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Asset price bubbles in EMs getting bigger: Jim Walker

Published on Fri, Nov 13, 2009 at 10:54 | Source : CNBC-TV18

Updated at Mon, Nov 16, 2009 at 09:39

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Jim Walker, Managing Director, Asianomics

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Q: Is it possible though that things continue like they have for the last six-months for another six to nine-months - a nice, cozy liquidity spiral, keeps taking asset prices higher, crude inches to USD 100 per barrel, all markets head to old highs and nothing gets pricked for another 2-3 quarters?

A: It can happen as Lord John Maynard Keynes said that markets can remain illogical for longer than most people can remain solvent. That is probably true that there is no logic to these market moves whatsoever. They are all based on liquidity as far as I can see and eventually they will reverse pretty dramatically. But whether they reverse next week or next month or in three to six months' times is impossible to judge.

But the prospect of this gentle slide continuing and effectively markets who have pegged themselves to US dollar, suffering further and further liquidity insertions, which push their asset prices higher, which always seem good at that time but eventually causes them to take very drastic action to try and stop the capital inflows, that prospect is growing.

It's going to be extremely bad news for emerging markets if that is what happens because all I can see happening just now is that bubbles are getting bigger in emerging markets. What we are faced with is a prospect of increased volatile as a direct result of this weakening dollar. It is great while people are participating and real asset and prices are going up.

Of course when the reverse happens, instead of getting a 5 or 10%, it's more likely of 50-60% and that is eventually what scares people away from a structural overweight of emerging markets and that is the danger that is lying on the horizon. We are being guided too much by all of the perception of dollar weakness and all the liquidity around the world that is searching for positive home and where they see that positive at the moment is emerging markets who cannot handle money inflows.

Q: In the near-term what do you think is going to see the most frenetic upmove - emerging market equities, commodities or could it be developed market equities as well?

A: I don't think its going to be the developed market equities but if its emerging market equities, then it is also commodities. The two are just completely correlated at the moment. As somebody pointed out to me recently, if you map the Australian dollar and US dollar exchange rate on the top of the Brazilian Bovespa, you have got a 100% correlation this year.

There is absolutely no reason that should be the case but that is exactly what is happening. People were taking a bet when emerging markets led by the myth that China keep growing faster than anyone else in the world and that translating into a bet on commodities and commodity currencies.

Everything in that universe is correlated. Unfortunately when that correlation breaks down and a reversal takes place, they will all sell-off. So at the moment what we can have is a melt up in emerging markets and commodities but the laggard being developed country equities. When the reversal takes place where you want to be is in developed country equities because they won't sell-off as badly.

Q: Where do you stand on interest rates - does it look like it will be a longer wait before a tightening cycle ensues in both the western world and even in India - longer than you though earlier?

A: It is already longer than I thought in India. The last time I was in Delhi and spoke with you, I was looking for an interest rate move in October. Of course that did not happen although the RBI did begin some tightening processes. I still think that the first real tightening move in India is still pretty soon within the next three-months and that would be true generally of emerging markets for example China is sending very clear signals that whether or not its interest rates that move, it is certainly going to be tightening restriction on things like property and asset prices generally over the coming months and potentially even weeks.

But as far as the big central banks are concerned in the developed countries, our view has been very straight forward, the private sector is going to overwhelm all of the efforts of the central banks and the public sector to pump up liquidity and pump up activity. There is a generalized credit contraction coming because people in the private sector were overleveraged and wanted to decrease that leverage.

The more the government spends the harder they will deleverage. They realize is that future public speeding in public deficits basically just means more private sector debt for them in form of taxation.

So you get an elongated process of the private sector deleveraging - pushing growth down, pushing activity down and that means interest rates because of what central banks believe at the moment are going to stay lower for much longer than they really should.

My view is that interest rates should go up from here, so that we have a normalized capital cycle and not misplaced capital. But try telling that to Ben Bernanke.