RISE OF EMERGING MARKETS LIKE INDIA PLAY GLOBAL.
Present situation is such where almost all the asset classes will be under pressure or are under pressure and the main reason for that is the reduction in liquidity. What people do not realize is that the Japanese Central Bank has withdrawn something like few billions worth of excess liquidity from Japanese banks. Now that money was not put to work in Japan because there was no room for it, a lot of that went abroad into emerging markets. There was a so-called carry trade and it is not that suddenly people are averse to risk. It is really that liquidity has been drawn out of the market and that is affecting emerging markets.
Hedge funds are in a fortunate position, they can go both ways but it is a very difficult period here because there is a certain sequence and one does not quite know what the sequence is. Clearly there is a making of a slow down due to the softness of the housing market, but it has not yet had its effect. In the meantime, we have cost inflation pressures so you are caught in a double whammy, that the economy is slowing down or expected to slow down but you still have to fight inflation.
There is a tremendous amount of money pouring into those markets and that is where the liquidity squeeze is most felt, so Turkey has been a particularly vulnerable market in this correction. There are also some political problems, although economically Turkey is very dynamic and the longer term is very attractive. But there are a lot of problems with accession to the European Union, in addition to the liquidity problem.
Emerging markets have been very good investments and will be again but they are more subject to volatility and swings and they were overdone.
It really has been sort of a parabolic rise and you know that it is something that cannot last very long and one also does not know how far it goes and the last bit is always the best bit. Commodities are in for a period of correction now.
People have got into hedge funds that do not normally engage in commodities. Commodities have become an asset class and people have invested in them. As an asset class it is now vulnerable and of course the biggest asset class that is vulnerable is real estate. We know that there is a slowdown in the residential houses in the US and it also is a worldwide phenomenon.
The moment we reach the peak of interest rates, the dollar is liable to come under pressure, which is in some ways a good thing because you have a fundamental imbalance that needs to be corrected. However, exchange rate movements will have to be quite extreme to correct those things by themselves.
Misconceptions play a very important role in shaping history.
The war on terror actually is a forced metaphor that people have accepted as the only way or the natural way to deal with terrorism. And yet it is the wrong way to deal with terrorism because a war by its very nature creates innocent victims and when you wage war on terrorists who keep themselves hidden, it is more likely that you hit the wrong people and if you wage war on abstraction like the war on terror, there is no limit to what you can do.
That is an unfortunate side effect because Dubai really is our ally and it would not have changed anything in the port security. Now there was a lot of criticism that we do not have enough security. So it was a wonderful opportunity for people to oppose the administration.
United Nations is on the verge of shutting down because we are not willing to pay our share of fees at the end of this month.
Basically the rise of China and India is a very positive force for the world economy. That is why the world economy is so strong, because those are large new markets that are opening up. It ought to be a positive development provided U.S weren’t consuming a lot more and saving a lot less than they ought to.
Federal Reserve is trying to be far sighted. Look around the curve and anticipate the decline in consumption that will eventually come from the slowdown in housing and not raise interest rates.
There will be an overshoot on the interest rates and that is one of the factors that is affecting the market. In the mean time if one does not raise interest rate then maybe it will not come. Maybe housing re-ignites.