Visualizing the Emerging Market Currencies Selloff

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By Jesse Colombo

In contrast to the praise heaped upon emerging markets as their equity markets reached lofty new heights in 2013, many emerging market currencies have started to sell-off sharply since early May.

Emerging markets are one of the main bubble areas that I’ve been warning about for two years (learn more in my emerging markets bubble report), and emerging market equity markets and bonds, aside from those in the soggy BRIC economies, have been soaring since late-2011. I have not been calling for an immediate popping of the emerging markets bubble yet; on the contrary, I wrote a report in April 2012 in which I discussed why ex-BRIC emerging market equities would likely rise sharply as the global “bubblecovery” or bubble-driven economic recovery continued to progress.

Here are the charts of the recent EM currencies selloff:

South African Rand: South African Rand Chart

Turkish Lira:

Turkish Lira Chart

Indian Rupee:

Indian Rupee Chart

Mexican Peso:

Mexican Peso Chart

Brazilian Real:

Brazilian Real Chart

Philippine Peso:

Philippine Peso Chart

Chilean Peso:

Chilean Peso Chart

Thai Baht:

Thai Baht Chart

Recent speculation about the “tapering” or slowing of the Federal Reserve’s current $85 billion per month QE program due to perceived economic strength has been the primary catalyst for the emerging market currency sell-off. Emerging market currencies and commodities have been some of the main beneficiaries of the Fed’s QE programs since the depths of the Great Recession, with at least $2.5 trillion worth of new cash being pumped into the financial system. These QE programs, combined with near-zero interest rates in the U.S. and Japan, have encouraged investors to seek higher returns abroad, which resulted in a “tsunami of liquidity” hitting the shores of emerging market nations, causing their currencies and asset markets to rise sharply.

With talk of the Fed starting to withdraw from its more aggressive QE program, the U.S. Dollar has rallied (as I foresaw in early February), while emerging market currencies and bonds, as well as commodities prices have experienced sharp declines in recent months.

Dollar Chart

Gold prices are down 22% since their October 2012 peak, which has contributed to the decline in the South African Rand (South Africa is a major gold producer).

Gold Chart

The price of Brent crude oil is dropping too:

Brent Crude Oil Chart

Copper prices are also down, which has contributed to the decline in Chile and Peru’s currencies.

Copper Chart

The health of emerging market economies is tied very closely to commodities prices, and the commodities boom/bubble of the past twelve years is one of the main reasons why emerging market economies have been growing so rapidly. If commodities prices continue to drop, as I expect to happen when China’s resource-hungry bubble eventually pops, emerging market economies will get hit very hard. Citi economist, Ed Morse, has recently declared the end of the “commodities supercycle”, saying “China has reached a new phase, less focused on infrastructure and urbanization, both of which are highly commodity intensive.”

$2.94 billion worth of capital has been pulled from emerging market equities in the week ending May 29, according to analysts at Barclays. Kit Juckes, a macroeconomic strategist at Societe Generale, said “As Fed policy reaches the mildest of turning points, emerging market assets are vulnerable across the board, the [South African] rand being the first of what I suspect will be a series of dominoes to fall over.”

Here is a chart of the recent outflows from emerging market equity funds:

Emerging Market Fund Outflows Merrill Lynch Global Investment Strategy, EPFR Global

To make matters worse, Turkey’s formerly high-flying stock market has crashed by nearly 10% today as anti-government riots erupted across the country:

Turkey Stock Crash Chart

Numerous financial tremors have occurred in the past four years, so I’ve learned not to become too alarmed by each one, in the early stages at least. The recent speculation about the Fed tapering its QE program may be premature considering the fact that U.S. economic growth is slowing down, while today’s ISM report showed that manufacturing activity contracted in May for the first time in six months. Investors may soon realize that the Fed will continue its QE program for longer than they had been expecting, which should prevent emerging market currencies and commodities prices from falling into a protracted decline this early into the sluggish economic recovery.

As with all adverse market moves, the emerging markets currencies selloff is certainly something to keep an eye on in case it develops into something greater.



