08/22/2013 12:16 pm ET Updated Oct 22, 2013

Is Another Emerging Market Crisis Brewing?

With the Indian Rupee, the Indonesian Rupiah, the Turkish Lira all selling off 10 percent or thereabouts versus the USD since the beginning of August, July and May respectively, one is beginning to be reminded of the Asian crisis of the late nineties, when current account deficit currencies led the collapse to a full-blown disaster.

Then, as now, hot money had flooded in, as a desperate search for excess returns led investors to boldly go where a few had never been before. After all, countries with a current account deficit need that flow of money to stay solvent and now, classically, the flow is suddenly drying up as the returns on 'risk-free' investments, such as U.S. Treasuries (well, risk-free in the sense that you'll get all your money back if you hold to maturity, but in between... ?), have risen dramatically.

Policy credibility and slowing growth don't help. The former took a dent last week in India, when the central bank introduced controls over the amount of money Indian residents and companies can send overseas. The trouble with partial capital controls is that then everyone fears the imminent implementation of full capital controls, and gets their money out as soon as possible, thus weakening the currency, etc., etc. This in addition to three gold import tax hikes this year.

Personally, I feel the chances of a full-blown repeat of the Asian crisis are quite slim -- generally speaking, hard lessons were learnt then and impressive FX reserves have been accumulated during the good years. Also, public debt levels are lower and savings rates higher, although Indonesia's FX reserves are not as impressive as some, but even there the better performance of the economy should mean that a quick dose of higher rates will calm things down.

Should we worry about potential contagion to weak eurozone peripheral countries? I don't think so, as the current account balances of Greece, Italy, Portugal, and Spain have all virtually improved to zero, compared to India's 4.8 percent deficit.

There's no doubt that the rising tide of global QE experiments, and Chinese overseas investment, had floated many ships, and that some of them will be left marooned in the mud as the Fed begins to taper, but whilst a repeat of 1997/98 is probably not something to lose too much sleep over, severe stress in such massive economies as India and Indonesia may, however, have a deleterious effect on regional and even global growth. But at the moment I'd still classify this as a black swan event, given the obvious growth in strength of the recoveries in the US, UK, eurozone and China. The latter evidenced by the latest The Markit/HSBC flash manufacturing PMI for August of 50.1, versus market expectation for 48.2 (last month 47.7).

Wednesday Aug. 21 saw the release of the minutes of the July 30-31 FOMC meeting and they did little to disabuse the market of its expectation for 'Septaper.' Indeed yields climbed straight after the release and carried through into the start of the next American trading session. I suspect this was mainly because of the following revelation in the minutes: "a number of participants (including non-voting Presidents) noted that "market expectations of the future course of monetary policy, both with regard to asset purchases and with regard to the path of the federal funds rate, appeared well aligned with their own expectations."

This is very akin to a similar bombshell sentence in the minutes of the last Bank of England MPC meeting and deals a severe blow to any FOMC attempt to put clear blue water between tapering, rising bond yields and the likely timing for Fed Funds rate hikes. If significant contingents on both committees don't think the market's expectations for rate hikes, much earlier than the majorities on both committees would have us believe, are off the mark, then no wonder the market doesn't behave itself, and pushes rate hike expectations further out!

All I would say to bond bears, amongst whose number I can count myself since the start of the year, is start to take care and maybe cut back on shorts. The emerging market sell-off could conceivably throw up a black swan event, leading to a safe haven flight, and we are already in the vicinity of my end-2013 3 percent target for the 10-year UST yield. Plus, the U.S. employment report releases on Sept. 6 are now set to be humongously important, with a weak figure the only thing between us and a September start to QE tapering.

Sorry, no blog from me next week, as I'll be touring Normandy, but back on HuffPost the week after to preview non-farm payrolls.