Emerging Market FX Reserves Are Declining, Sassower Says

whether at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. For almost a quarter of a century, developing economies built up their foreign currency reserves trying to stave off another type of financial crisis, potential dramatic decline in their economic trajectories. But now it seems like that trend is changing. I want to bring in Damian Sass, our fixed income strategist here at a Bloomberg Intelligence. He

joins us in our eleven three oh studio. Damien, you wrote this report. I thought it was fascinating. Can you explain why we've seen such a decline in foreign currency reserves in certain economies and just how big some of the declines have been. Yeah, sure, well, thank you Lisa, thank you pim Um. Well, look um, foreign currency reserves

are really used for three things, right. They used to maintain a currency peg for fixed and or managed um the currency regimes such as for example, China, which has in fact exhibited the greatest decline in reserves um over the past two and a half years. I mean from I believe really from four trillion to just under three trillion U S dollars now, so that's a pretty big, pretty sharp decline. But they are also used to support

external trade. I mean, I think the big statistic that central banks like to look at is your currency reserves. Your foreign currency reserves should be the equivalent of three months of import. But most importantly, they're used as a kind of a precautionary savings buffer during a balance of payments crisis such as you know in the late nineties we saw that in Asia. So those are really the

three primary uses. And you know, the way we look at here at b I is declining currency reserves and e M just exposes them to a whole slew of new risk. And I think the emphasis now must kind of shift from long term growth and um current account health. Two more that coverage ratios and short term liquidity metrics such as reserve ratios and short term short term external debt. And that's what we focus on here in this report.

Can you tell us the countries that are involved in this and perhaps just give a detail about each one. So from I mean from the from the good side, you have countries such as Peru and the Philippines which are which which track rather well. I mean their reserves are I mean, in the case of Peru nearly three times the i m f S reserve adequacy ratio. Seeing with the Philippines, I think it's and a half times, so they get both gold stars Peru and the Philippines,

that's correct, and add demerits um one. Malaysia is probably first among sort of the major e m s. You've also got South Africa, Turkey, and Kazakhstan. I mean, those four really kind of stand out to us as being below the IMPS reserve adequacy ratios, and China is right at the cusp. Yeah, so hold on a second. You also have a statistic in here that one fifth of emerging market economies at least those on record, have foreign currency reserves below the i m F reserve adequacy threshold.

Are we heading toward another emerging markets crisis here? So what we're looking at here is the i m F defines the emerging markets and however way they do it. But you know, of what they define as an emerging market are below that threshold. And these are countries, not only the majors. They can be Jamaica, Armenia, Pakistan, Tunisia, the Dominican Republic. I mean, so there are quite a

few of them. Many of those countries, however, do issue quite a bit of external US dollar debt, and a lot that that is in some of the broad e M indices, such as the Bloomberg Barkley's e M Hard Currency Aggregate Index. Can we just head back to China for a second. You said that they were kind of on the cusp of really being in a risky zone with respect to their capital adequacy requirements. What does this mean?

I mean, does this basically mean that they can't continue to support their currency the way that they have been. Doesn't mean that they're going to have to hold back on pumping billions of dollars into their financial system and what's the what's the consequence? Well, I mean, in China's case, right, they are using their currency to help They're using their currency reserves to help support their peg to the dollar.

And um, you know this doesn't in any way, shape or form mean that they're not going to be able to continue to do that. I mean, they still have by far and away the largest reserves globally. Um. You know, the way the I m F calculates reserve adequacy is they take total exports, broad money supply, short term debt, and other liabilities which are really kind of lines with the I m F, etcetera. And they and they create

this threshold. And look that threshold. It is sort of a soft threshold that's developed by the I m F to sort of guide expectations. But you know, China's a huge economy. I mean, you know, it's it's it's not going under anytime soon, if you if that's where you're headed here, I'm just simply pointing out the fact that we have to begin looking at some of these emerging

market nations through a bit of a different lens. Um. I can't decide whether to ask you whether the actual currency holdings are a big deal, like you know, whether they're holding dollars or euros. But you're telling me this is basically something that is endemic to each individual country, so they have their own issues. That's why this is happening. In that case, I want to know what can we buy in South Africa or in Malaysia or in Turkey or get ready to buy because you know, if smart

