On the Underlying Cause of the Emerging Markets Turmoil and the Blue Zones of Longevity – Part II!

From: aditya rana
Date: Sat, Sep 14, 2013 at 1:58 PM
Subject: On the Underlying Cause of the Emerging Markets Turmoil and the Blue Zones of Longevity – Part II!

Hi!,

With markets recovering some of their poise over the last week, following expectations that the Fed will resort to only a "taper-lite" program next week and the emergence of a diplomatic solution to the Syrian situation, it is helpful to analyse the root cause behind the large capital inflows into emerging markets in recent years and the implications going forward. A perspicacious note (http://www.project-syndicate.org/commentary/how-the-euro-is-sinking-the-emerging-economies-by-daniel-gros) by Daniel Gros (Director of the Centre for European Policy Studies), provides helpful insight into this critical issue facing global markets today:

-As the Fed embarked on yet another round of "quantitative easing" a few years ago, it attracted considerable criticism from emerging market leaders who complained that the Fed’s policy was a disguised attempt to devalue the dollar, and that the ultra-easy monetary conditions in the U.S. would result in the flow of "hot money" into their markets, thus driving up their exchange rates and pushing their external accounts into a deficit; and in the process exposing them to a sudden reversal of capital flows when U.S. monetary policy changed course.

-At first sight this is a plausible argument, particularly given that the mere hint of a slowing down of bond purchases by the Fed has led to capital flight from emerging markets.

-However, the real culprit behind the capital inflows into emerging markets, and the deterioration in their external accounts, in recent years has been the Eurozone.

-Quantitative easing in the U.S. cannot have been the main cause of the deterioration in EM external accounts as its current account balance has not changed significantly in recent years. The economic recovery in the U.S. has been accompanied by an increase in both exports and imports, and the net impact on EM and the rest of the world has been roughly neutral.

-By contrast, austerity policies in Europe have led to a significant swing in its current account – from a deficit of almost $100BN in 2008 to a surplus of $300 BN this year – a change of $400BN.

-This followed from the stop of capital flows into southern Europe countries, forcing them to convert their current account balance from a deficit of $300BN five years ago to a small surplus today. And with northern Europe not increasing their demand and hence maintaining their surplus, Europe now has the world’s largest current account surplus (even larger than China).

-The extraordinary swing of $400BN in the eurozone’s current account surplus did not result from a weaker Euro, which has remained strong, but a collapse in domestic demand resulting in practically stagnant imports over the last five years.

-The cause of the current turmoil in world markets is really European austerity – and the real cause behind the shifting of EM current accounts into deficits (with the exception of China). While Bernanke’s tapering might have triggered the current instability, the underlying vulnerability of EM has been Europe.

-With the EM world now being forced to adopt austerity policies, these countries are likely to soon start running current account surpluses (like Europe today), begetting the question – which country will be willing to run the offsetting deficit?

-With Europe and China being committed to maintaining surpluses, the open question is whether the U.S. will be willing to resume its role as the consumer of last resort – failing which, any recovery (if it happens) promises to be unbalanced.

A deeply insightful argument, and as in numerous occasions in recent years, drives home the importance of keeping the focus on the underlying fundamentals and their long-term trends, rather than getting lost in the hurly-burly of market gyrations. On the point of forthcoming austerity in emerging markets, I suspect (and hope!) that after an initial period of austerity to try and stabilize capital flows, EM countries will resort to currency devaluation and domestic reflation to bring about growth and current account surpluses rather than go through the painful process of internal devaluation -an option which is not (unfortunately) available for southern European countries.

Which leaves open the big question? – which country’s current account will accommodate the surplus – my guess would be mainly Europe – i.e. with the ECB taking on the baton from the Fed in terms of unconventional monetary policy – in the form of LTRO (please refer to last week’s newsletter for further details on this topic). This is likely to spur further recovery in the eurozone by boosting demand in northern Europe and thereby reducing the eurozone’s surplus. The U.S. could also play a part with a reversal of the consumer deleveraging process over the last five years.

In terms of investment implications, EM stocks provide the best prospects for medium-to-long term return as the latest forecasts from GMO indicate (6.5% per annum over 7-years). Select US$ credit bonds, particularly in surplus countries (i.e. China) would also provide the potential for superior return.

-As the chart below from BAML illustrates, EM stock markets are poised to enter into another period of outperformance compared to developed markets following the recent capitulation out of EM assets.

The Blue Zones of Longevity-Part II:

This is the second part of the summary of the recent book: "Blue Zones: Lessons for Living Longer From the People Who’ve Lived the Longest" written by Dan Buettner, an internationally recognized explorer and educator. The Blue Zones are five specific towns or regions around the world, where people are up to three times more likely to live to be at least 100 years old, while remaining active, with a significantly lower rate of disease. The Blue Zones include the Barbagia region of Sardinia in Italy, Okinawa in Japan, the community of Loma Linda in California, the Nicoya Peninsula in Costa Rica, and the Greek island of Ikaria.

For more than a millennium, Okinawa has had a reputation for nurturing longevity – early Chinese expeditions had referred to these islands as the land of the immortals.

-The Okinawan people enjoy what maybe the highest life expectancy (78 for men and 86 years for women based on 2000 figures) , the most years of disability-free and healthy life and one of the highest centenarian ratios in the world (about 5 per 10,000). In some islands (Ie Shima) there are an extraordinary 8 people over 100 amongst a population of 5,3000

-They suffer from much lower rates of heart disease ( one-fifth), breast and prostate cancer (one-fourth) and dementia (one-third) than Americans.

-However, the Okinawan culture of longevity is fast disappearing with the encroaching of American fast food culture, which has threatened the traditional lifestyle. Okinawa now has Japan’s highest rate of obesity, and among middle-aged men, one of the highest rates of premature death from heart disease.

-The Okinawan centenarians traditionally ate meat only during festive occasions, and typically ate sweet potatoes for breakfast, lunch and dinner (which came to Okinawa from China in 1605), providing 80% of their daily caloric intake. Sweet potatoes are an exceptionally high source of vitamin C, fibre, beta-carotene and minerals.

-Old Okinawans chant the phrase "Hara hachi bu" (eat until you are 80% full) before every meal and grow vegetables in their gardens (daikon, bitter melon, garlic, onion, peppers, tomato) – and miso soup, some tofu (average of 3 ounces per day) and perhaps some fish. Dinners are very light and eaten at 6pm consisting of vegetables, some rice and perhaps fish soup. The also consume a lot of the herbs mugwort and turmeric.

-Traditional Okinawan have purpose-filled life ("ikigai"), keep active daily by walking and gardening, have close-knit social networks, get lots of sunshine and have a positive attitude towards life and focus on its simple pleasures.

-The words of advice from a healthy and active 102 year old lady who plays the role of a spiritual advisor to the village- "eat your vegetables, have a positive outlook, be kind to people and smile!".

To be continued!

Here’s to eating your veggies, getting some daily sunshine and a dose of Turmeric!

Regards

Aditya

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