Boom and bust…

The emerging markets are now under pressure in late 2008 and showing classic signs of a bust. Some countries, however, like Chin, India and Brazil should survive in good form; others won’t.

The last emerging markets bust occurred from 1997 to 1999. Prior to that collapse, triggered by the Asian economic crisis, the asset class submerged in 1994-1995.

News that Argentina will nationalize $30 billion dollars’ worth of pension assets alarmed global markets in Latin America on Wednesday. Argentina, a basket-case economy for the last 35 years, will “borrow” pensioners’ assets to raise cash amid a funding crisis. Effectively, Argentina has nationalized its citizens’ retirement assets.

Argentina already defaulted on its debt back in 2001. The peso has collapsed over the last eight years making the country one of the most attractive bargains in the region. Yet the stock market, bonds and the currency all remain in the basement as the country sparks another in a long series of crises since 1980.

The emerging or submerging markets have now collapsed 55% this year and are about 60% from their all-time highs last fall.

No other investable region in the world performed better than the MSCI Emerging Markets Index from 2003 until mid-2007 – up more than 350%. But the entire complex is now coming undone in spectacular fashion this year as commodities prices plunge, credit fears grow and bankruptcies begin to snowball. It’s not a pretty picture.

The big threat now to this asset class remains sliding commodities prices and balance of trade implications for big exporters like Brazil, Russia and Indonesia, among others. These and most other commodity producers, like Chile, Peru and the Gulf states, all have near record foreign-exchange reserves and fat trade surpluses from copper, oil, etc.

At some point I expect commodities prices to at least muster a big counter-trend rally. They’ve been brutally oversold for weeks. That should lift the bigger emerging market natural resource countries.

But a far more serious threat lies in Eastern and Central Europe, home to one of the biggest booms this decade and a region I’ve avoided because of classic signs of a market “bubble.” The bust now underway poses serious policy implications for the European Central Bank (ECB) and other European lenders and corporations who have lunged into the region.

Hungary, home to one of the worst ponzi schemes in foreign exchange trading, saw its currency dive 10% yesterday as the country comes to grips with nervous investors running for the exits.

Hungary is a high deficit country, importing more than it exports and the forint is under severe pressure against most currencies. To boost liquidity, the ECB injected €5 billion euro ($6.4 billion) on Tuesday – unprecedented action considering Hungary is not a member of the euro-zone.

Hungary, like several other Balkan countries, borrowed heavily in lower yielding Swiss francs over the last few years to finance domestic consumption, including mortgage financing. This worked wonders as the forint and other regional currencies were rallying vis-à-vis the franc; but over the last several months the forint has tanked and individuals are unwinding this carry-trade in a big way.

The credit crisis has broader implications beyond the major market economies in the United States and Europe. It has also triggered a “flight to safety” and liquidity among all regions and countries, spilling over just about everywhere as leverage comes home to roost.

No doubt, 2008 will go down in the history books as one of the worst years in market history, on par or worse compared to other dreadful years in 2002, 1998, 1990, 1987 and 1973-1974.

As of October 23, the S&P 500 Index and the MSCI World Index have surpassed the devastation caused in the 1974 bear market. If the market declines another 35% from these levels, it’ll take-out the grand-daddy of them all – 1930.