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Summary

Our analysis provides kind of a Grand Unified Theory (GUT) of what is currently taking place in global financial markets
The massive borrowing by the U.S. Treasury is crowding out emerging markets capital flows
The structural factors that have kept long-term interest rates low and term premia repressed are fading
We expect a measured move in the 10-year Treasury yield to 4.25 to 4.40 percent, much sooner than the market anticipates

“Reagan proved deficits don’t matter.” – Dick Cheney

Deficits and the public debt are starting to matter. Really.
It is now more strikingly true than ever given the U.S. public debt-to-GDP is more than 3.4x higher than when President Reagan took office.

Emerging Market Debacle

Go no further than the debacle currently taking place in the emerging markets (EM), which began in the second quarter of this year, to witness the consequences of the U.S. Treasury’s trillion-dollar-plus demand shock for global funding.

Treasury_EM_Currencies

EM_Relative FX Vol to DM

In a closed financial system and a non-QE world, price (interest rates) would adjust to move the capital and debt markets back to a more sustainable equilibrium. The rise in interest rates would force the government to borrow less as higher interest rates crowd out other spending. Also, the supply of loanable funds to the government would rise as savings increase.

That is not the world we now inhabit, however, where global financial repression by central banks has resulted in a “rent control” like shortage of dollar funding. The shortfall is now being plugged, in part, by the residual capital flows, which had been chasing yield in the emerging markets over the past several years.

That is the sucking sound you have heard since late April.

…click on the above link to read the rest of the article…

Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else

September 21, 2018

Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else

The primary reason why stock prices have been soaring in recent months is because corporations have been buying back their own stock at an unprecedented pace. In fact, the pace of stock buybacks is nearly double what it was at this time last year. According to Goldman Sachs, S&P 500 companies spent 384 billion dollars buying back stock during the first half of 2018. That is an absolutely astounding number. And in many cases, corporations are going deep into debt in order to do this. Of course this is going to push up stock prices, but corporate America will not be able to inflate this bubble indefinitely. At some point a credit crunch will come, and the pace of stock buybacks will fall precipitously.

Prior to 1982, corporations were not permitted to go into the market and buy back stock.

The reason for this is obvious – stock buybacks are a really easy way for corporations to manipulate stock prices.

But these days it is expected that most large corporations will engage in this practice. Large stockholders love to see the price of the stock go up, and they are never going to complain when smaller shareholders are bought out and their share of the company is increased. And corporate executives love buybacks because so much of their compensation often involves stock options or bonuses related to key metrics such as earnings per share.

So in the end, stock buybacks are often all about greed. It is a way to funnel money to those at the very top of the pyramid, and those stock market gains are taxed at capital gains rates which are much lower than the rates on normal income.

…click on the above link to read the rest of the article…

Good Times…

September 13, 2018

Good Times…

My son wanted to know why it is that Venezuela (a topic that gets discussed around the dinner table at home) chose such painfully, obviously asinine policies.

After much thought I explained it thus.

Hard times create strong men. Strong men create good times. Good times create weak men. Weak men create hard times.CLICK TO TWEETI’d seen it before somewhere and so I dug it up. Here it is in a different form.

We bipeds don’t change. I’ve come to realise not to fight it, just see it for what it is and make sure you’re positioned accordingly…for your friends family and those you care about. Speaking of which you should consider joining our family.

No special offers, no steak knives, no wild ridiculous promises – simply rational analysis and positioning for a macro world we’ve never encountered before. EVER! That’s both exciting and terrifying at the same time.

We’re Bad

At literally everything. We buy high, sell low, look to what Johnny next door is wearing, what car he drives. We get taken in and scammed by shysters, we believe in the unbelievable.

Which brings me swiftly to EM where fund managers desperate for yield dived into the fire over the last few years. Now the inevitable pain is hitting as default fears mount for “BATS” as the emerging-market rout deepens.

Turkey’s implied default odds climbed to highest since 2008 and over in the land of great steaks default risk in Argentina is …ahem…substantial.

As Bloomberg points out:

Argentina’s implied default probability over the next five years climbed this month to 41 percent, the highest since Mauricio Macri’s government ended the nation’s decade-long legal battle with most holdout creditors.
Turkey’s implied default odds during that span rose to 31 percent, the highest since the 2008 global financial crisis.
Brazil’s implied default odds increased to 18 percent, the highest since the country’s worst-ever recession deepened in late 2016.
South Africa’s implied default odds soared to 15 percent, the highest since Donald Trump’s election in November 2016.

