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  • Whitney Baker on Emerging Market Outlook

Whitney Baker on Emerging Market Outlook

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Bloomberg Jul 25 11:40 · 5329 Views

Whitney Baker, Totem Macro, Founder & CIO speaks with Romaine Bostick and Scarlet Fu about the emerging market outlook.

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Transcript

  • 00:00 There's been a lot of talk about how there really is no other place for investors to go other
  • 00:04 than the US.
  • 00:05 Do you buy that?
  • 00:07 That's been a story for 15 years and obviously post COVID as well.
  • 00:12 I think it,
  • 00:12 it, it,
  • 00:14 it sort of behooves us to zoom out a little bit at what's driven that.
  • 00:17 And really there's been two things both for the 15 year view of this whole cycle and also post COVID.
  • 00:23 Those two things were more money printing in the US and elsewhere
  • 00:27 and basically better economic growth and better earnings.
  • 00:30 And some of that earnings was obviously the secular nature, a secular growth over cyclical growth that tech benefits from in this cycle.
  • 00:37 But some of it is also just the, the, the better job basically fixing the banks and and kind of getting the economy off the ground with the other
  • 00:44 global economy couldn't.
  • 00:45 And so the consequence of that is a lot of money printing is driven
  • 00:50 asset prices up.
  • 00:51 Nominal GDP is kind of stagnated down here, but been better in the US than elsewhere.
  • 00:56 And
  • 00:56 you've got this huge financialization, essentially asset inflation instead of
  • 01:01 broad nominal growth because the money is feeding into that Channel, whereas credit has been basically deleveraging this whole time.
  • 01:07 And that just went into turbo drive
  • 01:09 post COVID.
  • 01:10 And both those things are ending basically.
  • 01:13 Why are they ending?
  • 01:15 OK, so you have to zoom out a little bit.
  • 01:17 Obviously, we know that the US, if you think about the big picture, it's the world's biggest debtor.
  • 01:22 Now
  • 01:22 that debtor position, what I mean is they run perpetual current account deficits.
  • 01:26 These are the rest of the world and also
  • 01:30 on the fiscal side is a big contributing factor to that.
  • 01:32 What that's meant is that, you know, it's not a news story that Asia is essentially financed the US all of this time.
  • 01:38 But just for context, the US debt position versus the rest of the world was about 10%
  • 01:44 deficit or total debt stock, net debt stock in
  • 01:47 2007.
  • 01:49 Over the course of this cycle of all of this Asian buying of US assets,
  • 01:53 really sucking, essentially US has been like a magnet sucking in every dollar of cross-border capital this cycle.
  • 01:58 And so now the US owes the rest, the rest of the world, about 70% of GDP, which is, you know, well above what most emerging markets reach.
  • 02:05 And that's sort of our area of expertise,
  • 02:08 you know, at the top of their balance of payments upswings.
  • 02:10 So the reason it's ending is it's not the reserve currency argument.
  • 02:14 You know, the the focus is entirely in the wrong place.
  • 02:17 There hasn't been
  • 02:18 reserve currency bid for US assets since 2015.
  • 02:22 What's happened for the last 10 years is that Japanese banks and Asian real money, including Taiwanese life insurers, Korean pensions, Canadian real money,
  • 02:30 those investors have channelled all of their assets into the US and create essentially financed this,
  • 02:37 this cycle because it was the best place to be in that environment.
  • 02:40 And so they're now essentially balance sheet constrained to, to keep doing that.
  • 02:44 So your thesis is that American exceptionalism is ending really
  • 02:48 goes to this idea that there's a big regime change.
  • 02:50 Has it ended already or it's going to end?
  • 02:53 I, I, I want to get an understanding of how long this transition period is.
  • 02:56 I think that we're in recession already.
  • 02:59 I think that in the USI think that it's a shallow recession
  • 03:02 because it's basically a little bit of consumer services, business services
  • 03:06 coming down and offsetting that this structural investment drive and things that you guys,
  • 03:11 we've all talked about, you know, climate change, militarization,
  • 03:14 re onshoring, all that stuff.
  • 03:16 Meanwhile, the rest of the world just had a big recession because when hikes, rate hikes happened post COVID, they immediately flowed through to the rest of the world because there's floating rate debt there and they just didn't flow through in the US until very recently.
  • 03:29 So the US is basically going into a shallow recession.
  • 03:31 So that relative growth supremacy is going elsewhere.
  • 03:35 The nature of that growth will be much more cyclical than structural.
  • 03:39 And then obviously I like in terms of preferring tech over other,
  • 03:43 other sectors and drivers.
  • 03:44 And then really the the main issue is that the money printing is now ending for
  • 03:50 a variety of different technical reasons for the next six months or so.
  • 03:53 There's really no money printing.
  • 03:54 And that has been the thing in the last year through April that's really driven the US stockings.
  • 04:00 I am curious that when you look at
  • 04:01 economic conditions in Asia, particularly given some of the policy decisions that they've made over there here,
  • 04:07 are we looking at a potential upswing?
  • 04:09 Because I think a lot of people were certainly banking on that with China and even some of the other
  • 04:12 countries in in North Asia, this idea that there was going to be this upswing, this valuation that didn't materialize, at least not to the strength that some people thought earlier this year.
  • 04:20 Is that
  • 04:20 kind of
  • 04:21 a pipe dream?
  • 04:22 Do you find any sort of fundamentals to support that?
  • 04:24 Yeah.
  • 04:24 So no, I don't, I don't think that's going to happen.
  • 04:27 N Asia and the US have been the two engines of economic strength this cycle.
  • 04:32 The only places in the world that have actually leveraged up for the last 15 years, you know, Europe and the rest of the emerging world, they've all been trying to get their balance sheets in shape.
  • 04:40 And so the issue you have is because of all of this money printing in Asia, low rates, a lot of that channeled into US assets, sure.
  • 04:48 But on the other hand, a lot of it got channeled into domestic debt and property bubbles.
  • 04:52 And that's what you're seeing really across the board.
  • 04:54 But particularly with China,
  • 04:56 they're prioritizing their currencies over easing to deal with that.
  • 05:00 And so you just have this balance sheet challenge just real quickly, we're almost out of time, but is there any pockets of EM right now that you do find attractive relative to the US?
  • 05:08 Yeah, absolutely.
  • 05:09 I mean,
  • 05:10 EM is the opposite side of this story that the way that BRICS was the sort of leadership group of the last bubble,
  • 05:17 Fang has been the leadership group of this bubble.
  • 05:19 And all of this basically argues for a lot of dollar
  • 05:23 sort of a dollar unwind, right?
  • 05:24 The currency is very strong
  • 05:26 and all of these flows have come in and supported US assets.
  • 05:29 These financials in Asia are going to have problems holding those assets because of a combination of things, but mostly because they're also doing their own QT.
  • 05:37 So there's money contraction basically across the board and there's carry on wine now in the US because U.S.
  • 05:43 dollar has become a carry trade.
  • 05:45 So that unwinds with Fed cuts and it goes elsewhere mostly into economies that are very cheap, with
  • 05:51 markets that are cheap, with economies that are troughing out and rebounding.
  • 05:54 That stimulus will help them get off the ground and so it will further support their assets.