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The vicious cycle between the Emerging markets, Trade war and US interest rate

Updated: May 6, 2021

An interview with Yasmin Jonkers and Elliott Danker from Money FM 89.3 on 14 Sep 18

Qn: Kon How, recount your memory of Global Financial Crisis of 2008

In fact there were 3 stages leading to the Lehman crisis.

First, it was triggered by the US housing subprime mortgage crisis because of a flawed financial modelling – where retailer borrowed heavily and when interest rate started to rise, things started to cracked, this lead to Wall Street meltdown and then to the banking crisis, with Lehman crisis.

Qn: How was it different from Asia Financial Crisis in 1997 in terms of market impact?

Asia crisis was a top-down issue whereas Lehman Crisis was a bottom-up issue. But both started with greed or “a fear of losing out” in a super trend, leading to heavy investing with too much borrowed money.

In Lehman crisis, it was the retail investors that went into housing borrowing. Whereas in Asia crisis, it was the countries that went into borrowing for the expansion of their economies.

Then, I remember there was a competitive spirit in trying to catch-up with each other on this unprecedented growth in Asia. Of course, if one country get oversight in chasing after this trend, there will always be temptation of over-leveraging.

Personally, I felt the contagion effect that spread across Asia then was much faster and more intense than the Lehman crisis.

Qn: Walk us through some of the lessons investors can take away from the crisis.

Very good question, especially in this uncertain markets with trade war and EM crisis. There are 4 points:

1) Do not chase after a euphoric trend

2) Even if we fall into temptation and got into it, avoid over leveraged or over borrowed to fund our investment

3) Always be prepared for higher interest rate. A stress test of 4%, it is not a stress test, it should be the norm. Ask ourselves, if it is at 5% or even 6%, will we be alright?

4) Always have good reserved or saving set aside

Qn: Anything on charts we can look at to compare between 2008 and 2018? ie. was there a bull run/similar patterns/warning signs?

That is another very good technical question. In market psychology behaviour, we always believe there must be a fundamental reason for every “significant drop”, even if we could not find any news to support it.

Before the crash of 2008, there were some early sign in term of the price behaviour, between Sep 07 and Dec 07, Dow Jones declined quite sharply -18% within a 3 month period, that’s a “significant drop”. Then, it stagnated for a little while. And when investors started to understand more about the implication of the US subprime, market crash began.

Beginning of this year, there were an unusual market behaviour as well. Within 11 business day, between 26 Jan and 09 Feb, Dow Jones dipped a total of 3,256 or -12%, I will classified that as a “significant drop”. Since then, market has been quite rangy and is still trading below the 26 Jan high.

Qn: what will be the warnings signs for the next crisis? Yield curves, rates, etc?

We have to keep a very close watch between this 3 situations

1) Emerging markets and it's development

2) Ongoing trade war and

3) US interest rate.

There is a vicious cycle between this three.

(1) Firstly, the Emerging markets are already very heavy into borrowings

(2) With the trade war, business cost will be higher, this cost will past down to the end consumers which may lead to higher inflation.

(3) With a higher inflation, central banks will likely to increase the interest rate.

(1) Then, it goes back to the first situation - the Emerging markets. With higher interest rates and with the weakening of the emerging market currencies, it will definitely add more pressure to the current situation.

Yes, currently the 10 years yield is testing the 3% mark for the 6th time this year.

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