Emerging Markets vs Wall Street

The recent and not so recent turmoil in Emerging Markets (EM) can be considered as normal if one is willing to see the United States as an “exceptional” country. The currencies of Cuba and Venezuela have been languishing along with the Russian ruble that has been under attack for years. The Brazilian real and Argentine peso have done poorly not to mention the poor North Koreans while the Turkish lira has been the most recent victim of sanctions along with the Iranian rial. Even the renminbi has lost value against the dollar due to the trade war that Mr Trump began.

Meanwhile the US dollar continues to remain strong due to the Fed raising interest rates and attracting capital to the US. One must also take into consideration the recovery on Wall Street after the winter correction. The S&P is within striking distance of the January highs and set to go even higher. The question that should be asked is how the US manages to beat down country after country and seemingly come out even stronger.

One reason is the huge amount spent on the American military and ancillary organizations that all together comes to almost one trillion dollars. The American military machine has over 800 bases world-wide, and that influences economics and commerce. Another reason is that the US dollar is the main global reserve currency, which makes it possible for Americans to enjoy a high standard of living at the cost of workers in other countries.  As a result of the dollar being the main reserve currency, a lot of global debt is made in dollars, and this tendency accelerated following ZIRP policies at the Fed.

A factor that is not usually considered is that the US dollar is tremendously overvalued even if the Forex markets are what they are. It is still too soon to short the dollar, but the day of judgement is drawing nigh as US debt piles up. The debt crisis is coming.

Walter Snyder

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