…click on the above link to read the rest of the article…

From Buenos Aires To Nashville: The Emerging Market Crisis Spreads From Periphery To Core

September 10, 2018

From Buenos Aires To Nashville: The Emerging Market Crisis Spreads From Periphery To Core

This is the last emerging market crisis story for a while, promise. But one angle – exactly how a plunging currency in a far-off place affects supposedly stable markets like the US – is worth exploring because it’s happening right this minute.

Let’s start with the choices facing an American or European investor who needs a decent return, but who finds that interest rates have fallen to the point where traditionally safe things like bonds and bank accounts no longer yield enough.

Such an investor has two choices: 1) Stick with what they know and accept sub-par returns (which might mean being fired if you’re a pension fund manager, or – if you’re a retiree – having to spend your golden years as a Walmart greeter), or 2) Branch out into more exotic but higher-yielding instruments and hope for the best.

Option number 2 has been pushed by financial planners and pension advisors for the past few years, with emerging market securities being the exotica of choice. The sales pitch went something like this: Developing country stocks are cheaper relative to earnings and dividend yields than their rich country counterparts, while their bonds yield quite a bit – frequently two or three times – more than US Treasuries for only marginally more risk, so they’re a great way to diversify while goosing returns.

Many, many investors swallowed this and bought emerging market stock and bond funds. And for a while they reaped the promised high returns, allowing retirees to spend time with their grandkids and pension managers to keep cashing their massive paychecks.

…click on the above link to read the rest of the article…

Emerging Market Debt Crisis – A Reality Check

September 6, 2018

Emerging Market Debt Crisis – A Reality Check

QUESTION: Hello Martin … I follow emerging markets closely and one thing I note is that the size of the sovereign forex-denominated debt burdens are quite small relative to GDP except in the case of Argentina (48%). Everybody else, including Turkey and Indonesia) is 11% or less. How can you have a debt crisis if everybody is clearly able to service their debts? That’s what confuses me. Today the Bloomberg EM dollar debt index is at 6.05% — whereas in 1998 it was 17%! That is saying the risk is still fairly subdued no?

Thank and regards,

ANSWER: There are at least three major factors that are not calculated in this perspective. The dollar debt rises exponentially in the cost to service that debt as the currency declines. It was that very relationship which sent Germany into hyperinflation during the 1920s. Germany had to print more money to make reparation payments and the more they printed the worse it became. If you look closely, Turkey’s external debt has grown 10% just in the past year alone as its currency has declined and interest rates have risen.

Next, we have the rising interest rates which add to the crisis further undermining the economy. The interest must be paid in terms of the foreign currency. Also, keep in mind that they have also issued external debt in euros.

The third dimension of Emerging Market Crisis is private. In the case of Turkey, in particular, this debt crisis differs significantly in one very critical manner. We are not looking at purely as crises fueled primarily by government debt. Much of the private debt of corporations have also borrowed in dollars and euro. This makes the crisis very problematic. There can be no IMF bailout for all the outstanding private debt in foreign currencies.

…click on the above link to read the rest of the article…

Major Currencies All Over The World Are In “Complete Meltdown” As The $63 Trillion EM Debt Bubble Implodes

September 5, 2018

Major Currencies All Over The World Are In “Complete Meltdown” As The $63 Trillion EM Debt Bubble Implodes

The wait for the next global financial crisis is over. Major currencies all over the planet are in a “death spiral”, many global stock markets are crashing, and economic activity is beginning to decline at a stunning rate in quite a few nations. Over the past 16 years, the emerging market debt bubble has grown from 9 trillion dollars to 63 trillion dollars. Yes, you read that correctly. Now that emerging market debt bubble is imploding, and as a result emerging market currencies all over the globe are in “complete meltdown”. In fact, at least 20 different currencies have fallen by double-digit percentages against the U.S. dollar so far in 2018, and nobody is quite sure what is going to happen next.

You may be tempted to think that this must be a good thing for the United States since the value of the U.S. dollar has been rising, but it is not.

During the “boom years”, trillions of dollars were borrowed by emerging market economies, and a high percentage of those loans were denominated in U.S. dollars. Now that their currencies are crashing, it is going to take much more local currency to service those U.S.-denominated debts, and a whole lot of them are going to start going bad.

