Emerging markets, Sri Lanka, 9.1% CPI, market sentiment, NASA's Webb telescope & more

The episode opens with light chatter about an itchy, possibly polyester outfit that a speaker says Jason made them buy, followed by a joke about open-sourcing something to the fans. The host then welcomes listeners to episode 87, thanks them for feedback on episode 86, and says the first topic is emerging markets.

The hosts tease Friedberg as calling in from a "palace in Sri Lanka" and ask where Saks is, getting the reply that this is a soundproof padded room built for better podcasting. The exchange is jokes about Biden, inflation and Ukraine, not argument.

A host offers a quick primer on three market types. Developed markets such as the US, Japan and Europe typically show low single-digit GDP growth. Emerging markets are roughly defined as developing but not fully developed, a group that includes the BRICs (Brazil, Russia, India, China, and recently South Africa). Investors bet on them for growth the host puts at two to three times the developed world's.

The host illustrates this with 2019 figures: China at 6% growth and Vietnam at 7%, against 2.1% and 2% for the US. Frontier markets, such as Kenya and Vietnam in the host's examples, are described as small, unstable, illiquid and generally risky, though people sometimes bet on them. A chart comparing China, Vietnam and the US since the eighties accompanies this.

Citing a Wall Street Journal report from the previous week, the host says emerging markets are under heavy pressure and lists the main threads: higher bond and loan yields, investors who have stopped putting money into emerging and frontier markets and are even withdrawing it, surging inflation, slowing growth, and the possibility of contagion.

The host adds that nobody knows exactly how contagion would play out, points back to earlier warnings on Ukraine, fertilizer, wheat and oil, and calls Sri Lanka the possible canary in the coal mine. The host reports, as breaking news, that President Rajapaksha fled to the Maldives and a state of emergency and curfews were declared, with the curfew possibly cancelled by the time of taping. Friedberg is then invited to give his view.

The speaker answering the invitation, apparently Friedberg, says global debt is roughly $300 trillion, of which about $100 trillion sits in emerging markets. These countries have more volatile growth and currency problems, and recent borrowing has mostly been in local currencies, so currency devaluation erodes returns for investors who think in dollars. Some countries carry debt of 250% to 300% of GDP, according to the speaker.

Many of these countries are net importers of energy and food, so rising global inflation makes essentials costlier to buy and harder for people to afford, which the speaker links to what is happening in Sri Lanka. Rising US rates compound this: with Treasuries yielding about 3%, the speaker asks why an investor would choose a 10% yield in a currency and country they trust less.

According to the speaker, money has been leaving emerging market debt for US debt, and emerging market debt has fallen about 20% in a couple of months. That makes it harder for these countries to issue new debt, creating a spiral that may end in defaults. One default could prompt investors to sell other emerging market debt, tightening funding further.

The speaker hopes the US begins to taper interest rates and markets stabilize in the next couple of months, describing the situation as a food and energy crisis, a humanitarian crisis, and potentially a global financial crisis. Another speaker calls the matter highly complex but closely tracked, and notes that companies already at risk will begin to feel the impact. The conversation then moves to Sri Lanka.

A speaker says Sri Lanka has several short-term problems and a couple of long-term ones, and frames it by comparison with Jamaica and Singapore. In 1960, as the speaker recites it, Jamaica and Singapore each had about 1.6 million people and about $700 million in GDP, while Sri Lanka had 9.8 million people and $1.4 billion.

Moving to 2022, the speaker gives Singapore a GDP of about $360 billion and Sri Lanka $80 billion; a Jamaica figure of about $13 billion also appears, though the transcript's wording at that point is garbled. The speaker credits Jamaica with keeping population in check so per-capita income stayed healthy, and then asks what Singapore got right and what Sri Lanka got right and wrong.

The speaker argues that Singapore promoted multiculturalism despite a mix of cultures and religions while adopting English as a common language, which let it serve as a hub for the world. A second factor was very low corruption under a leader whom some in the West would call slightly authoritarian but who would describe it as Asian values.

The result, in the speaker's account, was a small but effective public service and sustained investment in education and health care, so that within a generation the country exceeded expectations.

A speaker who says they are a byproduct of Sri Lanka's civil war describes it as partly religious and partly ethnic, built up and fought over more than 20 years. In this account it took a very right-wing autocratic leader, the brother of the currently deposed president, to root it out, at the cost of enormous war crimes that the speaker says nobody would support, though it brought some stability.

The speaker says that, instead of growing, the leaders turned inward and let corruption become embedded in government, on the right and the left alike. Defense spending last year was, per the speaker, two and a half times its wartime level, and the public service grew to its largest ever when private enterprise should have been the priority. The speaker concludes these leaders fundamentally did not know what they were doing.

Another speaker adds that Singapore also had a strategic trade location, which Sri Lanka shares as an island, and asks whether Sri Lanka pursued the same aggressive tax and business policies and how much geography matters, noting that Jamaica lacks that advantage.

The reply is that Sri Lanka's importance has grown as China has emerged, but in recent years it alienated China and nearly everyone else. The speaker's key example is a large shipment of chemical fertilizer that was turned away at the port because, the speaker says, leadership decided to be woke and forced every farmer to go organic.

The speaker claims small farms shut down, large farms lost 20 to 30 percent of crop yields, food prices soared, and policies were reversed two or three times, summing it up as trying to go woke and going broke. The speaker also says the country offended China, the Middle Easterners, and the Japanese by cutting a light rail project Japan wanted to fund. These are the speaker's claims and are not checked here.