| The natives had never dreamt of such riches, and they had no difficulty believing that the cargo had been sent by the gods. This new religion, with its belief that the gods would send the faithful unlimited quantities of western merchandise, was known as the Cargo cult. |
| Alas, World War II came to an end, and one sad day the ships and aircraft disappeared over the horizon. Since then, the natives of the islands have waited in vain for their gods to return with fresh cargo. |
| In the last couple of years, the natives of the emerging markets have seen a new type of cargo cult""the arrival of shiploads of foreign investors bearing bagfuls of dollars, borne to their shores on a rising tide of liquidity. But, like the cargo ships, will the ships bearing dollars stop coming? |
| That will depend on global liquidity. Last June, Dr Ed Yardeni, who was at the time Chief Investment Strategist for the Prudential Equity group, wrote a paper, "Super Money and Global Booms", in which he said that Super Money, which is the sum of the US monetary base and the international reserves held by foreign central banks, is a great indicator of global liquidity. And it's global liquidity that drives what he called Global Synchronised Booms and Busts. |
| So which way is global liquidity heading? The countries with the largest forex reserves are Japan, China, India, Korea, Taiwan, Hong Kong, Singapore and Russia. In the last quarter of 2004, the forex reserves of Japan and the other countries excluding China rose a huge $100.5 billion. Chinese reserves went up by $95.4 billion. |
| At the same time, the growth in US broad money, which was 4.8 per cent in September, rose to 6.2 per cent in December. The net result of all this Super Money sloshing around was a tsunami of liquidity that hit the shores of emerging markets and raised their stocks sky-high last December. |
| Now consider what happened to Super Money in 2005. US broad money growth fell to 5.9 per cent in January and to 5.5 per cent in February, indicating substantial tightening. Japan's reserves declined by $3.9 billion between December and February. The forex reserves of the other countries, excluding China, increased by $23.6 billion in these two months. |
| In other words, Japan plus the other countries excluding China saw an increase of just $19.7 billion in the first two months of 2005. (The latest available figures for Chinese reserves are for December 2004.) |
| Even if we assume that China's reserves grew at the same pace as in the previous quarter, a wildly optimistic assumption, the growth of total reserves will be much lower than in September-December. It sure looks very much like a Global Synchronised Bust in the making. |
| To hammer the point home, consider that international reserves of all these countries, including Japan and China, rose by a massive $250 billion between January and March 2004. Growth decelerated sharply to $30 billion in the second quarter, a period when emerging markets tottered after the first Fed rate hike. In short, it's pretty clear that global liquidity and the performance of emerging markets are very closely related. |
| Does it mean that, with the current bout of tightening, the tide is ebbing for emerging markets? There's one unlikely source of comfort""US GDP growth has been slowing down, from an annualised 4.8 per cent in the second quarter of 2004 to 4.0 per cent in Q3, to 3.8 per cent in Q4. And if growth slows, where's the need to tighten monetary policy? |
| With anaemic growth in Euroland and the recent dip in industrial production in Japan, a soft landing in the US could very well mean that there'll be more liquidity left over for speculation. If that happens, the ships bearing dollars could once again come calling. |
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