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Is the Social Media Bubble Finally Popping?

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By Jesse Colombo

Since Facebook’s disappointing mid-May IPO and uninspiring first earnings report as a public company, as well as social media gaming developer Zynga’s disastrous earnings report on July 25th that sent shares tanking 40% overnight, the universe of social media stocks has been plunging to new lows as all things “social” are losing their glow.

Take a look at these ugly social media stock charts:

Global X Social Media Index Fund
(a good proxy for the social media sector)

Social Media Index Fund Chart


Facebook stock is down an incredible 50% since its IPO:

Facebook Stock Chart


LinkedIn Stock Chart


Yelp Stock Chart


Zynga Stock Chart

Pandora Media

Pandora Media Stock Chart


Groupon Stock Chart

Angie’s List

Angie's List Stock Chart

Falling social media stock prices are making fools out of wildly optimistic Wall Street stock analysts and are causing billionaire (or former billionaire) social media company founders to lose fortunes, such as Facebook CEO Mark Zuckerberg’s jaw-dropping $9 billion loss and Groupon CEO Andrew Mason’s 75% loss, to name just a few. Facebook’s stunning stock price collapse means that California’s cash-needy state government stands to collect hundreds of millions of dollars less in IPO and capital gains taxes than they had originally expected.

Even more worrisome is the fact that social media company stocks are still quite overvalued, despite their recent “haircuts.” Facebook has a P/E ratio of 69, even though its earnings are expected to grow a “mere” 28.6% next year. LinkedIn carries an astronomical 640 P/E ratio, which is hard to justify even with its 79.7% earnings growth expectation for next year. The rest of the publicly-traded social media sector, from Groupon to Angie’s List to Zynga, do not even have earnings to speak of, making their recent IPOs eerily reminiscent of the Dot-com bubble era stocks that debuted without earnings either. These excessively high social media company valuations are due to hype, plain and simple, and mean that these stocks can fall much further as the air finally comes out of the social media bubble.

Social media companies’ stock prices are a matter of concern for all people, not just investors, because the social media bubble has played a very important role in the U.S.’ post-2009 “bubblecovery” or bubble-driven economic recovery. (I consider the social media bubble to be a part of “CCC Aches” bubbles that have helped the global economy recover from the Great Recession. Read more about this concept here.) The social media bubble has helped to create nearly 500,000 U.S. jobs in recent years (a very high percentage of newly-created jobs) and has helped to launch a housing and commercial real estate recovery in hard-hit San Francisco and parts of New York City. The social media bubble has contributed to an explosion in post-2009 entrepreneurial activity, with the number of startup incubators tripling from 2009 to 2011. The social media bubble is also important because it has been one of the few glimmers of economic hope that many Americans have had in recent years, especially for young aspiring-professionals who see few other appealing career options (1, 2, 3). I cannot overemphasize the value of hope and optimism in dire times such as these – the economy and financial markets are driven by human psychology and having a reason for hope is what many people need to keep charging on (for example: “If Mark Zuckerberg can make it in these times, so can I!” or “At least some businesses are still booming!”).

I believe that the recent plunge in social media stocks will eventually lead to the ending of the overall social media bubble, including the aforementioned startup boom. One of the main reasons for this explosion in social media startup activity is the outrageous valuations of publicly-traded social media companies such as Facebook and LinkedIn and how it creates a powerful incentive to launch social media startups for the purpose of “flipping” or cashing-out at very high prices via buyouts or IPOs, regardless of whether the startup is profitable or not. When social media company stocks ultimately trade at far lower prices, the sectors’ hype will die down and the tech startup boom will grind to a halt.

I am most concerned with the economic impact of the social media bubble’s popping, as I expect a wave of technology company and startup failures and layoffs to occur in a manner similar to the popping of the Dot-com bubble in the early-2000s and will likely contribute to the ending of the post-2009 “bubblecovery.”

(Note: I have been publicly warning about the social media bubble since June 2011 on my Twitter blog and on my website The Bubble Bubble since January 2012.)



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