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We are living in a period of mass “Jonestown” economic delusion. Just twenty months ago – central bankers were offering to buy nearly every junk bond known to mankind, dramatically distorting the “true cost of capital.” All the way from crypto to emerging markets – it was a moral hazard overdose. Everyone on earth was borrowing money at fantasy-land bond yields.
Now, the Fed is promising endless rate hikes and $1T of balance sheet reduction onto a planet with emerging market and Euro-zone credit markets in flames.
Listen, all I have is an economics degree from the University of Massachusetts, but after having spent the last 20 years trading bonds professionally and embarking on a 20k feet deep autopsy on the largest bank failure of all time – from my seat the current Fed agenda is sheer madness and will be outed very soon.
The true cost of capital was distorted for so long, we now have hundreds of academics– clueless to the underlying serpent inside global markets. When the 6 foot seven, Paul Volcker walked the halls of the Marriner S. Eccles Building of the Federal Reserve Board in Washington, our planet embraced about $200T LESS debt than we are staring down the barrel at today. Please call out the risk management imbeciles that make any reference of “Powell to Volcker.”
In 2021, global debt reached a record $303T, according to the Institute of International Finance, a global financial industry association. This is a FURTHER jump from record global debt in 2019 of $226T, as reported by the IMF in its Global Debt Database. Volcker was jacking rates into a planet with about $200T LESS debt. Please call out the risk management imbeciles that make any reference of Powell to Volcker.
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The world is on the cusp of an economic storm, and most global investors haven’t strapped on their rain boots nor deployed their umbrellas for what is coming in 2020. As we note in this piece, the most vulnerable fall first, all eyes on emerging markets for the next domino to drop.
Bloomberg examines South African financial markets, where the Johannesburg Stock Exchange (JSE) is about to record the worst third quarter since 2011, an ominous sign that the global recovery this year is only a myth.
Bloomberg notes property and construction sectors of the JSE were the weakest performing sectors, along with technology, telecommunications, retailers, agriculture, education, and financial services.
South Africa barely avoided a recession in the second quarter, and economists are warning that unless the economy substantially expands in the quarter ahead, below-trend growth will return in 2020.
“South African needs a minimum of 2.5% growth consistently to cause the unemployment rate to fall and to stabilize public debt and at least structurally we’re some distance away from that milestone,” said Standard Bank chief economist Goolam Ballim.
South Africa faces ever-worsening economic and social problems heading into 2020; a slew of factors are driving the country towards collapse: increasing government debt, disintegrating infrastructure, collapsing education standards, widespread crime and violence, currency volatility, and investment outflows.
JSE, weighed down by domestic issues of an imploding country, is also dealing with a global economic downturn that is heavily weighing on emerging markets.
The South African rand is likely to break above the 15.2 level as the country’s socio-economic crisis continues to expand into 2020.
…click on the above link to read the rest of the article…
The Impending Crisis
At one time, specifically during the post-World War 2 Bretton Woods era, it looked like as if the capitalist model could be indefinitely sustainable and avoid plunging the world into major world conflicts. That era began to come to an end during the stagflation crisis of the 1970s, and came to a complete end at the end of the Cold War which ushered in the era of the so-called “globalization” which took form of unbridled competition for markets and resources. At first this competition did not show many signs of trouble. There were many “emerging markets” created as a result of the collapse of the Soviet bloc into which Western corporations could expand. However, the law of diminishing returns being what it is, the initial rapid economic growth rates could not be sustained and attempts to goose it using extremely liberal central bank policies, to the point of zero and even negative interest rates, succeeded in inflating—and bursting—several financial “bubbles”. Even today’s US economy bears many hallmarks of such a bubble, and it is only one of many. Sooner or later the proverbial “black swan” event will unleash a veritable domino effect of popping bubbles and plunge the global economy into a crisis of a magnitude it has not seen since the 1930s. A crisis against which the leading world powers have few weapons to deploy, since they have expended their monetary and fiscal “firepower” on the 2008 crisis, to little avail. The low interest rates and high levels of national debt mean that the next big crisis will not be simply “more of the same.” It will fundamentally rearrange the global economy.
…click on the above link to read the rest of the article…
A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.
The U.S. dollar continues being the single most important factor for the Emerging Markets.
And as the dollar keeps getting stronger – it will continue crippling them.
“But isn’t a strong dollar supposed to be better for Emerging Markets by making their exports cheaper?”
Yes – and no.
True, a stronger dollar does make foreign currencies cheaper – which can boost their exports.
But the problem today is that Emerging Markets are bogged down with massive amounts of dollar-denominated debts. And the weaker their currencies are – the harder it is to repay those debts.