money goes where no one else wants to go. And I know, I mean the last time we were here, Pin we talked about Turkey maybe being you know, fundamentally undervalued on a number of different metrics. I mean, you know, whatever the political turmoil is or whatever the you know, news headlines are, it is a dynamic, industrialising economy, um that builds you know, automobiles, trucks and has an incredible retail sector. Sure, sure, I mean that's exactly right. I

mean Turkey, we know their financial sector issues. I mean it's one of the most one of the largest sectors in emerging markets in terms of its issuance of US dollar debt um And there are a number of banks there that we can highlight for you that have highlighted another you know kind of um, give me, give me

one give me one of Turkish Bank. Well, you've got guarantee, you've got a punk, you've got I mean, you've got quite a few there that are you know, beginning to you know, perhaps look a little bit interesting on that metric. But you know, I think what we're really talking about here is this is really supposed to be a sovereign risk sort of metric. So looking at the sovereign risk the actual you know, debt from Turkey itself or from Kazakhstan itself, from Malaysia, I mean, that's kind of what

you're looking at now. In the case of Malaysia, you're looking at the cook bonds, which is a whole different animal um which I'm not about to get into right now. Um, in South Africa, they you know, the country does issue a lot of um, you know, sof in debt in U S. Dollar and Euro as well. Um bast you've got s com which are what I like to call

quasi sovereign type institutions. We gotta leave it there. Damien sas our great great stuff fixed income Strategiest Bloomberg Intelligence and just go to b I go on the Bloomberg to check out all of Damien's work you gotta you gotta read this to be up to date. This is Bloomberg Another day, another high for US stacks. Can this last?

We're gonna take a deep dive into both the technicals with Jeff Weiss, chief technical analyst at clear View Trading Advisors, as well as the fundamentals with Yelena Sliva, senior u S economist here at Bloomberg Intelligence. So, Jeff, I want to start with you, Hi, thank you for so much for joining us. So given that some of the tech indicators that you look at, first of all, what are the most reliable ones and what are they saying about

the current run up in stocks? Well as reliable as an indicator is lee, So I'm always looking at the downside of what could go wrong, because in the stock market, right, you could be right nine out of ten times, and on the tenth time if if you don't know what to do, it could obliterate the other nine times you're right. I still think the bulls have it. I still think

we're in a in a primary bull trend. Uh. In fact, we actually one of your charts over there that I gave you shows that for three Friday closes in a row, the broad based Dow Jones Total US stock Market Index has closed above a fairly significant trend line dating back quite a ways. In addition, that's been confirmed by the

S and P as well as other indicators. So to me, not even going into the new multi year highs and the weekly Advanced to Climb liner, the big board and the new highs and the daily advanced declientline, it is still to me a bull until proven otherwise. And that's not gonna be CAUs of some news. It's going to be because of the action of the market itself. Okay, So then let's take a look at the fundamentals, Elena. Are we seeing economic data to support this bullish outlook

that is sort of being shown by the technicals. What we see in the economic data, and we are looking at different indicators, We only see a pickup in survey indicators so far. So if you look at a Bloomberg function e c SU, for example, you will see that the biggest upward surprises are coming from the survey and

business cycle indicators. Everything else is pretty much flat. So this week we're gonna see a bunch of different indicators from retail sales to industrial production, and they're all like expected to be oh okay, but not nothing like a big upward surprise is expected. So uh to me, it looks like we we are okay, but it's still a sluggish recovery. It's still uh sluggish growth. Jeff wise, p h excuse me. I wanted to also just mention and

congratulate you on your new book. It's called Relationship Investing Stock Market Therapy for your money, and boy does that you know if anything needs therapy now, it's it's everybody's money. And you have been noted as someone that is able to combine both the art and the science of market analysis.

And having said that, I want to just have you speak a little bit about one of the things you described that people ought to spend the lion's share of their time on the analytical portion of the investment process and not on trading fees. We keep hearing all about fees. You know, don't spend money on fees. Tell us why this is something that you've learned well? To me? Um, you know I I I always say that's kind of like having a bad dinner but bragging about the mint

at the at the end of the meal. Pim uh to me again, you want to obviously get you know, as competent advice as possible, consistent with very reasonable fees. But to me, it's all about where do you buy, where do you sell, getting the primary trend right, riding it for all it's worth, and then having someone or some approach that will give you a discipline to stop a cut from becoming a hemorrhage from becoming a financial amputation.

