The Herald Bulletin

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January 31, 2014

'Big Joe' Clark: Changing world markets may impact investors' appetites

The process of eating appears rather simple when you break it down to those three steps: cooking, eating, and digesting.

Most of us would choose to overlook the digestion portion of the process but it’s a critical component. In fact, it’s the most critical, as that is where the nutrients come from that fuel your body.

Growing an economy is a little more complex, but there are still critical cycles. The better we understand the cycles, the better we can determine what we expect to have happen in the future.

The emerging markets — think Brazil, India, Russia and China — made up less than 30 percent of the world’s GDP in the 1990’s. The Wall Street Journal reported that they represent more than 50 percent of the world’s GDP in most recent years. That is a mind boggling growth rate but where did all the “nutrition” come from to help them grow so rapidly? The answer is a cycle that allowed for massive inflows of capital in the form of leverage or borrowing money.

The emerging markets were built on debt and the question for the world economy will be whether they can survive based on what they built because the lending has run its course. At least for now.

The past economic cycle, both domestic and abroad, was based on having access to cash. The world grew, the economies got stronger and prices rose until the global financial crisis in 2008. The merry-go-round came to a sudden stop. Now, access to credit isn’t as easy for the emerging market countries. China has a huge banking problem, wage-inflation is out of control and there are more questions than answers with the second-largest economy in the world. India is in financial turmoil, and Russia’s hosting of the upcoming Olympics presents security risks that concern the world.

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