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The Death Of The Petrodollar Was Finally Noticed
The Death Of The Petrodollar Was Finally Noticed
Three months ago, we wrote “How The Petrodollar Quietly Died, And Nobody Noticed“, in which we explained in painful detail why far from the simple macroeconomic dogma which immediately prompted the macro tourists to scream that “oil prices dropping are good for US consumers“, the collapse in the price of crude is not only a disaster for oil exporting nations – one which will lead to a series of violent “Arab Springs” across the oil-producing developed world – but far more importantly, have a massive impact on capital markets as a result of the plunge in the most financialized commodity in history.
On the death of the Petrodollar we commented that unlike previously, when petrodollar recycling funneled the proceeds from oil-exports into financial markets, helping to boost asset prices and keep the cost of borrowing down, henceforth “oil producers will effectively import capital amounting to $7.6 billion.” We added that “oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.”
The conclusion was simple: “net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity – not to mention related downward pressure on US Treasury yields – is negative.”
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Price Discovery and Emerging Markets
Price Discovery and Emerging Markets
I got to admit, Paris and Charlie have thrown me off a bit. Can’t be just me who noticed how well the French CAC 40 was doing since Charlie Hebdo got shot, can it? Up some 2%, I don’t quite recall, Wednesday, the day of the attack, and 3.59% yesterday. Doesn’t that strike you as odd? It did me. It’s maybe the perfect example of how alienated the financial world has become from the real world, from you and me. And it doesn’t even surprise us anymore, it doesn’t hardly seem worth mentioning anymore. But I thought I’d do just that: mention it. The CAC 40 lost 1.9% today, but still.
“Fed bullish” said yesterday’s headlines. Of course they did. But France? What have traders in Paris seen in the killings and blood stains that made them so jubilant they got all the way to +3.59%? And where are the ethics hiding in that number? I see no ethics. Should we accept that the financial part of our world has none? That it’s a kind of a parallel universe? That it doesn’t reflect anything that happens to us, and ours?
Today the equally jubilant US jobs report has the Dow down almost a full 1%. Maybe nobody believes anything anymore, any more than the financial world reflects the real one. And maybe nobody cares anymore either. We just go about our days knowing that jobs reports are nonsense, that price discovery has been put six feet under, and that if we’re really smart, we can still make money off of other people’s misery. And isn’t that what Darwin said the purpose of life is? Or was that Ayn Rand? I’m sorry, Charlie threw me off a bit.
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Wall Street Heathens: How Their Greed And Gambling Became The Axe Of Statist Policy | David Stockman’s Contra Corner
One of the most unfortunate acronyms ever invented was BRIC. It supposedly embodied an epoch-defining ignition of capitalist growth and prosperity in Brazil, Russia, India and China. And these leading paragons were held to be emblematic of a general economic awaking in the EM.
But it was no such thing. The BRIC countries were actually economic cripples riven with socialist and statist policy afflictions that had the good fortune to hitch a ride on the central bank fueled credit binge of the last two decades.
Not surprisingly, the term was invented in 2001 by Goldman’s London based stock peddler and propagandist, Jim O’Neill. The latter’s patented slide shows about the awesome BRIC advance were typically bulging with charts and data. But what O’Neill failed to comprehend was that these bounteous curves and soaring CAGRs were tracking a metastasizing monetary bubble, not a miracle of capitalist prosperity.
The Biggest Economic Story Going Into 2015 Is Not Oil – The Automatic Earth
The Biggest Economic Story Going Into 2015 Is Not Oil – The Automatic Earth.
Isn’t it fun to just watch the market numbers roll by from time to time as you go about your day, see Europe markets up 3%+, Dubai 13%, US over 2% (biggest two-day rally since 2011!), and you just know oil must get hit again? Well, it did. WTI down another 3%+. I tells ya, no Plunge Protection is going save this sucker.
And oil is not even the biggest story today. It’s plenty big enough by itself to bring down large swaths of the economy, but in the background there’s an even bigger tale a-waiting. Not entirely unconnected, but by no means the exact same story either. It’s like them tsunami waves as they come rolling in. It’s exactly like that.
That is, in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And I’m not talking Putin, he’ll be fine, as he showed again today in his big press-op. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. And make no mistake: to be a contender for bigger story than oil going into 2015, you have to be major league large. This one is.