Because I lived through nineteen seventy three nineteen seventy four, and I've seen the horrific toll something like that couldn't inflict, and that's one of the motivating reasons I wrote this book to try and help people avoid some of those mistakes. Well, Jeff, so pare what Elena was talking about with your bullish sentiment. I'm struggling to sort of understand end the sort of feeling that the stocks to just keep on hitting new highs day after day after day, when, as Elena said,

we're not really seeing the justification for that in fundamental data. Yes, that could change, but so far we're not seeing it well, Lisa. In technical jargon, if you wait very often, not always, nothing's always, but if you wait for the underlying background or fundamentals to justify why a stock market has moved. I don't know what someone's gonna be paying for that privilege. Is it an SMP fifty, Is it an SMP twenty,

I don't know. I can tell you this though. Um, in my opinion, the twenty two thirty to twenty two thirty five area is a daily closing area I'd watch, and that's four percent below where we are now. That to me is the area to watch, all right. So basically, Jeff, you're saying that the economic data is a lagging indicator. Elena, is there any economic data point that you look at

you do not think it's a lacking indicator? Well, I think what we should look and that is probably gonna be even more important than economic data, is what cha Yellen is going to tell us tomorrow, And that could be a little bit forward looking. Right, So we think that she will continue to be on a davish side. Uh, She's gonna be herself, no, no hawky ish science from her. Uh. Probably the testimony itself will not contain any clues as about the timing of the next rade hike, but she

will probably be asked about it. And uh, I don't think she's gonna rule out March. She's probably gonna say, oh, it's a life meeting. Every meeting is a life meeting. But uh, we don't think that that really means that they will hike in March. Uh. Still at Bloomberg Intelligence Economics, we think that the tightening will be gradual. Only two eight tikes this year June and at the end of the year. So uh, the outlook for the fit is still kind of the same gradual tight ending this year

and no no big surprises. Quick one to you, Jeff Wats Imagine that you've got the scenario that you sat out all of this move higher in stocks. Now you're wondering was that a mistake? Should I admit it to myself and get in or do I just you know, keep my counsel. If it were my money and I basically write that book from from me, what would I

do if your money, the reader's money, where my money? Yes, I think it's a bull trend um at the mistake Otherwise, Uh, yeah, a mistake or you know, to me, a mistake is not selling a stock on the way down when you should and selling it the market understand to get the extra ten cents on the upside and risking twenty five hours on the downside. But yes, I think we are in a bull trend. I think, you know, miss Yellen is welcome to come over my home, but there will

be no talk about, you know, economic statistics. There. We will be looking at we will be looking at stock charts. And again, I was in economics major. It's just that I don't have an ability to look at reams as I note in the Book of Fundamental Data and Economic Analysis, and have any idea what that portends for me in terms of the stock market. So to me, if I want to look at a stock, I look at the stock. To me is the purest form of analysis. And thanks

for being with us and sharing it. Thank you, Chief technical Analyst, clear View Trading Advisors. He's the author of the new book Relationship Investing Our Thanks also to Elena Strieteva, senior US economist for Bloomberg Intelligence. This is Bloomberg P and L is brought to you by proper Cloth, a leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier. Create your custom shirt size by answering ten easy questions select from a

were five fabrics to suit your personal taste. Shirts start from eighty five dollars and are delivered in just two weeks with Proper Cloths perfect fit Guarantee. Remakes are completely free and expert staff are standing by to help. For premium quality, perfect fitting shirts, visit proper cloth dot com Custom shirts made Smarter. The musical artist Adele opened the fifty nine Annual Grammy Awards by singing the well her rendition of the hit song Hello, and she went home

the big winner. And now Kim Fox is going to sing it for us and your dreams, uh perhaps our nightmare. Um, you know adult took home five awards, and also that she had that tribute to George Michael and yes, this is going somewhere. But you know, the other album that was really in competition was from Beyonce, and that was the Lemonade album. But you know there was one winner, no matter who wins, and that was a gentleman named Rob Stringer. And here to tell us who is Rob Stringer.

We've got our own Lucas Shaw Bloomberg Entertainment reporter. Lucas, is that enough of us set up? Yeah? It is so. Rob Stringer is the head of Columbia Records, which is I believe the oldest functioning record label in the United States. It's been around since then the late nineteenth century. Of course, had a different name back then. UH. And in over the years, they've worked with David Bowie who won Big

Last Night. They've worked with Bruce Springsteen, worked with Bob Dylan, and over the past ten or fifteen years, their biggest two acts you you would say, have been Adele and and Beyonce. They've actually worked with Beyonce since she was in the girl group Destiny's Child and and Rob Stringer. In April will go from being the head of Columbia Records to being the head of all of Sony Music, which is the second BIGS record label in the world.

