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Wednesday, February 5, 2014

Comments on two Bonddad posts


New Deal Democrat - the oil choke collar is gone. Gas prices used to choke off the US economy whenever it tried to pick up. Now? Not anymore.

By the way, that sounds vaguely like a Jim Rogers bear/bull cycle datapoint. In a DM bull, commodity prices don't manage to choke off growth, and DM economies manage to produce goods for cheaper because they don't have to deal with inflation in raw materials prices.

How would that happen? Well, you can kill off some commodity demand in EMs by making the prices of commodities skyrocket in the local EM currencies - which is what happens when EM currencies collapse. Kill off some demand and the price (in USD) goes down.

Reducing the change in demand y-o-y by reducing EM GDP growth to slower than commodity supply growth would reduce prices too.

And maybe in some cases the EMs continue to produce commodities, or even try to increase production because it means more and more dollars that they can bring in to their economies. So that'll boost supply. Heck, some countries will probably begin to subsidize commodity production, since it's (or at least seems to me to be) an easy way to attack a current account deficit.

It all seems to support my secular DM bull/EM bear thesis.

And for story #2,

Bonddad - emerging markets all have inflation in common. That especially sucks for them, cos the easy way to fight inflation is to jack up interest rates: but in a rising-US-rates world, that just strangles their economies by choking off credit.

Again, that makes the case for a secular EM bear.

Note btw that I don't consider China an "emerging market", as far as thinking about their place in these scenarios. I think they're more like 1990s Korea, frankly, and I think Korea left the EM world decades ago.

The EM/DM semantic construct is too arbitrary and not responsive enough to differences in the details. A heuristic is not reality.


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