I’ve never been to Argentina. But this year ought to be the year. Mainly because Argentina, alongside Turkey, India, South Africa and Indonesia, are rapidly becoming cheaper places to visit.

But let me backtrack a second and talk about the world in general.

Janet Yellen Is (Almost) The Mistress Of The World

The US Federal Reserve, for a private institution, has a lot of power. Currently, it is engaged in trying to save the US economy from turning into Japan. And Ben Bernanke (Janet Yellen, as of this Saturday) has the ability to move the world with an eyebrow raise and slight inflection.

And the occasional emerging market economy?

Collateral damage.

To summarise: for the last few years, the Fed has been pumping liquid cash into the US economy. The basic plan went something like this:

  1. Use the cash to buy up the “safe” government debt securities from investors (ie. pension funds, provident funds, governments with foreign reserves, etc).
  2. This makes the prices for these instruments quite high, which has the corresponding impact of making their interest rate yields really low.
  3. Which, in turn, creates the conditions for portfolio-rebalancing to take place, where the investors are forced into higher yield (and higher risk) investments like equities and corporate bonds. Pension funds, after all, have to pay pensions at some point. They need to be earning sufficient returns to cover their payment obligations.
  4. Putting money into shares and corporate bonds makes it cheap for companies to raise financing.
  5. So hopefully they will use that financing to expand.
  6. Ta dah! You have an economy that’s stimulated.

But if you go back and read my Risk On…Wait…Risk Off! post, you’ll notice that this had another side effect. Any country that was engaged in quantitative easing (the US, the Eurozone, Japan) became a cheap country in which to borrow money. And the emerging markets? Well, they’re riskier, and also not engaging in QE, so their interest rates were higher. It’s being a bit simplistic, but money flowed out of the First World and into the Third on a rising tide of carry-trades (borrow at a cheap interest rate, invest at a higher interest rate).

And then last year, Mr Bernanke and Mr Draghi and co started making noises about economic improvement and “tapering”. The global Risk On trade bubble began to crack, and money started to return to the First World.

Some graphs:

screen shot 2013-08-30 at 7.13.26 pm emergingmarketcurrencies_euro_graph


If anything, the finance world is now expecting even more tapering than it was in 2013.

Which means that the emerging market economies are suffering. Their currencies are crashing, and there is general mad scramble. In fact, even as I was writing this post, the Turkish central bank held an emergency late-night meeting and raised its one-week repo rate from 4.5% to 10%! The overnight lending rate was also increased – from 7.75% to 12%.

I mean – when you consider that most central banks only move their rates one quarter of a percentage point at a time…

Why That Makes For Cheap Holidays

Well, obviously, weak exchange rates mean that you get more bang for your buck/euro/quid. In Turkey two weeks ago, I had a lunch that set me back less than £5. It involved a half a chicken, salads, breads, dips and drinks. Like a real Turkish feast.

In London, £5 could get me a sandwich at a Pret. And a glass of tap water.

And you might think that prices would adjust fairly quickly in the emerging markets. But they don’t. At least – not for a while. And even then, the impact tends to be muted by the fact that very few countries are entirely dependent on imports… Local industry will continue as it did before (perhaps with a token moan about rising fuel prices).

So if you’re sitting in London and planning a trip abroad – it’s good news for you!

And for my fellow South Africans, this might be the year to stay home…