That’s very important to keep in mind – especially as trillions of dollar-denominated bonds mature over the next few years.
Let’s take a closer look. . .
Since 2009 – Emerging Market governments and corporations have gorged on cheap dollar debt.
How?
Because when the Federal Reserve cut interest rates to zero and launched three rounds of money printing (via Quantitative Easing) in attempt to save the global financial system post-2008 – two critical things ended up happening.
First – U.S. investors were starved for yield. Meaning they couldn’t make enough interest from government bonds to meet their future obligations. So they started lending abroad to foreign countries that offered higher rates of interest (although much riskier).
And even though some of these borrowers didn’t deserve such favorable rates (like Turkey and Argentina and Greece) – lenders still gave them what they wanted.
And Second – the Emerging Market governments and corporations saw this as an opportunity to get cheaper dollar financing. They could now get dollar loans at lower rates of interest than what was available locally.
Here’s an example of a ‘free money’ tactic Emerging Markets would do with their cheaper U.S. debt. . .
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For nearly a decade stocks enjoyed an environment of unprecedented bullishness, where good news was good news, and bad news was even better as it suggested central bank intervention via monetary stimulus, boosting asset prices. But that is no longer the case according to the head of Natixis SA’s $1 trillion asset-management arm who says that volatile equity markets are the “new normal.”
“We’re back to the basics: risk on, risk off,” Jean Raby, CEO of Natixis Investment Managers, said in an interview Tuesday at the Canada Fintech Forum in Montreal. “Over the past several years, in a way, bad news was good news because it meant a more accommodating monetary policy. Now we’re in the real world where bad news is bad news, and good news may not be such great news.”
The good news, according to Raby is that for now at least, the fundamental “bad news” is not quite as bad as markets have made it out in the past month, stressing that no single region is in contraction and emerging markets contagion from Turkey and Argentina is probably “overstated.”
“I have to believe, when I look at the fundamentals, that we are still on pretty sound footing.”
Natixis Investment, which is controlled by Groupe BPCE, France’s second-biggest bank, warned earlier this year that a global sell-off could hit its asset-management business, although higher volatility could benefit its trading operations.
While the recent Saudi turmoil has moved away from the front pages, Raby was asked about the longer-term impact on investment in Saudi Arabia, saying it’s too early to tell.
…click on the above link to read the rest of the article…
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I admit: I’m a permabear.
This is no surprise to those who know and have followed me over the years. But I’m publicly proclaiming my ‘bearishness’ because doing so might open up a needed and long overdue dialog.
Here’s my fundamental position: Infinite growth on a finite planet is impossible.
Cutting to the chase, this is why I predict a major crash/collapse across stocks, bonds and real estate is on the way.
The recent market weakness seen over the past two weeks is nothing compared to what’s in store. As we’ve been carefully chronicling, bubbles burst from ‘the outside in’, starting at the weaker places at the periphery before progressing to the center.
Emerging market equities are now down -26% from their January highs and -18% year-to-date. China’s stocks market is down -32%, even with substantial intervention by the government to prop things up.
The periphery has been weakening all year, and the contagion has now spead worldwide.
Taken as a whole, global equities have shed some $13 trillion of market capitalization for a -15% decline:
The rot has spread to the core with surprising speed. Now even the formerly bullet-proof US equity markets are stumbling.
The S&P 500 is now negative on the year:
It’s been obvious for a long time to those who have watched The Crash Course that endless growth is simply not possible. Not for a bacteria colony in a petrie dish, not for an economy, not for any species on the planet. Eventually, when finite resources are involved, limits matter.
But the vast majority of society pretends as if this isn’t true.
…click on the above link to read the rest of the article…
Often unobtrusively, the stakes can grow incredibly large. There’s a dynamic that has been replayed in the past throughout the emerging markets. Bubbles are pierced and “hot money” heads for the exits. Central banks and government officials then work aggressively to bolster their faltering currencies. These efforts appear to stabilize the situation for a period of time, although the relative calm masks assertive market efforts to hedge against future currency devaluation in the derivatives markets.
…click on the above link to read the rest of the article…
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With the recent plunge in the S&P 500 of over 5%, has the long-anticipated (and long-overdue) market correction finally begun?
It’s hard to say for certain. But the systemic cracks we’ve been closely monitoring definitely got an awful lot wider this week.
After nearly a decade of endless market boosting, manipulation and regulatory neglect, all of the trading professionals I personally know are watching with held breath at this stage. The central banks have distorted the processes of price discovery and market structure for so many years now, that it’s difficult to know yet whether their grip on the markets has indeed failed.
But what we know for certain is that bubbles always burst. Inevitably. Each is built upon a fallacy; and when that finally becomes apparent to enough people, the mania ends.
