Bringing Back Traditional Mongolian (Beef)

Tenderized skirt steak, sautéed in a sauce that’s sweet and unveils a perfect touch of pepper and spice.

Broccoli on the side (though I prefer fried rice).

That’s traditional Chinese food take-out cuisine just how I like it — more American, less Mongolian.

But traditional Mongolian is making a comeback.

It’s a hopeful economic revival that calls for desperate measures. Might as well try it …

We Don’t Like Your Way,

But Our Way Ain’t Workin’

Eighty percent of Mongolian trade is with China and Russia.

Think about what that’s meant for Mongolia, who deals very much in commodities and natural resources that include copper, oil and gold.

Not good.

I am borrowing this chart from Bloomberg, which depicts the recent rise and fall of Mongolian economic growth:

Mongolia isn’t in recession yet. But they sure fear it’s not long before GDP is contracting.

You see, Mongolia’s glory days of 2012 led to rapid increases in government spending.

Uh-oh.

Now Mongolia is realizing the same thing as so many developed economies around the world: Growth cannot be sustained, and debt becomes increasingly difficult to finance. The difference is that Mongolia doesn’t have a lot of the first-world financial luxuries like a Federal Reserve.

Mongolia has been doing its best. But its best has meant dumping FX reserves to keep the currency (the tugrik) from plunging.

The answer: Bring back the old.

And by "old," I mean the stuff that went out of style with Communism.

A new government has taken over in Mongolia. The Mongolian People’s Party has declared the country deep in crisis. And its actions to cut spending represent new slout for the MPP after having been out of play since the Communist era in Mongolia.

Godspeed.

Because Mongolia is going to need a miracle that’s not spelled a-u-s-t-e-r-i-t-y.

Mongolian beef has been far more appetizing than Mongolia as an investment.

Image credit: Craig Dugas on Flickr

Interest Rates Hiked to 15%

In addition to the FX reserve depletion, the Mongolian Central Bank has hiked interest rates in hopes of a miracle.

They cut rates to 10.5%, but most recently popped that level back up — to 15%!

All to hopefully prop up the currency and stabilize the flow of capital and important price levels.

This has, unfortunately, happened at a time when the U.S. dollar hasn’t been very strong. In fact, many currencies — including emerging market currencies — have been recovering decent ground in recent weeks.

Check out this chart of two ETFs:

Emerging market currencies have risen 15% in the last six months. Emerging market stocks have risen 36% in that same time frame.

The U.S. dollar correlation with emerging currencies is straightforward. But it’s worth noting the correlation between the U.S. dollar and emerging market stocks as well.

You see, considering the state of affairs at the Federal Reserve, the global market is very sensitive to the Fed’s monetary policy.

Why?

Because, like Mongolia is realizing, these emerging economies need dollar-based liquidity flowing in order to fuel economic activity.

A Federal Reserve that’s intent on hiking interest rates, for example, essentially makes dollar-based investments more attractive than their counterparts. This also makes it harder for emerging economies to service their dollar-based loans.

That means money flows to the U.S.

That means money flows out of other economies, especially emerging markets. They are a risk that investors don’t want to take if the money dries up, so to speak.

Now, there are a lot of other major central banks around the world. Most aren’t on the verge of considering whether it’s a good idea to think about hiking interest rates.

That is, if there ever is a time to do so at some point in the future … like when the markets are ready to digest the possibility of the Federal Reserve’s forward guidance on interest rates.

(Breathe.)

Nevertheless, some commentators and analysts in my universe are now tossing around an intriguing institutional research piece. It suggests there are tighter financial conditions that most might realize by looking at the ECB, BOJ, BOE and Fed monetary policies.

And the one indicator in focus is LIBOR.

The London Interbank Offered Rate is the estimated average rate at which banks in London can borrow from one another.

LIBOR serves a benchmark for short-term interest rates around the world.

And it’s been going up!

The rise is attributed to 1) bank demand for U.S. dollar liquidity and 2) limits to supply due to changes in U.S. regulations.

In other words: This is being partly driven by a rule change. But that doesn’t mean it’s not having an impact on the funding market.

Don’t let that slip by you — it’s important!

The whole charade — central banks’ adopted mandate of financial market stability — depends on policymakers keeping us reassured that credit will be affordable and available as needed.

A rising LIBOR suggests policymakers DO NOT have total control.

And that could generate a crisis in confidence that sends capital fleeing for safety.

Not sure how that safe-haven capital will be divvied up among the U.S. dollar, gold and Japanese yen. But I think it’s safe to say the Mongolian tugrik and emerging market assets won’t be recipients of a flight to safety.

Going back to the chart on emerging markets, it looks like a 3% to 5% rally is possible before the WisdomTree Emerging Currency Strategy Fund (CEW) and iShares MSCI Emerging Markets ETF (EEM) run into important price resistance.

Might that, and a subsequent decline, coincide with a flight to safety driven by both a real and perceived tightening of financial conditions?

It just might.

Keep an eye on EEM, CEW and the U.S. dollar in the weeks ahead.

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also …