How common is this for one record label to have two of the most celebrated artists at the Grammy Awards. It is common for a record label group like Universal or Sony or Warner UH to really dominate those I forget. I think a couple of years ago, Universal had almost all of the major nominees, and that is the biggest record label group. But to have one label within the group is less common. Usually you have you know, it's split amongst three or four or five in anyone category.

So Rob Stringer obviously made some really good selections with the signing of Adele and Beyonce. Does this translate into green into profits, into saving the music industry that's being eaten away by online streaming music services? More than anything,

I think it provides stability. So if you are trying to figure out where your next hit is going to come from or where the sales are going to come from, Uh, you can rest easy knowing that you're relying on Beyonce and Adele because every time those acts release an album, it's gonna sell. You know. Adele took the unusual step with with her latest release twenty five, of not making it available on any streaming services the first couple of weeks, and she a loan hold. She went on to set

a record. Now, the money for first week sales, now, the money from streaming services is is rising. But but what's different is that you tend to have a longer tail with it. Because people will stream your album over a long period of time, you can kind of keep

making money longer after it's release than you might have. Otherwise, you don't get as much to that kind of first week pop. You get a lot of streams, but even if you get, you know, a hundred million streams in a week, you're not going to make a ton of money. So if you have these artists like Adele or Beyonce who can balance that interest on streaming with still being able to move full albums, you're in a pretty good position.

Hey hey, Lucas, the record companies missed another digital revolution. I mean they missed the online streaming. I mean that's why we talk about Spotify, Pandora, Amazon, Apple and so on. They missed that. But I understand that the big thing on social media last night for the Grammys was Beyonce, and it was her performance and her costume and so on that lit up the social media world. Does the record record companies figure out how to make money out

of that, because Facebook and Snapchat certainly think they do. Uh. The only way that the record companies would make money from that would be more people streaming or buying her album, which will invariably happen because you just get so much attention from it. People are gonna wake up today and they're gonna want to listen to Lemonade. The challenge with that is that Beyonce has limited where her album is

even more than Adele. So though Adele is now available on Spotify and Apple Music, in these other places Beyonce you either buy it or you you stream it untitled,

which is her husband jay z service. You know. But you raise a good point, which is that they're all these ways, all these touch points for for music and really for for more broadly for entertainment, whether it's on Facebook or Snapchat or Twitter or YouTube, and the music industry has really struggled with how it can kind of effectively monetize that because unlike with a movie, where you can't really replicate the movie the experience of a movie in like a you know, a brief Facebook post, you

can hear a song in all of these different avenues. And so they've really tried to extract more money from them and are in the process right now of of negotiating with Facebook to try and figure out how they

make money off of Facebook. But it's it's a tough balance because these tech companies feel like as long as they're not just completely ripping a full song, uh, it's it's nice exposure for these artists to monetize their works in other ways, Lucas, how irrelevant are the Grammys at this point to the major labels just because it's not giving them any more money necessarily, not directly, right, Um, you know, it's just an opportunity to to fump your

chest and say you're you're the best for a little while. I mean, I think it's not who doesn't want a reason to do that? Right? Yeah? Uh? You know they took the sixteen share right, a sixteen share on in the overnights for Nielsen. So that was like the same as it was last year, Yeah, which was which was bound down. Yeah, right, Like all awards shows, they mattered most, kind of they seem to matter most for that that baby boomer generation and a little bit after it. You know,

they're really popular throughout the seventies, eighties, nineties. You have a new old people, that's what you're saying. I know, Lucas well, No, no, because I'm unusual. I actually liked I like the Oscars. I'm not a huge fan of watching some of the others. The Grammies are kind of fun, but you do have a whole generation of young people for whom needs don't really matter, especially because they're not

awarding the artists that are most relevant to them. That's one area where the Grammys actually they're a little better because the Grammys do tend to nominate the most popular artist, and especially those who appeal to the younger listeners. I mean, young people love Beyonce, love Chance, the rappers who won a bunch of awards last night, The Oscars, and and to a lesser extent, the Emmys, which award h D the best in TV, tend to see to this to

definitely to an older, wealthier viewer. So I have more faith in the Grammys maintaining their credibility. The problem with the Grammys is that they always give the awards to kind of a white pop act. So there was a lot of chatter last night about how for the past five years you've had a white pop star beating what many would say was a more deserving artist in R

and B or in rap. Kendrick Lamar has lost. Beyonce's lost a couple of times, and at some point the Record Academy is going to have to come to grips with that. Did you have a party last night while you watched it? I was in the back room at the show. I then attempted to go to one of the labels after parties, and the weight outside was so bad that I went Luca's shop. Bloomberg News, thank you so much for joining us. Brian Shapata is here with us in our Bloomberg eleven three oh studio in New York.