That means that many financial institutions here in the United States and over in Europe are going to end up holding enormous piles of bad debt, and the losses could potentially be astronomical.

The dominoes are starting to fall, and even the mainstream media is admitting that what we are facing is really bad. For example, the following comes from a CNBC article entitled “The emerging market crisis is back. And this time it’s serious”…

…click on the above link to read the rest of the article…

Don’t Cry for Me Argentina – It’s a Global Debt Crisis

September 5, 2018

Don’t Cry for Me Argentina – It’s a Global Debt Crisis

QUESTION: Mr. Armstrong; Our government here in Argentina has told us we should expect more poverty and there is no hope for the future. Socrates has been amazing on its forecasts on our currency. There are enough of us down here who would sincerely ask would you consider advising Argentina to straighten out our economy and nation? You have forecast this emerging market crisis long before anyone else and your solution video on YouTube is very thought-provoking. If we can demand the government meets with you, would you do it?

KRD

ANSWER: The sone maybe Don’t Cry for Me Argentina, but it applies to the entire world for what happens in Argentina is merely the beginning of the global debt crisis. We can see from the chart that the dollar has been soaring. However, the Array picked August as the Panic Cycle and that has been spot on. Unfortunately, it does not look like this is going to calm down. We may be headed into a real Emerging Market crisis by October.

The reason why we are able to forecast such events well in advance is rather common sense. As I have said before, every solution to a crisis sets the stage for the next crisis. The Emerging Market debt crisis is unfolding because central banks in the USA and Europe lowered interest rates to “stimulate” the economy and they have no idea about how an economy truly functions. This is all based upon Keynesianism which is in turn based upon an isolated theory of the economy. They never consider that you lower interest rates and there are pensions who simply need higher rates to break-even. Then emerging markets issued debt in dollars with higher yields for the pension funds bought it assuming there was no currency risk.

…click on the above link to read the rest of the article…

“It Will Get A Lot Worse”: Global Stocks Tumble As EM Contagion Roils Markets

September 5, 2018

“It Will Get A Lot Worse”: Global Stocks Tumble As EM Contagion Roils Markets

Global stocks tumbled on Wednesday, as a drop in European markets followed a broad sell-off across Asia, as rising pressure on emerging markets intensified concerns of contagion and spillover into developed markets, leading to a sea of red in world stocks.

A day after emerging market currencies tumbled, it was the stock market’s turn in the hot seat, with shares sliding from Japan to Australia, and were crushed in Indonesia, where the nation’s benchmark lost almost 4%. Meanwhile, with no let-up in trade tensions near and new $200bn in US tariffs against China likely to be slapped as soon as tomorrow, the dollar strengthened for a fifth session and commodities slipped, led by oil, while the 10-year Treasury yield eased back to 2.89%.

At the same time, with the Fed showing no signs of slowing its rate hikes, investors are turning ever more cautious on emerging markets. Traders were focused on turmoil in developing nations wondering just how high rates will reach to contain the currency selloff, how acute the resulting economic slowdown will be and whether the volatility will spill into developed markets. Overnight, inflation in the Philippines exceeded 6% for the first time in nine years, joining Turkey and Argentina as another developing economy with soaring prices.

Predictably, the ongoing rout in emerging markets has not only not showed any signs of letting up, but accelerated overnight, with most currencies around the globe sliding against the soaring dollar, while the MSCI index of emerging market stocks heading toward a bear market.

…click on the above link to read the rest of the article…

The Global Financial System Is Unraveling, And No, the U.S. Is Not immune

September 4, 2018

The Global Financial System Is Unraveling, And No, the U.S. Is Not immune

Currencies don’t melt down randomly. This is only the first stage of a complete re-ordering of the global financial system.

Take a look at the Shanghai Stock Market (China) and tell me what you see:

A complete meltdown, right? More specifically, a four-month battle to cling to the key technical support of the 200-week moving average (the red line). Once the support finally broke, the index crashed.

Now take a look at the U.S. S&P 500 stock market (SPX):

SPX is soaring to new highs, not just climbing a wall of worry but leaping over it. So the engine of global growth–China–is exhibiting signs of serious disorder, and the world’s consumerist paradise–the U.S.– is on a euphoric high (Ibogaine in the water supply?)

This divergence is worth pondering. How can the two economies that have powered a 28-year Bull Market in just about everything (setting aside that spot of bother in 2008-09) be responding so differently to the global economy and global financial system’s woes?

