Remember Rudy? The Note Dame football movie where Sean Astin played Rudy, a college student who wasn’t quite big enough to play with the big boys but with his passion and drive he was able to put on the golden helmet and play for the Fighting Irish. So often we discount the little guys in sports. And the same thing happens in the economy. We assume that if a country doesn’t have a GDP that falls in the top 10 then they aren’t a threat to global growth.
ASIAN CURRENCY CRISIS
Over the weekend I was reading John Murphy’s latest book, Trading with Intermarket Analysis. I haven’t finished the book yet but one section where Murphy discusses the Asian currency crisis got me thinking.
Back in 1997 Thailand began to float its currency, the Thai baht, after previously pegging it to the U.S. dollar. This change to their currency coupled with their massive amount of foreign debt triggered the country’s economy to essentially collapse. The contagion from Thailand to other Asian countries quickly causing Indonesia, Malaysia, Hong Kong, South Korea and Japan to all be affected. The IMF stepped in with a bailout of $40 billion to stop the bleeding and in one year, and in one year country’s nominal GDP sank 40%. U.S. markets weren’t as affected but did experienced a short period of weakness and likely helped build the fire that lead the market top a few years later.
BLACK SWAN
My point in bringing up the Asian crisis is that Thailand was not a powerhouse country in 1997. According to the World Bank, their GDP sat just below Iran, Peru, Tunisia, and Fiji. Back in ’97 Cyprus’ GDP was nearly eight times the size of Thailand. Many of the reports of the problems facing Cyprus are discarded due to the lack of size and power that comes from the small island nation. We chose to spend more time focusing on Spain and Italy, and to some degree rightfully so. A run on the banks in Spain would of course have larger global implications in comparison to Cyprus. But if you are looking for a black swan event, it’s more likely to come from one of the peripheral European nations that it will from PIIGS.
TIPPING POINT
Does it appear Cyprus is bringing down the house? Not quite yet. I’m not here to say we should stock pile canned goods and jump into our homemade bunkers because people are lining up at Cypriot ATMs. While Thailand didn’t send the global economy into a tailspin, it did cause panic in the Asian markets. Many would argue that Europe is at the point where the smallest wrong move could cause alarm and contagion through the EU.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
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Read the TraderPlanet interview with John Murphy on his latest book here.
