Biblical Predictions For Emerging Markets.

Did the biblical story of Joseph and his dream predicting seven years of plenty followed by seven years of famine anticipate a modern market pattern of up and down years that emerging markets seem to be following? Seems like a fascinating premise.

Beginning in 1975, there’s been a pattern of seven years of plenty (plenty of capital inflows, that is) followed by seven years of famine (debt and depression), with this pattern repeating two more times. And now we’re halfway through the 4^th cycle.

The emerging markets have just come out of a period or rapid growth and healthy stock market gains during 2004 – 2011.

Is famine about to strike the developing world? From Project Syndicate…

The hypothesis of regular boom-bust cycles is supported by a long-standing scholarly literature, such as the writings of Carmen Reinhart. But I would appeal to an even older source: the Old Testament – in particular, the story of Joseph, who was called upon by the Pharaoh to interpret a dream about seven fat cows followed by seven skinny cows.

Joseph prophesied that there would come seven years of plenty, with abundant harvests from an overflowing Nile, followed by seven lean years, with famine resulting from drought. His forecast turned out to be accurate. Fortunately the Pharaoh had empowered his technocratic official (Joseph) to save grain in the seven years of plenty, building up sufficient stockpiles to save the Egyptian people from starvation during the bad years. That is a valuable lesson for today’s government officials in industrialized and developing countries alike.

For emerging markets, the first phase of seven years of plentiful capital flows occurred in 1975-1981, with the recycling of petrodollars in the form of loans to developing countries.  The international debt crisis that began in Mexico in 1982 was the catalyst for the seven lean years, known in Latin America as the “lost decade.” The turnaround year, 1989, was marked by the first issue of Brady bonds, which helped write down the debt overhang and put a line under the crisis.

The second cycle of seven fat years was the period of record capital flows to emerging markets in 1990-1996.  Following the 1997 “sudden stop” in East Asia came seven years of capital drought. The third cycle of inflows, often identified as a “carry trade,” came in 2004-2011 and persisted even through the global financial crisis. If history repeats itself, it is now time for a third sudden stop of capital flows to emerging markets.

I’m not sure if I’m willing to argue against this intriguing idea. I, myself, have predicted seven years of slow growth and high unemployment in the US following the end of our “Great Recession” in 2008. I’m sticking to my prediction of seven years of “famine” ending in 2016. So who am I to argue?

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