I just returned from Europe. The drive from the airport in Bucharest to the hotel was slow. There was a fair amount of traffic even at 7 pm. When I went to the airport in the morning, I was grateful that I was leaving the city, not in the traffic trying to enter. In Istanbul a drive that should have taken 10 minutes took forty and five kilometer backups on the bridge across the Bosporus are common. If there was any doubt as to why oil is $100 a barrel, all you have to do is to look at the traffic problems in emerging markets. But that brings up another problem.

Where did all of those new drivers get those cars? Certainly the economies of many emerging markets have done well over the past three year, but these countries are still relatively poor. Incomes are about a third of Western Europe and a quarter of the US. My guess is that these new car owners, like subprime borrowers had access to the liquidity that has been available in the international capital markets over the past few years.

 In Romania the Lei has recently depreciated 20% against the Euro. This could cause problems for the banks that loaned the money to the car owners who bought the gas and drove up the price. If there are troubles in the international banking system, then there should be a slowdown in the economy, the demand for oil, and inflation. The difficulty is there are now inflationary expectations, which will make cutting rates exceptionally difficult for most central banks exacerbating the downturn. The good news is that it will eventually relieve the traffic problems.

William Gamble
Author: Freedom: America’s Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
Suite 1D 1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/