Asset price bubbles in EMs getting bigger: Jim Walker

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Jim Walker, Managing Director of Asianomics, while speaking to CNBC-TV18, expresses concern over the asset price bubbles in emerging markets (EMs) getting bigger. The cause of which, according to him, is more participation on corrections. He feels that the rally in global asset classes can continue on liquidity. However, he adds, "Developed equities may not sell off sharply."

On the dollar scenario, he says that there is huge negative sentiment against it. "The consensus is that the dollar is headed lower."

Walker is not very comfortable with the weak dollar carry trade and says that he is not sure about how long the weak dollar carry trade will continue.

He expects the first rate tightening in India to happen in the next three months.

Here is a verbatim transcript of the exclusive interview with Jim Walker on CNBC-TV18. Also watch the accompanying video.

Q: Let us start with the dollar and where is the dollar headed?

A: There is a tremendous consensus that the dollar is headed weaker. In fact I would say there is 100% consensus and we all know what happens when we get 100% consensuses. They tend to go in opposite direction. But at the moment there is a huge negative sentiment against the dollar, against what the US is doing in terms of printing money and spending money. It is difficult to see what the trigger is going to be to make it turn unless we begin to see much weaker economic numbers again and people start to take fright at the risks that they have already taken in places like emerging markets and in commodities and start going home to the US dollar.

That is likely over the next three-months but it is hard to position when that is exactly going to take place.

Q: There is one view which is gaining currency globally. The Fed is increasingly talking about holding low interest rates for an extended period of time. There is no threat to the weak dollar trade, which is very crowded at this point in time. Do you agree with that assessment because that seems to be the genesis of the kind of liquidity which is sloshing around in emerging market equities and commodities?

A: I agree with what you have described as the being the main generator of this negative dollar sentiment. But I am baffled by it because UK has zero interest rates and Japan has zero interest rates and euro is at 1% interest rates. Around the rest of the world there are some places significantly higher but they are significantly riskier. But the main currencies that have benefited from this dollar weakness - there is no reason to be positive about them either.

Why anybody in the right mind would be long Sterling relative to the dollar when the British government has much more in the way of budget deficit problem, has interest rates are exactly at the same level as the US and a much more poorer prospect of getting over the debt position that they have got themselves into. It beats me but the Sterling has strengthened this year.

I am afraid that at some point people are going to start questioning themselves about where they are putting their money and why they are putting their money there. And at that point they will come back into the dollar more than likely.

Q: What is more likely way that this will proceed from here - that the dollar falls a bit more and then there is a huge rebound something like what we saw in the crude market or are these the levels we generally going to live with the dollar for next year as well?

A: It going to be volatile. This is the real danger over there. There are two elements of danger that are on the horizon. Either there is a sharp rebound, which I would tend to believe is going to be the case purely because I don't think the global economy is recovering very well and people are going to get scared again, or there is going to be a very sharp fall in the dollar, which would be much worse because if that were to take place then it would scare the living daylights of everybody that has investments in markets around the world. We would see a sell-off in the dollar and a sell-off in all other assets as people panic about where the dollar is going to go.

Of course at that point what you would really want to be in is what the Reserve Bank of India has decided as good bet and that is gold.

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