The Emerging Markets Bubble (or The “BRIC” Bubble) – The Bubble Bubble
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Encouraged by the rise of China and India in the past decade, investors and economic commentators have eagerly looked toward other emerging market nations in hopes of finding “The Next China” – or at least the next country to supply the raw materials that China needs for its construction-driven growth boom and bubble (which entails the building of empty cities to create economic growth). Furthermore, since the 2008 Global Financial Crisis, investors have sought to invest in emerging markets as a way of diversifying away from investments in the heavily-indebted and slow-growing American and European economies. Unfortunately, the vast ocean of “hot money” that has poured into emerging markets has created a massive economic bubble throughout nearly the entire emerging world, including overheating economies and property bubbles everywhere from Brazil to Indonesia to Turkey. Ballooning asset prices and easy money has led to “luxury fever” as emerging market nations copy the spendthrift ways that contributed to the West’s downfall just a few years earlier. The Emerging Markets Bubble is a derivative of the bubbles in China and commodities and will pop when they inevitably do.
The emerging markets boom started in approximately 2001, when China was admitted to the World Trade Organization (WTO) and Goldman Sach’s Jim O’Neill coined the acronym “BRIC” (Brazil, Russia, India, China) to describe the “Big Four” fast-growing emerging market economies that were expected to surpass the developed G7 economies in size by the 2020s. Each member of the BRIC nations had their own unique and complementary role: China was seen as the primary driver of growth with its rapidly developing manufacturing base, aggressive urbanization rate and extremely ambitious infrastructure development that occurred in the form of “mega-projects.” India became the world’s offshoring and information technology services hot-spot and its booming middle class was seen as a new market for Western products. Natural resource-rich Russia and Brazil’s role was to provide the raw materials needed for China and India’s fast-paced urbanization and development.
As global commodities prices rose to unprecedented heights during the past decade, eventually becoming a bubble in their own right, other resource-rich emerging market nations from Indonesia to South Africa saw a powerful rise in their fortunes as well. BRIC and emerging markets became a popular investment theme in the mid-2000s and became even more popular after the violent Crash of 2008 and Global Financial Crisis shook investor confidence in American and European investments. Central banks in the United States and Japan reacted to the strongly deflationary 2008 meltdown by slashing and holding interest rates at nearly zero percent (a policy known as ZIRP or Zero Interest Rate Policy) and by pursuing an unconventional monetary policy calledquantitative easing (which can be considered a form of “money printing”), driving even more global investment capital into higher-earning investments in rapidly-growing emerging market nations.
Though emerging market economies and assets had slightly deflated during the most acute phase of the Global Financial Crisis in 2008 and early 2009, they quickly rebounded due to the incredibly stimulative monetary policies of global central banks. China’s $586 billion stimulus program , an economic defense measure, led to a sharp surge in economic activity as the country built massive infrastructure “mega projects,” opulent government buildings and scores of entirely empty cities to create economic growth [2, 3, 4].
The combination of stimulative global monetary policies and China’s construction-intensive (and thus natural resource-intensive) economic stimulus program caused commodities prices to roughly double from early-2009 until early-2011:
Soaring commodities prices helped to boost the fortunes of resource-rich emerging market economies and cushioned them from a good portion of the West’s economic suffering. (Note: not all emerging market economies that are currently experiencing bubbles are commodities exporters.)
In 2009 and 2010, emerging market asset bubbles began to strongly reinflate due to globalcarry trades in which investors borrowed capital from deflation-prone countries with low interest rates (like the U.S. and Japan) and deployed it into higher-yielding investments in non-deflation-prone economies such as those in emerging markets . By late-2010, capital flows to emerging markets had risen to $825 billion – a level that exceeded the last peak in 2006-2007, while inflows to Asian economies rose 60% above their prior peak . Dilma Rousseff, the President of Brazil and a trained economist, has frequently decried the large pool of speculative capital that has sought returns in emerging market assets, calling it a “liquidity tsunami” due to its ability to cause inflation, overheating and asset bubbles in emerging market economies . The economic bubbles in Canada and Australia have inflated for similiar reasons (rising commodities prices & carry trades) as the emerging markets bubble.
