Readings: Inflation Scare, China & India, Vietnam
- Investors Insight: The End of the Inflation Scare?
. . . two sets of players can create money ex- nihilo in our system: central banks and commercial banks. So if the excess liquidity creation has not been the central banks, then the explanation must lie with the commercial banks. To return to our old favorite, Irving Fisher’s equation of MV=PQ, it seems obvious to us that the current increase in P (prices) has more to do with the past few years’ extremely buoyant V (velocity) than excessive M (money) growth.
In India and Southeast Asia: If the US went through a ‘good devaluation’ (i.e.: a lower currency without a spike in inflation, triggering an increase in foreign and domestic investments and productivity gains), then it increasingly looks as if India and Southeast Asia have just gone through a ‘bad devaluation’ (i.e.: a lower currency which brings about fast money growth, higher inflation, deteriorating trade balances and foreign investor flight). As such, certain countries (India, Vietnam…) are now stuck in the unfortunate position of having to defend their currencies, which is rarely conducive to either economic, or asset price growth.
Read the whole article - not very appetizing for investors in India, mind you.
- Barrons: What Happened to China and India?
. . . the Shanghai index is falling in a momentum driven stampede — and given the absence of significant technical positives, save for any short-term bounces, it is not unreasonable to expect this index to once again approach the 2000 level in the coming weeks.
Using a logarithmically scaled chart, there was a very clear multi-year trendline breakdown in February 2008. The move up from the March lows to the May highs kissed the broken bull market trendline from below in what chart watchers call a “test” of the breakdown. The market tried to erase its breakdown and get back into its old trend but could not do it. Put another way, the bears were tested and they passed.
. . . there is a rather important support area near the 10,000 level from a sizable correction that occurred in 2006. This would also represent, in round numbers, a 50% retracement from the 2007 peak and a psychological level investors tend to respect.
- Asia Times: Vietnam’s hard economic lesson for China
. . . the problems with Vietnam have only become worse, with the currency in free fall against the US dollar as foreigners are trying to get their investments out as quickly as possible. Averting this would require the authorities to increase interest rates sharply in order to maintain the attraction of the dong, but doing so will only increase bad debts at the local banks and in turn spark a surge in non-performing loans at state-controlled banks.
Between rising imports of commodities and oil, as well as burgeoning investment needs that demand to be addressed, these countries have been running current account deficits. The funding for the deficit has come from foreign investments and remittances from nationals working abroad. Given the obvious parallels to the Vietnam story, it is highly possible that both countries will face rising outflows from foreigners as well as slowing remittances from their own nationals working abroad in the near future.
This applies to India as well. NRI remittances are as large (or larger) than FDI & FII inflows.
Related Posts: