When the tide goes out

I am starting to worry about the interest rate rising. It is not about the timing of QE tapering. We can see US unemployment trend is getting better, which mean US economy is gradually improving, and prospect is looking good. Interest rate will eventually rise when the economy gets better. And I predict the interest rising trend has started.

Whereas China continue to face slow down problem. It's rampantly heavy public investment has hit wall. Many of those investments are getting tiny return. It is clear that China has grow to a size that they can't just invest on any thing and get good return. From now on, every investment will have to be carefully evaluated the risk and return. This will be different from previous 3decades of flying growth story. Growth should return to normal 5 to 8 percent. But before that can happen, China has to solve other problems. Huge state province debt, highly not local affordable housing price, and over capacity of many major industry sector. Those problems will certainly drag down growth in may be 2 to 3 years time. Besides, the implementation of economy structure reform will ultimately determine the sustainability of China long term economy growth story.

While China has its own battle to fight, the predicted slow down of China in few years ahead will affect surrounding regional countries. The major hit will be commodity base countries. Further more, India has its own tough economy situation (currency depreciation, high inflation, increasing debt). Commodity demand such as metal, edible oil, will have tough time for recovery. Previous few years of commodity price boom has created a wealth for commodity country such as Malaysia and Indonesia. They thus have started their high growth plan in infrastructure construction and housing construction. Centered in high growth in China, the wealth effect has draw in huge foreign investment into many Asia emerging market. In addition, high ambition of those Asia emerging countries has been borrowing money to increase spending on construction to boast growth. Of course, those happened during past few years of very low interest rate environment. All of this resulted in increase of asset prices. When asset prices increase, the process repeated and create a vicious cycle of uptrend asset prices.

That's why I am worry about the rising of interest rate. US is still the largest economy by far in the world. When the largest economy improve, regardless of the state of others, interest rate will follow US economy situation and rise. When interest rate rise, the money will flow back to US. Now with the emerging markets had show signs of weaknesses, foreign money may find more reason to pull out from emerging market back to developed market to avoid risk. This will further exacerbate the emerging market problems (slow growth, high inflation, low commodity price, high borrowing). When interest rate rise, bad loan will emerge, falling asset price may then follow on.

As Warren Buffet said, "when the tide fade, you will discover who's been swimming naked."