H. Michael Arguello_

Harvard's Portfolio: Top-Heavy in International ETFs

I have to disagree with the strategy and I feel sorry for the Harvard fund if they pursue this, at least in the short term. Most people here in the developed world think the developing world has some magic hat whereby they can grow forever regardless of economic conditions. Having lived in the third world, I can tell you reality is very different.

I think you will see a nasty crisis hit emerging markets very shortly. You have major patron states in the developing world about to crash and when they do, they will take their client states down with them. For example, Iran, Venezeula and Russia. With oil under $75/bbl, both have precarious finances. The Russian markets have all but collapsed without high priced oil (and the the war in Georgia); a default by Russia, looking increasingly likely, would send ripple effects as debt underwritten/backed/su... by Russia would also suffer. That extends out beyond just Russia as Russia has been using its commodities might as part of its foreign policy these last few years.

Venezuela actively backs Bolivia and Ecuador's govts (financially) as well; with oil prices so low, the higher cost producers like Venezuela will be pushed to the brink. That will take down Hugos friends (its already in process). Iran is very similar, supporting Syria and a few others with its oil wealth.

The prospect of having multiple defaults throughout the emerging world all happen at the same time is like 1997 on steroids (which began when Russia defaulted on its debt, coming soon to a theatre near you!). You will see a currency crisis; the current downturn in EM currencies is nothing, it is simply an unwinding of their appreication during the last 24 months due to the commodities boom.

With re: the invincible Chiense dragon, I think you will see red ink for the first time in China. Their economy is heavily dependent on exports - the US has no manufacturing base since China makes it all for us. When you see retailers hurt - you are seeing the Chinese hurt, it just takes an extra quarter for it to filter through due to the intermediation of the retail industry. Blend in a Chinese asset bubble popping, specifically in real estate and stocks (already in progress) and you have a nasty recipe for a downturn. I have family who are importers of goods from China, one just got back from a trip to his suppliers there. Apparently, its alreayd starting to get ugly with huge layoffs and many firms simply shutting down.

I have no positions either way at the moment although I am contemplating a position in a short EM ETF. The overall picture is really bleak for the EMs - the only BRIC nation I would even dream of investing in right now would be Brazil, altho I am more inclined to short them all. Best of luck to all, if you are going long EMs, be prepared to sit tight for a decade or two.