Tuesday, April 1, 2014

Sheep vs Goat countries part 1

As I noted earlier, since the Federal Reserve began its taper talk last spring, investors have been forced to separate the sheep -- the well-managed emerging economies -- from the goats with their poorly run economies. 

The sheep -- South Korea, Malaysia, Taiwan and the Philippines -- have surpluses in their current accounts (the excess of domestic saving over domestic investment) from 4 percent of GDP to almost 12 percent as of late 2013. They are exporting that difference, which allows them to fund outflows of hot money. The same surpluses mean the sheep haven’t had to raise interest rates to retain investors' funds.

The sheep also have stable currencies against the U.S. dollar, with exchange rates relatively unchanged since 2009. Moderate inflation of less than 4 percent has been the norm in the sheep countries for several years. The stock markets of the sheep economies have also been fairly flat over the last decade, unlike the less-well-run goats, whose equity markets have sunk. In part 2 of this article, I will explain more fully what makes a goat a goat.