End of easy money will put pressure on Latin American currencies. Time to adjust portfolios?

Analysis: History may repeat itself for Mexico, Peru as Fed eyes exit

By Krista Hughes

MEXICO CITY | Sun Jun 9, 2013 4:18pm EDT

(Reuters) - "Mexico and Peru's popularity among foreign investors means they are among the emerging market economies most exposed to losses when the United States finally moves to take its foot off the monetary accelerator".

"History shows that when U.S. interest rates jump - widely anticipated when the Federal Reserve begins reducing its $85 billion a month bond purchases - new foreign investment in Peruvian and Mexican financial assets drops by almost two-thirds.

In what many see as a dress rehearsal, worries that the Fed might slow buying later this year pushed Mexican 10-year yields up almost 100 basis points in May. The rise was twice the jump in U.S. Treasuries".

"Bonds in Brazil, Colombia and Peru also sold off and major Latin Americancurrencies fell on average 5.5 percent on the mere hint of a limit to the cheap cash that has pushed many emerging markets to record highs.

Latin America has outperformed other emerging markets in attracting foreign investment over the last two years and economists say countries with the highest inflows may see the strongest outflows when the wind turns.

Mexico, with its close ties to the United States, has been the biggest magnet for Latin American portfolio flows since 2009, with foreign ownership of local bonds close to 40 percent. Peru and Chile lead taking all foreign flows into account".

Reuters' analysis of data shows that "a one percentage point rise in U.S. 10-year yields since 1995 is typically followed by a 63 percent drop in net, non-foreign direct investment inflows to Mexico. Taking inflows over the last 12 months, that would be equivalent to a $50 billion fall".

"In Peru, where foreigners own a whopping 57 percent of local currency debt, a comparable rise precedes a 61 percent drop in inflows, while a 40-48 percent fall could be expected in Chile, Colombia and Brazil, which has just dropped a tax on foreign investment in domestic bonds to attract more capital'

Peruvian Finance Minister Luis Castilla downplayed risks to his country from a Fed exit and welcomed the sol's easing from 16-year highs.

"We're a country that has been running fiscal surpluses," he told Reuters. "We are not a country that will need to be tapping markets such as other countries in the region. That gives us some comfort."

"But Peru is also pressured by slower growth in China, undercutting the high commodity prices that have buoyed its economy. The minerals exporter has just posted its first quarterly trade deficit in more than four years and economists are trimming growth forecasts.

To some investors, the sell-off in May was a wake-up call to those who had preached that emerging markets were the new global safe haven amid ongoing weakness in developed economies".

Zhou Xiaochuan Governor of PBOC: China needs to sacrifice short-term economic growth to make structural adjustments.

"China’s slower expansion in the first quarter is “normal” as the world’s second-largest economy sacrifices growth to make structural reforms, People’s Bank of China GovernorZhou Xiaochuan said".

"While a “mild” global slowdown is affecting China, the 7.7 percent gain was “overall normal” compared with the government’s 2013 target of 7.5 percent, Zhou told Bloomberg News outside a meeting of the International Monetary Fund in Washington on April"

“China’s undergoing economic restructuring, which sometimes is not in lockstep with growth,” Zhou said. “We need to sacrifice short-term growth for the purposes of reforms and structural adjustments.”

China’s economy had a stable start in the first quarter and growth was within a reasonable range, Zhou said at the IMF meeting, according to a statement on the PBOC’s website.

In China, “structural adjustment has scored notable achievements,” according to a PBOC statement. "The contribution of service industries to economic growth in the first quarter exceeded that of manufacturing for the first time, it said".

"In his statement to the IMF, Zhou reiterated that changes in China’s financial sector will involve “further interest-rate liberalization, capital account convertibility and exchange rate reform.” While inflation has been “relatively stable,” the government remains on guard due to rising costs for labor and raw materials, pricing reforms and excessive global liquidity, Zhou said".

Source: Bloomberg

Barron's interview to Marc Faber Part II

On present policy makers mistakes.

''They are applying neo-Keynesian theories that call for the government to step in after a recession to boost demand. This might be right in some instances, but I doubt Keynes [British economist John Maynard Keynes] would approve of current policies. Neither would the late economist Milton Friedman, even though Bernanke invoked him to justify his actions. The neo-Keynesians would argue that if the Fed hadn't flooded the system with money, things would have been much worse. That might be true, but they would have been worse for a shorter period of time''.

On how excesses might be corrected.

''At some point, there will be a big reset. Now the rich will be targeted through some kind of wealth tax or significantly higher tax rates. Eventually there will be so much antagonism against well-to-do people that it won't be comfortable.

Also, geopolitical conditions could deteriorate badly in the Middle East and Asia. America's reset toward Asia has alarmed the Chinese, who won't tolerate U.S. interference long term in the region. Then there's the possibility of a Black Swan event. If the S&P 500 drops 20%, the Fed will print more money, so that's not a huge downside risk. But the bond market could collapse, inflation could accelerate, or the Chinese economy could implode. Or we could have a destabilizing political event, or a pandemic''.

On his personal investments.

"'I keep 25% of my assets in equities. I haven't shorted anything yet, although I am tempted to short the S&P or the Russell 2000. I don't own U.S. stocks, but I hold some Asian shares, including Singapore real-estate investment trusts, which I will discuss momentarily. Markets in the Philippines, Indonesia, and Thailand have quadrupled from their postcrisis lows, and aren't attractive any more. But I still hold some shares in these markets with relatively high dividend yields.

I'm not keen on Chinese equities, but if conditions worsen and China prints money like crazy, the currency will weaken and stocks will rise. I own some issues in Hong Kong, but without great enthusiasm. 

I figured the Japanese stock market would go ballistic as soon as the government weakened the yen, and that's what happened. Since the Oct. 15 low, the market is up more than 70% in yen terms and 35% in dollars—before the recent correction, that is. I bought brokers such asNomura [NMR], which has more than doubled in price. The Japanese market is correcting now, and the yen might rebound somewhat. But whereas the U.S. is near a long-term top, Japanese stocks made a generational low in 2012 and won't go below that''.

A closer look to the latest U.S. Job's Report .

Long-Term Jobless: Still a Bleak Picture

By ANNIE LOWREY

"Long-term unemployment remains a very dark shadow in the May jobs report: 4.4 million workers have been out of a job for more than six months. In essence, the job market has normalized for the short-term unemployed. But the longer you have been out of a job, the bleaker the picture gets.

The number of people who report being out of work for less than five weeks has returned to almost the same level as in 2007. But the number of people unemployed 5 to 14 weeks is about 25 percent higher. For those out of a job 15 to 26 weeks, it is 78 percent higher. And the number of long-term jobless, those unemployed for more than 27 weeks, is a whopping 257 percent higher''.

''The long-term unemployed are struggling mightily to get rehired, as confirmed by recent research by Rand Ghayad and William Dickens of the Federal Reserve Bank of Boston. Some economists have theorized that the unusually long spells of unemployment we have seen in the wake of the recession are caused by a “mismatch”: The long-term jobless were in obsolete professions, with obsolete skills, and that is why they are not getting new gigs.

But Mr. Ghayad and Mr. Dickens argue that is not the case. The long-term jobless seem to be having trouble finding work across industries, for instance. Discrimination does seem to be a major factor, though: Employers simply do not want to hire the long-term jobless, as my colleague Catherine Rampell has reported and further research by Mr. Ghayad has shown".

Economix,New York Times 09.06.2013