The US dollar will keep rising more or less in and of itself, simply because the Fed has ‘tapered QE’, and much of what happened in global credit markets, especially in emerging markets, was based on cheap and easily available dollars. There’s now $85 billion less of that each month than before the taper took it away in $10 billion monthly increments. The core is simple.
Oil Price Pain: Who’s Next After Emerging Markets And Fracking?
Oil Price Pain: Who’s Next After Emerging Markets And Fracking?.
The price of oil has sunk almost 50% since June with West Texas Intermediate crude slipping below $60 a barrel last week and Brent falling below the same level on Tuesday. “Yippee!” I hear you say, “cheap gas and a drop in inflation!” Well, yes in terms of a boost to consumers, and indeed a boost to global GDP, lower oil prices are a good thing and make most of us feel better off.
While I wouldn’t want to put a downer on the party, a sudden collapse in oil prices as we are seeing is not all good news. There are consequences, and the faster and further it falls, the greater those consequences could be.
Take a look at Russia: the ruble has collapsed, interest rates have foolishly been hiked from an already crucifying 10.5% to 17% this week consigning the economy to a deep recession next year and the central bank is burning through its reserves in failed attempts to support the currency and shore up the banks. Corporate Russia is deeply in debt to the outside world, mostly priced in dollars and will struggle to repay the interest on loans this coming year.
Nor is Russia alone, Venezuela is in an even worse position without Russia’s reserves, likewise Argentina, Iran and even previously booming Nigeria are now facing major problems. Turmoil in emerging markets is nothing new but has the potential to seriously upset markets at home and to destabilize banks and investors that have spent the last few years since the financial crisis chasing dwindling yields in ever more risky environments overseas.
Emerging Markets in Danger | Erico Matias Tavares | LinkedIn
Emerging Markets in Danger | Erico Matias Tavares | LinkedIn.
There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever.
The yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012.
MSCI Emerging Markets Index and Yield Spread between High Grade Emerging Markets and US AAA Corporates: 14 March 2003 – Today
Source: US Federal Reserve.
This means that the best credit names in emerging markets have to pay a bigger premium over their US counterparts to get funding. When this spread spikes up and continues above its 200-day moving average for a sustained period of time, it is typically a bad sign for equity valuations in emerging markets, as shown in the graph above. One swallow does not a summer make, but it is worthwhile keeping an eye on this indicator.
Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain – Bloomberg
Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain – Bloomberg.
Stephen Jen landed in Hong Kong in early January 1997 as Morgan Stanley’s newly minted exchange-rate strategist for Asia.
He was soon working around the clock when investors began targeting the region’s currency pegs, first felling Thailand’s in July. The rout spread through Asia before rocking Brazil andRussia. It led to the collapse of Long-Term Capital Management, an event that introduced the Federal Reserve-brokered bailout.
If the 48-year-old native of Taiwan, with a PhD from Massachusetts Institute of Technology, sounds a little jaded now, it’s not without some reason. He says he worries that many emerging-market analysts are too young to remember the late 1990s. Instead they learned the ropes in an era dominated by the rise of Brazil, Russia, India and China — a supposed one-way bet to prosperity.
“Many became EM specialists after the term ‘BRIC’ was coined in 2001 and don’t know any serious crisis,’’ says Jen, who now runs the London-based hedge fund SLJ Macro Partners LLP.
Emerging Markets Masking Corporate Foreign-Debt Levels, BIS Says – Bloomberg
Emerging Markets Masking Corporate Foreign-Debt Levels, BIS Says – Bloomberg.
Foreign-debt levels of companies in emerging markets from China to India and Brazil are underestimated, threatening financial stability, the Bank for International Settlements said.
Companies are raising more foreign funds through their offshore affiliates and accounting practices understate the currency risk in such transactions, the Basel, Switzerland-based institution said in its quarterly report. Almost half of the $554 billion that the firms raised in the five years through 2013 came from the affiliates, the BIS said.
“Offshore subsidiaries of emerging-market non-financial corporates are increasingly acting as surrogate intermediaries,” raising money abroad and transferring it to their parent companies, economists led by Stefan Avdjiev wrote. “This trend could have important financial-stability implications. Yet, analysis of it is hindered by conceptual difficulties associated with statistical conventions on the measurement of cross-border flows.”
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