And today, there are currently massive bubbles in stocks, bonds and real estate. Every one courtesy of the central banks (as we have written about in great detail here at PeakProsperity.com over the years).
And with no Plan B in place to gracefully exit the corner they have painted themselves — and thereby the global economy — into, the only option available to them is to double-down on the pretense that we’d all be screwed without their stewardship. They have to do this I suppose. To admit the truth would throw the world into panic and themselves out of a job.
Who knows what they think privately? But in public, they give us real gems like these:
Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking
U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said.
…click on the above link to read the rest of the article…
The IMF is perpetually late in its forecasts. Here’s the latest hoot: IMF Warns of Possible Emerging-Markets Crisis.
A new study by the International Monetary Fund projects emerging economies will muddle through recent market turbulence without a severe shock to their financial systems, but flags an outside chance of a crisis.
In a “severely adverse” scenario, the IMF says capital could flood out of countries at a pace not seen since the 2008 global financial crisis.
Outside Chance of a Crisis? What the Hell?
Argentina and Turkey are both in a full-blown crisis. So is Pakistan which last week went to the IMF for help.
Here’s a hint: It’s a certifiable crisis to go to the IMF for a bailout.
And what about Venezuela deep in hyperinflation.
Wake-Up Call
“This should serve as a wake-up call,” Ms. Lagarde said of the mounting debts and risks of capital outflows.
Wake-up call to do what? Please tell us Ms Lagarde.
The emerging market crisis is already underway.
When the global junk bond and equity bubbles pop, we will not just be talking about emerging markets that are in trouble.
Hello IMF, please wake up.
EMs in the crosshairs: Between war games, fake news and bonds
From military exercises to trade wars, the fury is intensifying. At the same time, global liquidity is compressing while rates are rising. Growing uncertainty, contracting liquidity & rising cost of capital will continue to place non-US assets (and in particular EMs) in the crosshairs.
“Wag the Dog” showed the power of ‘fake news’ but…
In the 1997 movie ‘Wag the Dog’, a spin doctor was hired to help distract people from sex scandals by staging a televised ‘fake war’ in the lead-up to the Presidential elections. It was the first time that Hollywood described what has recently become known as meddling or convincing people that ‘white is black’. These days there are far more efficient and potent ways of targeting voters & disseminating fake news than Brean (spin doctor) could ever have imagined.
Ever since then the life has been imitating art. From John Kerry’s swift-boat controversies in ’04 to data dumps and fake accounts in ’16, the avalanche of bots and news (fake or otherwise) has become so overwhelming that people have no chance to process it, and separate the wheat from the chaff. As societies no longer agree on what truth is, there is no need for verifiable facts.
…it could all go badly wrong while liquidity continues to tighten
This brings us to the latest news that the US Seventh fleet might conduct military exercises in the South China Sea. Although there are real issues at stake (freedom of navigation), there is clearly considerable room for accidents and unexpected turns.
…click on the above link to read the rest of the article…
A few days ago we discussed how soaring oil prices have been a stagflationary double whammy to emerging markets, which have been hit not only by a surging dollar, resulting in a collapse in local currencies and spiking import costs, but a spike in local currency oil and gasoline prices resulting in a surge in inflation and a slowdown in the economy as local infrastructure grinds to a halt.
This morning, this dynamic was revealed clearly – and painfully for Turkish residents – when Ankara reported that consumer inflation climbed to one of the highest levels since President Recep Erdogan came to power 15 years ago, spurring more calls for higher interest rates to rein in prices or at least for Erdogan to normalize relations with the US.
Turkish inflation soared to 24.5% in September from a year earlier (up 6.3% on the month, the highest since April 2001), rising for the 6th consecutive month driven by an across-the-board spike provoked by the lira’s meltdown; it was also the highest since June 2003 and rising above all Wall Street expectations where the median estimate was 21.1%. Worse, the CPI print was higher than the central bank’s policy rate of 24% suggesting more rate hikes are now imminent… but will Erdogan agree?
Medley Global analyst Nigel Rendell said the inflation figure was “a shocker” but said he was cautiously optimistic that weak consumption might offset inflationary pressures at some point.
“Interest rates of 24 percent provide some protection, and there is a sense that the weakness of domestic demand will be the dominating disinflationary force in a few months’ time once the foreign exchange pass-through has fed its way through the system.”
As the following key highlights from the Turkstat report show, the price increases was broad based across virtually all categories (via Bloomberg):
…click on the above link to read the rest of the article…
US consumers may be cursing rising gasoline prices which are rapidly approaching an average of $3.00 across the nation as Brent hits a new 4 year high above $84, but that is nothing compared to the horror that motorists across most emerging markets are facing.
