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Magical nonsense won’t lift emerging-market gloom

At some point in the next two quarters, the global backdrop for emerging market bonds will turn increasingly gloomy.

The global economy is in a stuttering recovery. For one thing, corporate America has to restore profit margins. So it has to cut wages, which it didn't do during last year's phoney recession. Second, the US housing market - a mainstay of household wealth creation during the US equity market meltdown - won't keep on working the same magic.

Despite a slow global recovery, central banks will gradually tighten monetary policy. And global bond markets are also going to have to price in the US as a much bigger borrower. So interest rates will rise and yield spreads on emerging-market bonds will widen.

That's the most likely prospect. There is an even darker one, to which I ascribe a 40% probability. US equities will head south as corporate profit growth comes in way below expectations. There will be a big hit to household net worth and consumer confidence.

If this happens, the US could grow much less than expected. When the US grows slowly, the world stops growing.

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