He reports on bonds for Bloomberg News and wrote a story to that published today about just how much selling there has been by China and Japan in the past few months. And you know, Brian, first, I just want to get a sense from you how much of this selling is being driven by concerns about the new US president and how much is being driven by concerns at home where these nations need to drum up money to

support their economies. Yeah, it's a little bit of both, in the sense that you know, you've got Donald Trump is the new president, and of course the markets are reacting to this through the reflation trade. Yields jumped up quite a bit right in November after you got elected. And you know, if you're a Japanese investor, you don't like to see those losses on your books when you have the Bank of Japan essentially controlling interest rates, and

you know, you're just getting a flat return there. So uh, for some of these investors, it seems like it's a lot easier to just stay home. You know, you have you know, easy money policy, whereas in the US, uh, the idea that Trump's fiscal policy is gonna spur growth is gonna spur you know, the Federal Reserve into action, and then all of a sudden, you know you've got rising, rising interest rates. Um hasn't really played out so far

this year. Yields are still mostly flat in the treasury market, but the prospect that they could, you hire, is definitely a concern. So who's gonna get burned if this trade doesn't work out the way you describe in other words, of it turns out that they're gonna go back in and buy US treasuries, who's gonna get burned? Um? I mean I think that if they go back and buy treasuries, I think everyone is going to be happy because yields will fall and there'll be a persistent amount of demand.

But it's really the foreign flows or something that people are really keeping an eye on. Because Japan has one point one trillion dollars of treasury holdings, China has another trillion. It's a thirteen point one trillion dollar market and declining. And China, right, I mean particularly yes, China is going as there was not too long ago, right it was, it was very high, um, but it's gone down quite

a bit. Fed's still a large holder, but even they're talking about, you know, potential non reinvestment of their balance sheet as well. So, uh, this pairing back of demand and the treasury market is definitely something that is giving some investors pause. Right. Well, and you were saying that that people would be happy if they stopped selling or they came back, but dave one one people one group

that would not be happy would be the banks. You see that that increasingly banks are linked to the hip with US treasury yields in a way that I mean, have they ever been misconnected before? Well you have to go back and run the analysis to figure it out. It's clear though you look at the past several months that the day to day kind of moves are definitely

having some effect. And it's understandable. I mean with the financial companies who really have the concern about their ability to make money because they after all, it depends on what they can earn on their loans, their investments, and what they pay out to their depositors what they call the net interest margin. And for a lot of these banks, we've seen it a narrow the last a few years in this environment of low interest rates. So you know the idea that you know, maybe bond yields go up

and loan rates go with them. You can understand why there has been this focus with the financial stocks. And actually today the financials are the best performers among the eleven main industry groups in the S and P five, So it's definitely playing out as we speak. I was just looking at the shares of Goldman Sachs. They are the biggest mover in the Doubt runs industrial average, I believe,

up more than one and a half percent. You know, I have to wonder, Brian, going back to your story, so we as you mentioned, we have seen yields pretty flat, if not down this year from where they were from the peaks in December. Who's coming in and buying them?

Why is there so or where is this support coming from? Well, I mean at a certain point you have to realize that the whole idea behind secular stagnation and demographics, um, all those things are still here, even though there's a lot of focus on Donald Trump and potentially being a game changer. I mean, ultimately, a lot of these structural elements in the economy are still in play. And you know, a two point five percent on the tenure treasury. I

mean that's something that we haven't really seen since. So you know, a lot of a lot of investors are saying, you know, it's time to start, you know, putting some money back to work here, even if they are still being quite cautious. Nothing like having people follow a move into a record territory rights nothing, nothing like that. Thanks very much, Brian Schappatz, our bond reporter, for a Bloomberg great story on the Bloomberg about the sail off in treasury.

Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio. P and L is brought to you by Proper Cloth, a

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