The more I learn about stocks and markets, the more I become a believer that macro economics are taking over and the the major “moves” in the market are driven by them. Also, there is a little value but a lot of valuation. The latter means that rise of the stock market does not make any sense based on true economic conditions. But the valuation, the price measured in dollar, has been increasing.
Today I want to look at the impact of the dollar on the emerging markets. The first graph shows the dollar index from 2011 and the second is the 4 etfs that are emerging markets etf.
Take a look at the following periods. 2011-2014, the dollar index practically moved side ways, so did the emerging markets. From mid 2014-2016 the dollar index went up, the emerging markets followed with a lag but the difference in dollar index is matched in the emerging markets. Then from 2016 to 2018, the dollar index went down with pump at the end of 2017, the emerging markets did exactly the opposite. Finally from 2018 till 2019 the dollar index went up, and the emerging market went down. The conclusion we are trying to draw here is the negative very high correlation between the emerging markets and dollar index.
Keeping with the macro, what is in for the dollar. Well, if the feds are not going to increase the interest rates, if we are not going to decrease the balance sheet, and 2 more ifs, the market does not crash leading to a surge in the dollar or oil prices skyrocket also leading to a surge in dollar demand, then the emerging markets will be on the run from here on.
The first 2 ifs are pretty much done, we know from previous blogs that as long as the national debt is increasing, the interest rate will never never go back to higher normal rate than what we have today. So if 2.5 or even 3 was attainable before the feds reverse course this time, this is it. This is the highest interest rate we are going to see for the future. The same thing with the balance sheet, the feds are practically monetizing government debt and have do to so forever from here on.
In 2008 there was a sharp rise in oil prices right before the crash. Some think that was a straw that broke the camel’s back. But that lead to a shortage in dollars as everyone was looking to convert and store their wealth in a non depreciating asset, that was the dollar then.
So, as you see the game is not about making “money” but rather storing wealth in the right “asset” to keep it from disappearing. That is why people historically resorting to gold and sometimes to actually owning the gold physically. Also people resorted to land or real estate.
What gives an object value is 3 things. 1 – what it cost to make (labor and goods), 2 – what it is able to generate, and 3- what people are willing to pay for it. The latter is the good will part. The second is the economist part and the first is the “existence” part. So, if no one is willing to pay me anything to cut there grass, I probably will not have a land escape business. Or if no one is willing to pay more that $100 for an once of gold and it cost $300 to get it out of the ground, then no one will be a miner.
In the emerging market game then, I am going to add some emerging market stocks slowly and see if I can make some money of them as time goes by. I will have a very tight stop on them in case things started turning around and I was not able to keep track.
Here is a list of emerging market etfs sorted based on cap size https://etfdb.com/etfdb-category/emerging-markets-equities/. I am going to dip into the largest 4, VWO, IEMG, EEM and SCHE. I am also going to add a little bit of silver and gold although I am not a big fan of the concept.