The Year of Living Dangerously

One of my favorite movies, The Year of Living Dangerously, takes place in a politically unstable Indonesia.  Maybe that's a reason why I own the Indonesian ETF (IDX) which has alarmingly plunged nearly 12% in the past four trading days.  Talk about "living dangerously".

Inflation fears are reported to have prompted the sell off.  Investors are apparently dubious that the Indonesian central bank can keep core inflation under 5% given a tailwind of fast rising food prices.  The Financial Times reported last week that the UN's Food and Agriculture Organization has announced that world food prices have just surpassed the previous record last seen in 2007-2008.  Bank Indonesia kept its interest rate at a record-low 6.5 percent after a meeting last week, but these low rates (by Indonesian standards) won't hold if inflation keeps rising.

Bear in mind IDX can be volatile-- similar big price swings were seen last Spring.  Much of the retreat could be simple profit taking given the rise in IDX since March 2009.  Nonetheless, some of the shine has worn off several of the Asian emerging markets.  In order to avoid a big loss, my response will be to sell IDX when it records a weekly close below 74.17.