Review of Last Week -- US is currently growing, but extremely slowly (about 1.4% average in 2013) and has modest inflation under 2% with unemployment slowly falling to a level of about 7.4%. -- The Euro17 is in shambles with negative growth and very high 12% average unemployment. Its youth unemployment is extremely high with Spain in the neighborhood of 40% and Italy around 28%. Its inflation rate is steady at about 2%. -- Japan is trying a radical policy, attempting to stimulate a moribund economy that has been growing less than 1% for two decades and has delivered deflation since Only recently has Japan started to look better, but it faces huge obstacles, not the least is its enormous domestic government debt. Japan’s 4% annualized growth in Q1 of 2013 has brought hope to many Japanese and the small rise in the CPI signals a possible reversal of deflation that has crippled long term debtors. -- Outlooks by the IMF and the World Bank do not show significant increases in growth for these four regions during 2013 and However, there is greater optimism for higher growth in There remain problems for each of these countries which can be split into long run and short run problems. The short run issues deal with the proper role of government (stimulus versus austerity) and the nature of economic policy (discretionary versus rules). The long run issues center on demographics (lower birthrates and greater old age dependency) and the effect that high debt/GDP ratios may have on future standards of living. There is also the ever-present problem of rising health care costs and income/wealth inequality.

Emerging Markets and the Global Economy What is an emerging market? IMF Definition for Emerging Markets (EMs) “The capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and are broadly accessible to foreign investors.” Wikipedia definition “Emerging markets are nations with social or business activity in the process of rapid growth and industrialization.” Usually EMs have per capita incomes from $ 1500 USD ~ $12,000 USD

Latin America EuropeAsia Middle East & Africa The most notable of the emerging markets are the BRICS B razil R ussia I ndia C hina S outh Africa

Is there a single reference which discusses our topic today? I believe there is. It is a book (Kindle book and Audible audiobook available for immediate download to your computer and/or smart phone) by Ruchir Sharma. Mr. Sharma is head of Emerging Markets and Global Macro at Morgan Stanley Investment ManagementKindle bookAudible audiobook

In your afternoon discussions and reports each group will be asked to look at a particular emerging economy (or perhaps two such countries). You will be asked to evaluate this country -- how it is doing now, how it may perform in the future. You can use an extensive World Bank data set I have placed on the webpage for Lecture 6.

Stock-Bond Arbitrage Equation – Understanding the Effect of Risk

Why are the Emerging Economies Slowing Down? (1) The emerging economies are entering a phase of downward adjustment since during 2010 they had been operating at a pace that was far above their potential and any continued growth at this level risked igniting inflation. (2) The slowdown in US growth (and elsewhere) is affecting emerging markets negatively through trade, finance, and confidence. (3) The BRICS are moving towards state capitalism with -- greater roles for state run enterprises -- countries are becoming resource nationalistic -- there is a move towards greater trade protection -- countries are looking to employ import substitution to bolster the economy -- many countries are turning to capital controls These policies lead to inflexibility and reduced economic activity, They also tend to protect vested interests and hold down creative destruction. (4) The commodity super-cycle is over and China is consuming less resources. (5) The US Fed is hinting at tapering of monetary policy which will make funds less available. (6) Emerging markets are now running trade deficits financed very tenuously by -- more debt and less equity -- more short term and less long term instruments -- more foreign currency loans, less domestic currency loans -- risky cross border interbank loaning

Diffusion Indexes – How they are calculated. Some Excel Techniques Useful for Data Sets