The U.S. Federal Reserve’s $600 billion Quantitative Easing 2 (QE2) program that began in the fall of 2010 caused commodities prices to surge and resulted in a new wave of fears over emerging market asset bubbles and economic overheating. In early 2011, the Bank of England’s Andrew Haldane warned of emerging market asset bubbles due to capital inflows from advanced economies  and the IMF warned of “signs of overheating” in emerging market economies . By the summer of 2011, emerging market economies were red-hot and The Economist magazine published a “temperature gauge” to show which emerging market economies were most overheated, with Argentina, Brazil, Hong Kong and India at the top of the list . Around the same time, Joachim Fels, a top Morgan Stanley economist, warned that the BRIC nations faced an “elevated risk of credit bubbles and rising defaults”  and BRIC banks began to show the signs of a credit crisis .
Emerging market economies and their equity markets have cooled somewhat since the summer of 2011 due to another flare-up of the Eurozone crisis, the ending of the U.S.’ QE2 program in June 2011, the U.S. debt ceiling debate and credit rating downgrade and China’s ongoing economic slowdown. Despite the slowdown in emerging market economies, their bonds and fixed income assets are still booming (along with their property markets) and attracting massive capital inflows , which is helping to fuel their explosive credit growth . Now that emerging market central banks are pursuing looser monetary policies to boost economic growth (including the possibility of another Chinese stimulus package), it would not be surprising if economic overheating and stock market bubbles reared their ugly heads again in the future.
The tsunami of global “hot money” has created an epidemic of international emerging market property bubbles in hubristic defiance of the lessons that should have been learned from the calamitous American and European real estate crashes. Naive emerging market property investors are most likely justifying their investments with the famous last words, “this time is different!”
(Note: the Emerging Markets Property Bubble is just one part of the “Post-2009 Global Housing Bubble” or “Housing Bubble 2.0” that I have identified. Other regions with major property bubbles are Australia, Canada and Northern & Western Europe. Please click on the links to learn more about this very important global housing bubble.)
Here are charts of just some (but not all) of the emerging market property bubbles:
China’s Property Bubble
Hong Kong’s Property Bubble
Taiwan’s Property Bubble
South Korea’s Property Bubble
India’s Property Bubble
Singapore’s Property Bubble
Malaysia’s Property Bubble
Indonesia’s Property Bubble
The Philippines’ Property Bubble
South Africa’s Property Bubble
Israel’s Property Bubble
Russia’s Property Bubble
Serbia’s Property Bubble
Brazil’s Property Bubble
Argentina’s Property Bubble
Colombia’s Property Bubble
Uruguay’s Property Bubble
Cheap credit and soaring real estate prices have led to rampant “bubble drunk” behavior in emerging market countries. Singapore seems hell-bent on repeating the mistakes  made by Dubai during its mid-2000s bubble as it builds extraordinarily opulent vanity projects such as the Marina Bay Sands, the world’s most expensive standalone resort that looks like a cruise ship (and has a massive pool on top of it) , and an artificial forest comprised of 150-foot tall biometric “supertrees.”  Singapore’s bubble economy is fueled by interest rates that are linked to the U.S.’ ultra-low interest rates, which are far too low for Singapore’s fast-growing and inflation-prone economy . South Korea, whose citizens were among the best savers in world as recently as the late-1990s, now has the lowest savings rate in the OECD as its consumers have been binging on debt and spending so much money that they are beating notoriously profligate Americans at their own game. The average South Korean adult has nearly five credit cards and the country’s household debt burden exceeds that of the U.S. before the Global Financial Crisis [19, 20].
Brazilians have recently been on debt-fueled international shopping spree for luxury-goods that has boosted the fortunes of Florida and New York City  (which is one of the many reasons why our post-2009 economic recovery is actually a “bubblecovery.”) In India, where nearly 95% of the population lives on less than $2 per day, brand-addicted consumers are causing the luxury sector to boom  and Ferrari picked it as the country of choice to unveil its $687,000 FF four-seater . While the West is mired in its worst economic crisis since the Great Depression, the luxury sector has the emerging markets bubble to thank for its exploding sales, including a vigorous start in 2012 . Very few people realize that Europe’s economic situation would be far worse than it already is if it were not for the saving grace of booming luxury goods exports to emerging markets (another “bubblecovery” datapoint). When the emerging markets luxury bubble pops, the severity of Europe’s economic crisis will greatly increase.
Emerging market economies and investment assets are experiencing a bubble of enormous proportions as their investors and consumers make the very same mistakes that the West made just a few short years ago. The Emerging Markets Bubble will pop when the bubbles in China and commodities prices pop and may lead to a crisis like the 1997 Asian financial crisis in the best-case scenario and a global depression in the worst-case, but highly likely scenario. Singapore and Hong Kong, with their finance and real estate-heavy island economies, may experience a similar fate to Iceland and Ireland in the 2008 financial meltdown.
This time isn’t different.