When Rates Go Up, Stuff Blows Up
I’ve said the title of this issue a few times before in The 10th Man, here and here. When rates go up sharply, stuff blows up, because lots of people are negatively exposed to higher rates.
Households, corporates, and governments are all negatively exposed to higher rates, in different degrees. Back in 1994, we found that it was Mexico, Procter & Gamble, and Orange County, California who all suffered because of higher interest rates.
Where does the risk live today? We will soon find out.There is a playbook for when interest rates go up. Rising interest rates do not necessarily cause a recession per se, but they are usually found at the scene of the crime. There was no recession in 1994, but the financial world shivered. Today, we have rising rates and a more-hawkish Fed which has shown no signs of letting up. As usual, emerging markets are puking their guts out.
I was in Argentina last week and saw the carnage first-hand. I wrote about it in The Daily Dirtnap. The Argentine peso declined a smooth 20% in a week:
Meanwhile, Turkish President Recep Erdoğan is calling himself an “enemy of interest rates.” He is an FX trader’s dream.
Of course, there are idiosyncratic things going on in Argentina and Turkey, but all EM currencies and stock markets have been getting hit hard. Emerging markets was a consensus pick at the beginning of 2018, so it is making some people look a bit foolish.
When interest rates rise in the US, it makes US securities more attractive relative to emerging markets, and capital flows reverse—which is exactly what is happening today. Emerging markets happen to be the most leveraged player when it comes to US rates. But let’s talk about some more obvious examples.
…click on the above link to read the rest of the article…