There’s a rule of thumb that’s also worth pondering. While the stock market attracts all the media attention–every news cast reports the daily closing the the Dow Jones Industrial Average, the SPX and the Nasdaq stock index–the bond market is larger and more consequential. And larger still is the currency market–foreign exchange (FX).

As the chart below illustrates, a great many currencies around the world are in complete meltdown. This is not normal. Nations that over-borrow, over-spend and print too much of their currency to generate an illusion of solvency eventually experience a currency crisis as investors and traders lose faith in the currency as a store of value, i.e. the faith that it will have the same (or more) purchasing power in a month that it has today.

…click on the above link to read the rest of the article…

Peso, Rand Plummet As Emerging Market Crisis Deepens

September 4, 2018

Peso, Rand Plummet As Emerging Market Crisis Deepens

The EM contagion is slamming currencies around the globe, and while the Turkish Lira remains relatively immune for the time being, traders are now focusing their attention on the South African rand and the Argentine peso, both of which are in freefall this morning.

The ZAR has plunged 3.2%, the most since Nov. 10, 2016 on a closing basis, after the country reported that it had unexpected slumped into recession, which in turn is reigniting concerns about a rating agency downgrade. At the same time, the yield on rand-denominated government bonds has jumped 24bps to 9.24%, the highest since Dec. 1.

The Argentine peso is the other EM currency in freefall this morning, dropping 5.5% to 39 per dollar (vs the Friday close dueo the Monday US holiday) when the market opened in Buenos Aires Tuesday following a new series of measures announced by the government on Monday, including new export tariffs to help close fiscal gap by 2019, a move which the market clearly finds insufficient.

As Bloomberg notes, NY-traded shares of Argentine companies opened down, with the Bank of New York Mellon Argentina ADR Index dropping 4.4 percent at the open. Bank stocks led declines with drops of as much as 13 percent.

The First Global Domino Tips

September 4, 2018

The First Global Domino Tips

It’s hard to believe it was only about three months ago. Time flies when disaster unfolds all around you. In early June, Brazil’s central bank arranged a press conference where its President Ilan Goldfajn would set everyone straight. The currency was falling, he admitted, but it would be easily handled by closely following the Portuguese version of the global central bank handbook.

Sometimes you just have to admire the unrivalled brazenness of these guys and gals. Or, as I put it at the time, Goldfajn just called everyone stupid. He would have to believe that of us because Brazil has been through this before. Not in some long distant past disgrace, but just a few years ago. In fact, as he spoke, Brazil still hadn’t yet begun its recovery from the last time.

I couldn’t resist what I still think was appropriate snark in response:

We are just short of five years from when the last Banco chief called a press conference in 2013 to declare pretty much the same exact thing. Only then, Banco acted and had initiated a swap program that by early 2015 had extended to more than $115 billion. It ran so smoothly, the Brazilian economy is today celebrated as the model for how all EM crises should be handled.

Just kidding. Of course not. The real crashed and with it the Brazilian economy.

Is that ahead for Brazil, repeating the nightmare? Today’s statistics for Q2 2018 aren’t looking good, not that anyone who isn’t stupid would have expected otherwise.

Brazil’s economy had been decelerating for some time before. The currency, meaning dollar, and economy go hand in hand in that regard. Both BRL as well as Brazil’s economy each fell into an obvious “L” pattern. That’s not a very good template to follow in either direction, but it makes the potential re-emerging downslope that much more precarious.

“Expect More Pain”: As EM Contagion Goes Global, Wall Street Sees No Way Out

September 4, 2018

“Expect More Pain”: As EM Contagion Goes Global, Wall Street Sees No Way Out

With Trump set to announce another $200BN in Chinese tariffs as soon as Thursday, sparking fears of a more acute phase of global trade wars and sending the dollar higher and US equity futures lower, the emerging market contagion vortex is starting to take on a life of its own and as Bloomberg notes this morning, “even when the most vulnerable countries vow to protect their currencies, the dollar steps in to rain on their parade.”

As noted earlier, the selloff in emerging market currencies has been relentless, dragging down the MSCI FX index to the lowest level in over a year, pressured by the trio of the South African rand, which dropped after Pretoria reported that the nation had entered only its second recession in 9 years, the Turkish lira, which is down again after the central bank failed to restore confidence that even a telegraphed rate hike will be sufficient to curb the country’s soaring inflation, and the Argentine peso which slumped 4% yesterday after president Macri’s latest announcement of emergency measures did little to raise sentiment.