With currencies across the developing world tumbling as a result of a toxic mix of global trade tensions, the strong dollar and rising U.S. interest rates, dollar-denominated crude has become all the more expensive. And while the price of Brent crude, the international oil price gauge, has risen by 22% this year in dollar terms, its cost has doubled if you’re buying in Turkish lira. It is up 39% in Indian rupees and 34% in Indonesian rupiah. And don’t even mention Argentina.
The soaring prices are forcing emerging-market countries and central banks to act. According to the WSJ, India, the world’s third-biggest oil importer, is weighing temporarily limiting oil imports, while Brazil and Malaysia have introduced fuel subsidies. On Thursday, central banks in Indonesia and the Philippines both raised interest rates to tame rising inflation.
In South Africa, where fuel prices are at a record high, the central bank said in a statement last week that “the impact of elevated oil prices and a weaker exchange rate on domestic fuel costs is increasingly evident.”
“Emerging markets already have a lot of problems as it is, and when you throw an oil price spike to the mix, that creates another big risk factor,” said Jon Harrison, managing director for emerging markets strategy at TS Lombard.
The sharp spike in oil – and gasoline prices – assures a double whammy to the economy as local infrastructure is forced to, literally, slow down. And absent a major change, such as a sharp drop in the dollar or oil prices, the large developing nations like Turkey, India, the Philippines and South Africa are out of luck as they import all or most of their oil.
…click on the above link to read the rest of the article…
India’s financial markets are in the throes of this Emerging Market crisis. The Mumbai-based Infrastructure Leasing & Financial Services (IL&FS) is an over 30-year-old infrastructure lending giant that claims to have helped develop and finance projects worth $25 billion in Asia’s fastest-growing economy. The company recently defaulted on debt payments because it ran out of cash. This is illustrating what we have been warning about. As interest rates rise and the dollar, the first casualty will be the Emerging Markets (EM). Because interest rates were driven to absurdly low levels in Europe and the USA, those who need yield ran off to the EM field.
Central Banks cannot manage the economies anymore. We live in a porous global economy. The Fed buying back 30-years bonds to lower real estate loan yields was absurd. The false assumption was that only American owned such debt. But the dollar is the reserve currency. That meant that more than 40% of such debt resided outside the USA. Central Banks can no longer manipulate the economy using the demand side economic models. They drove capital rushing into the EM sector desperate for yield – especially state operated pension funds.
This is why we have a serious debt crisis on our hands. The greenback is STILL going to press higher against the rupee. Just look at the pattern. This is NOT an isolated high. We are looking at a significant rally still on the horizon for the dollar.
It is that time of the year again. Every year, people start talking about a possible stock market crash in October, because everyone remembers the historic crashes that took place in October 1987 and October 2008. Could we witness a similar stock market crash in October 2018? Without a doubt, the market is primed for another crash. Stock valuations have been in crazytown territory for a very long time, and financial chaos has already begun to erupt in emerging markets all over the globe. When the stock market does collapse, it won’t exactly be a surprise. And a lot of people out there are pointing to October for historical reasons. I did not know this, but it turns out that the month with the most market volatility since the Dow was first established has been the month of October…
The difference is quite significant, as judged by a measure of volatility known as the standard deviation: For all Octobers since 1896, when the Dow Jones Industrial Average was created, the standard deviation of the Dow’s daily changes has been 1.44%. That compares to 1.05% for all months other than October.
Like me, you are probably tempted to think that the reason why October’s number is so high is because of what happened in 1987 and 2008.
But even if you pull out those two months, October is still the most volatile…
You might think that this difference is caused by a few outliers, such as the 1987 crash (which, of course, occurred in October) or 2008 (the Dow suffered several thousand-point plunges that month as it reacted to the snowballing financial crisis). But you would be wrong: The standard deviation of daily Dow changes is much higher in October than other months even if we eliminate 1987 and 2008 from the sample.
…click on the above link to read the rest of the article…
CAMBRIDGE – A recurrent topic in the financial press for much of 2018 has been the rising risks in the emerging market (EM) asset class. Emerging economies are, of course, a very diverse group. But the yields on their sovereign bonds have climbed markedly, as capital inflows to these markets have dwindled amid a general perception of deteriorating conditions.
Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let’s call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.
What’s driving this divergence? Are financial markets overestimating the risks in EM fixed income (EM yields are “too high”)? Or are they underestimating risks in lower-grade US corporates (USEM yields are too low)?
Taking together the current trends and cycles in global factors (US interest rates, the US dollar’s strength, and world commodity prices) plus a variety of adverse country-specific economic and political developments that have recently plagued some of the larger EMs, I am inclined to the second interpretation.
In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world.
…click on the above link to read the rest of the article…