Is There An Asian Financial Crisis On The Horizon?

I posted yesterday about how a strengthening US Dollar could potentially benefit Israeli stocks that trade in the US. I was asked by some readers how come I think that the USD is poised for a rally? The answer…FIFO.

FIFO is an accounting term that stands for ‘first in first out.’ With the global economy on the skids, the US was the first country to start having problems and with a vigilant Fed at the wheel, I think the US will return to normal growth in the next 6 months. After all, no recession occurred. The US has had no negative GDP growth quarters, and actually had a surprisingly good 0.9% GDP for Q1. Europe on the other hand, is just starting to show signs of a slowdown. I have heard analysts predicting a potential contraction of over 2% in European growth. That certainly will be bullish for the greenback.

I really think investors need to keep an eye on what’s happening in South East Asia. Asian stock markets like Vietnam rocked and rolled during 2006-07, unfortunately, steep market drops and a worsening economic situation may be a precursor to another Asian financial crisis like we had 11 years ago. Keep in mind that the Vietnam market has lost more than 55% during ‘08, and with inflation jumping, the currency has dropped. This isn’t just an issue in Vietnam. Countries like India, China, Philipines and Hong Kong are all in the midst of spiking inflation, and in the case of the Philipines and Thailand for example, sinking currencies.

Inflation surged to 25.2% in May. Yikes. Reading a recent Reuters report, one gets the feeling that there is a big problem on the horizon:

“All readings from the economy are not healthy,” a Vietnamese dealer with a foreign bank said. “The economy is not performing as well as expected by investors so they are pulling out and this trend is not short-term because we see nobody arriving. It is now an approach to a crisis.”

Forwards on the Vietnam Dong are predicting a 30% depreciation in the currency versus the USD. Sinking currencies and inflation that governments are unable to control are a recipe for disaster. I get the feeling that George Soros and other currency focused hedge funds see blood in the water and are ready for an attack. This sounds all eerily familiar to what happened 11 years ago.

Investors should pay close attention to what’s happening in South East Asia, as it could lead to a global financial crisis the likes of which we saw a decade ago.

Disclosure: Author’s fund has no position in any stock mentioned as of 6/5/08.

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