Meanwhile, in addition to the imminent announcement of a new $200BN in China tariffs, US investors are now eyeing the Fed’s September rate hike which now appears inevitable, helping the dollar extend gains which in turn is further pressuring emerging markets amid deepening worries over idiosyncratic risks in emerging markets including Argentina’s fiscal woes, Turkey’s twin deficits, Brazil’s contentious elections and South Africa’s land-reform bill.

…click on the above link to read the rest of the article…

Emerging Market Contagion Threatens Oil Market

September 4, 2018

Emerging Market Contagion Threatens Oil Market

The emerging market currency crisis is not over yet, and could yet morph into a broader contagion that threatens to drag down oil demand.

Last week, Argentina’s peso fell by around 20 percent in just a few days, taking year-to-date losses over 50 percent. The central bank frantically hiked interest rates from 45 to 60 percent in an effort to stem the losses, hoping to halt the peso’s spiraling descent. The peso regained a bit of ground, but now trades at over 37 pesos to the dollar, compared to 27 pesos per dollar in early August and 18 pesos at the start of the year.

This may seem like a problem for Argentines, but the currency turmoil is indicative of a broader malaise sweeping over emerging markets. A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down.

…click on the above link to read the rest of the article…

EM Rout Returns As Global Stocks Fade, Dollar Surges

September 4, 2018

EM Rout Returns As Global Stocks Fade, Dollar Surges

S&P500 futures have been trading rangebound since Friday, and pointed to a mixed open for U.S. shares as traders return from Labor Day holiday. Nike fell in the pre-market after the sportswear-maker revealed its new ad campaign will star Colin Kaepernik who led protests during the playing of the national anthem.

The Stoxx Europe 600 index dropped 0.3% after earlier rising as much as 0.4% led by banks, miners and carmakers. Danske Bank retreats as much as 7.1%, ING falls as much as 3.2%. Danske said it is in the process of finalizing an internal investigation into allegations that its Estonian operations were used to launder billions of dollars in illicit funds; separately ING agreed to pay 775 million euros to settle an investigation by the Dutch prosecutor into issues including money laundering and corrupt practices, one of the biggest fines ever given to the country’s banks in a criminal case.

Italian government bond yields fell back from three-month highs, with investors encouraged by soothing comments from Italian ministers on forthcoming budget proposals. According to Reuters, Rome’s Economy Minister Giovanni Tria was pushing the governing coalition to keep next year’s budget deficit below 2 percent of output. Deputy Prime Minister Matteo Salvini had said on Monday that it would not breach the European Union’s 3 percent limit.

…click on the above link to read the rest of the article…

Russell Napier: “The IMF Is About To Send A Profound Shudder Through A Generation Of Investors”

September 3, 2018

Russell Napier: “The IMF Is About To Send A Profound Shudder Through A Generation Of Investors”

Bringing Up The Bodies in Emerging Markets

‘The order goes to The Tower, “Bring up the bodies.”’

— Bring Up The Bodies, Hilary Mantell (The Forth Estate, Jan 2015)

For many investors the meltdown in emerging market exchange rates is just some temporary contagion from Turkey; it will go away. The reasoning goes that it is a myopic liquidation of perfectly good assets, just because Turkey happens to be classified as an emerging market. Your analyst has long disagreed with that and late last year outlined the consequences for emerging markets from the bankruptcy of Turkey.

Of course the greatest surprise for investors is not that this is a problem for emerging markets but that it is, much more importantly, the beginning of a European crisis. However, it is not just the negative impacts from the broad financial forces outlined in these reports that are depressing emerging market exchange rates. There is something much more important and insidious undermining these exchange rates: the rise of the rule of man and the decline of the rule of law.

Professional investors have become entirely distracted from the structural decline in the rule of law in emerging markets, as they beat themselves up about Brexit and the Trump Presidency. Given the backgrounds of the average investment manager, it is not surprising that their attention should be diverted to these local issues that challenge not just their portfolio values, but also their personal values. Whatever these two political shifts represent, however, they do not represent a decline in the rule of law. If the US does have a President, whether Republican or Democrat, who breaches the law then it is highly likely that they will be held to account by the legal process.

…click on the above link to read the rest of the article…

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