and prostitution in its GDP this year. It's because the mafia has become a legitimate bank. Italy is currently in its longest recession. It is tough for individuals and businesses to get capital through ordinary channels. The tightness of credit and lack of capital finance has forced banks to deny loans to the general public and businesses. That's why the mafia has stepped up and offer loans at high rates to nearly anyone. The loan-shark attitude of the mafia is a risky offer but provides capital that individuals and businesses need for growth. U.S. multinationals will be forced to do business with them unknowingly. This shadow economy in Italy is currently worth an estimated EUR 10.5 billion and rapidly growing. Italy's public tax evasion account for EUR 60 billion per year. The presence of shadow banking is evident in Italy's economy and is a persistent threat to the nation's well-being. A low interest rate environment is not only distorting markets, but also fueling shadow markets, gray markets and shadow banking at an accelerated pace. Shadow banking is an entrepreneurial development in the future of black market growth potential. Economists have said European Central Banks negative rates have not had as much impact as some expected. The reason why is because the mafia is offering lower interest than credit cards. Italy's sophistication in entrepreneurial banking has reached its tentacles into North America. There's not enough profits in drugs and the punishment is too severe. They want the Mexicans to handle the drugs as they want no part of it.
The sluggish economy in Greece has investors fearing the outlook of Europe and its European Union. Corruption has been an escalating problem in Greece ever since the George Pandreou NGO scandals that left EUR 30 million unaccounted for. Loans to finance trade deficits and the bribing of Greek officials arranging these loans have rapidly increased trade deficits in the region. Cumulative trade deficits add up to about EUR 235 billion, 80% of the current Greek public debt. Another 10% is the result of bribes to Greek officials used to generate import transactions that led to these trade deficits. The final 10% of current Greek public debt is the corrupt political constituencies that accept these arrangements.
In a recent poll, Indians indicated that corruption was holding the country back and 92% believed it was getting worse. 68% of India's total illicit capital loss happened after liberalization due to deregulation and trade liberalism. The rise of India's shadow economy has increased the transfer of black money abroad. For example, state officials and politicians in the state of Karnataka had profited $2 billion from shipping illegal iron ore to China. Commodity scams from emerging markets are notoriously difficult to track partly because they involve huge players. It's difficult for regulators to prove anything. Commodity traders need to raise prices and profit from them regardless of use, depletion and scarcity. Emerging markets such as India and China need commodities at the lowest price possible. Fluctuation of prices matters little; it's what nations are willing to pay that matters. That is why shadow markets exist. It becomes an illusion no different than printing money to pay for it.
To sum it up, Chinese and Russian autocracy, along with emerging markets, work in concert with shadow markets. The global bull markets are becoming increasingly edgy that Washington and Yellen have developed a consensus that free markets means free from politics. American institutions that directly invested in emerging markets may find it difficult to pull out of their positions due to the dominance of worldwide shadow economies. In 2013, investors exited positions worth 32.5 billion in stocks and bonds from emerging markets. However, in 2014, investors pumped 221.7 billion back into emerging markets. It just keeps increasing because of easy money. Investors must understand that all bull markets need to catch their bearings, and that's why pullbacks are healthy. There are times when these global bull markets must exert their masculinity regardless of how attractive the dove is. It means catching your breath and reasoning for yourself the following day. That's why Akerlof won the Nobel Memorial Prize in Economic Sciences. He stated, "The public and economists have too great an acceptance that whatever markets do is right."
Thanks to my colleague Fiorenzo Arcadi for providing research into this article.