Markets are taking out the garbage

As global markets were gripped by the unfolding rout in emerging markets last week, the eye was caught by another story about a “rubbish tsunami” in Bali.

Apparently this tourist mecca’s beaches are drowning in garbage because Bali’s inadequate waste collection is overwhelmed by the amount generated by the tourists, so it gets dumped in the creeks instead and finds its way to the beaches.

Little wonder that the Indonesian rupiah is one of the emerging market currencies under pressure – why would anyone invest where the garbage isn’t collected from a place that depends on tourists swimming at the beach?

In fact, this global sell-off is a very selective one.

The Argentine peso, the Ukrainian hryvnia and the Venezuelan bolivar have all collapsed because of serial mismanagement by the authorities there. The South African rand and the Turkish lira have collapsed because those countries have consistently lived beyond their means.

Commodity currencies like the Australian dollar are under pressure because China is struggling with a credit bubble and corruption and last week's economic data confirmed that, as a result, its growth is slowing faster than expected.

The announcement that the Fed would start tapering quantitative easing this month was the ringing of the bell for the bottom of the US dollar. As the US monetary cycle turns, the world’s reserve currency will strengthen: in other words, it's time for the money to come home.

But it seems money isn’t being pulled out of the Philippines, Sri Lanka or Vietnam, only those places where the risks are high because of incompetence or corruption, or both.

In 2007-08 the global headquarters of incompetence and corruption was the United States as the banking system imploded after years of risk mismanagement and poor regulation.

Money fled from the US into the “growth” markets of the BRICS (Brazil, Russia, India, China, South Africa) and others, but actually investors were just trying to follow Warren Buffett’s Rule No.1: “Never Lose Money”. (Rule No.2 is: “Don’t forget Rule No.1”.)

Investors roam the world looking for safety first, returns if you can get them. If you doubt that, consider the fact that money is now pouring into US and German bonds at less than 2 per cent yield, not to mention gold at zero yield.

The cliché goes that markets hate uncertainty, which is true, but what they really hate most of all is corruption and incompetence and now that the Fed is starting to withdraw the liquidity that has been covering up the incompetence and corruption of US banks for five years, it’s time to be selective.

Which is why the Dow Jones is falling along with the Argentine peso.