The Emerging Markets Bubble

If the Fed's cutting rates, then it must be blowing another bubble, right? But it's not going to be tech stocks or housing again, so what's left? Green technology, obviously, is bubblicious right now, but it's also tiny: investment of $6 billion this year might be up 60% from last year, but it's still a long way from the point at which a crash could cause any real damage.

In today's WSJ, Justin Lahart and Joanna Slater put forward a different asset class: emerging markets, which are now officially trading on higher multiples than their developed-market counterparts. Everybody seems to think a bubble is forming, and everybody is very excited about this: after all, bubbles have the ability to make a lot of money for a lot of people before they burst, and most people in any case tend to overestimate their ability to get out before the crash.

The frothiness in emerging-market debt has already been and gone, and it does make a certain amount of sense that emerging-market equity will be next, especially so long as commodity prices – which drive many emerging-market economies – remain elevated, and China's astonishing growth record shows no signs of coming to an end.

On the other hand, the markets as a whole do seem to have forgotten that emerging-market crises are pretty regular occurrences, and tend to be extremely painful indeed. I have no idea when or where the next one will come, but I do think that when it happens, liquidity in EM will seize up so quickly that almost nobody will be able to get out. The only question is how much contagion there will be: if there's a crisis in India, say, will Brazil suffer greatly? My guess is yes. EM is still a risky asset class, even – or perhaps especially – when it looks like more of a safe haven.