Tags: Poland | GDP | US | currency

Throwing the Baby Out With the Bathwater

By    |   Wednesday, 05 Feb 2014 07:10 AM

That is the best way I can describe what is gripping the world these days.

Stock markets slid in January, but are now free falling in February. We may see a few reversals, but in general the markets are primed to decline.

The fear gripping the markets is the apparent economic challenges in several countries around the globe and how that can destabilize the world growth. While the fears are certainly overblown, what frustrates me is that the economic challenges in these countries are not new and certainly were not developed in late 2013 or now.

The Fragile Five — Brazil, India, Indonesia, Turkey and South Africa — have been facing significant headwinds since the first mention of taper by the Federal Reserve last year. They were individually socked in the gut most of last year, including steady declines in their stock markets and currency rates. Granted they are in weak economic states and deserved to be punished, but for the world to react in such a fashion is plain nonsense.

I have been in Europe since last week, so I will give you some examples of what is occurring here. We have seen a dramatic decline in the Hungarian forint, Polish zloty and Turkish lira in the last two weeks. All these currencies are smaller currencies and do not command a global presence, but that does not mean that they are not internally strong.

The Polish zloty has dropped precipitously and lost more than 5 percent in the past week. Yet the fundamentals of the economy are very strong. In the top five growing economies in Europe, stable inflation outlook, strong balance of payments and a vibrant and growing workforce are the hallmarks of Poland. Did you know that Poland exports 26 percent of its output to Germany and an additional 20 percent to the United Kingdom, France and Italy combined? So unless this is a veiled attack on the euro, I am not sure I would see a decline in the zloty worthy of weak fundamentals.

Hungary has similar traits and it exports 24 percent to Germany and an additional 16 percent to France and Italy. Growing strongly with attractive tax policies to being in Investments, I cannot understand how the currency can be devalued so much in such a short time.

Meanwhile, no one gets to question the fundamentals of the United States and its deficits. GDP growth you say? As I described to you a few months ago, once you change the measurement stick and change the definitions of what constitutes GDP growth, you can assure yourself of at least 2.5 percent every quarter. So now talk to me about GDP growth in the United States. As long as labor participation and wage inflation do not appear in the United States, no amount of massaging the data will convince me of real growth in the United States.

Frankly, I will be buying the Polish zloty against the U.S. dollar as well as the euro to take advantage of such a unique buying opportunity. Poland will come out of this unscathed. I cannot say about the United States in 2014.

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Stock markets slid in January, but are now free falling in February. We may see a few reversals, but in general the markets are primed to decline.
Wednesday, 05 Feb 2014 07:10 AM
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