Emerging markets must now brace

Coming Emerging Market Debt Meltdown

Posted on December 20, 2014 by Martin Armstrong

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It seems the one primary area that people disagree with the view of the future is the rise in the dollar that is on the horizon. I have warned that in discussions behind the curtain, there will be a move to replace the dollar as the reserve currency. I have also stated that the only possible solution will be a new world currency that is composed of a basket. There are three subtle events that confirm this view is a lot sooner than anyone suspects. We may be looking at the rapid change in the world monetary system after 2015.75 with what we have called BIG BANG.

1. Obama’s former Economic Adviser has stated now the US should gove up the reserve dollar status
2. The IMF is holding discussions on expanding SDRs
3. World Bank is also now suggesting a new currency for reserve purposes needs to be established

Furthermore, so many people (mainly Americans) are so bearish on the dollar because of debt that they cannot see the simple fact that even $17 trillion in debt is nothing in comparison to $158 trillion in worldwide debt. They also fail to grasp that the US debt is the ONLY place for money right now to park among nations. Europe has no single debt and as such we see predominantly the bunds of Germany going negative as capital shifts to Germany inside the EU.


Additionally, the vast majority of people do not understand how capital moves and therein lies their problem. Just look at what happened in Europe. Back in 2010 when Greece first came on the radar as in trouble, capital began to flee and traders looked around to see who would be next. They suddenly discovered Portugal, Spain, and Italy. There are now sniffing around at France. In 1931, when all of Europe moved into default with a few exceptions, China and Asia as well as South America for the fourth time overall, capital fled to the USA sending the dollar to record highs. This set in motion the whole protectionism game as politicians did not understand what was developing.


Herbert Hoover wrote in his memoirs “foreign government reserve deposits were constantly driven by fear hither an yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. … [capital] behaved like a loose cannon on the deck of the world in a tempest-tossed era.”
Understanding how capital moves is absolutely imperative to surviving the future. If you cannot grasp this aspect, you will lose everything by 2020 – and that is no joke. The US Federal Reserve has pulled the trigger on the nonsense of QE and has cautioned that rates will rise. The Fed will have no choice as the stock market rallies they will be criticized for QE creating inflation. Of course this will not be true since the dollar is being absorbed globally. You cannot simply add QE to domestic economic conditions and expect inflation. The dollar is the RESERVE currency and it is a global money supply – not purely domestic.
We will see not just Russia in economic chaos as commodities must decline into the end of 2015 including energy as the dollar rises, but all emerging markets must now brace for their ordeal by fire. Domestic analysts focus purely on domestic issues never looking around the globe to comprehend the real trend at hand. Emerging markets have collectively borrowed $5.7 trillion actually in US dollars. This presents  a repeat of Greece.
The Greek financial crisis was caused NOT by simply unrestricted spending, but the conversion of their debt to euros and then the euro rose in value more than doubling the “real money” they had to repay. This became like stip-mining taking the wealth of Greece and exporting it to the bond holders. It was such a great deal for the buyers of government debt like money from heaven, and the worst of all worlds for the Greek people.
Now we will see this VERY SAME trend hit the emerging markets like a hammer. The emerging markets have issued debt in dollars which is a currency they cannot print and do not control. This hard-currency debt has tripled in the last decade and is split between $3.1 trillion in bank loans and $2.6 trillion in bonds. This will ripple through the banks causing massive new losses just as the Cyprus banks held Greek debt. This time, it will be the debt of all emerging markets. We are looking at a drastic scale of the biggest cross-border lending sprees of the past two centuries.
A large portion of this emerging market debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. This has made the emerging markets vast borrowers dollars so in a trading position they are “short dollars”. This is the greatest short-position on a currency on the boards and when the dollar RISES, they will face the margin call from Hell itself. This will set off another banking crisis for bankers always buy the high and sell the low. They have NEVER learned even once from any economic crisis.
The Fed dashed all lingering hopes for continued dollar leniency on Wednesday this past week. The pledge to keep QE-stimulus for a “considerable time” has vanished into the sunset.  The developing countries may be just as vulnerable to a dollar shock. The Russian Rouble crash is just the beginning. Furthermore, the commodity bulls have found every possible excuse to convince themselves that China would continue to drive a commodity supercycle. That has proven to be dead wrong for a unbiased glance at their share markets there clearly demonstrate a decline has been in motion since 2007.
These false assumptions have blown up hedge funds and traders around the globe as results for 2014 have proven to be the worst year perhaps ever. Russia’s Vladimir Putin may be brilliant, but his timing is way off for his country suggesting that the hard times ahead will be even harder.
The collapse in energy also threatens to create massive economic readjustments throughout the Middle East. Additionally, this economic chaos is spreading beyond Russia reaching also Nigeria, Venezuela and other petro-states. Indonesia had to intervene on Wednesday to defend the rupiah. Brazil’s real has fallen to a 10-year low against the dollar, as has the index of emerging market currencies. Sao Paolo’s Bovespa index is down 23% in dollars in three weeks.
The coming meltdown in Emerging Market debt can be seen in Pimco’s Emerging Market Corporate Bond Fund, which suffered a loss of $237m in November, and the pain is unlikely to stop as clients discover that 24% of its portfolio is in Russia. We are facing a very serious crisis for BIG BANG.

Emerging markets

Economic Confidence Collapsing to new lows in Thailand

Posted on February 7, 2014 by Martin Armstrong

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The local press in Thailand are reporting the collapse in economic confidence among local Economists’ with respect to the overall economy in Thailand. This is the lowest it has ever been in the past three and a half years. Our models clearly demonstrate that we are looking at a continued economic slide especially among emerging markets that will put greater pressure behind a rising US dollar. The European banks have a total exposure of more than $3 trillion in emerging markets. The economic conditions are worsening and this will only increase the pressure on civil unrest against a government that is also seen as corrupt in Thailand.

The Emerging Market Crisis

 

Posted on January 25, 2014 by Martin Armstrong

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The fourth quarter real estate in Singapore turned down showing that the whole Emerging Markets did tend to peak out with the ECM last August. This has led to a flight of investors from the once-booming emerging markets sector that is similar to the shift in what we began to see in 1994 that manifested into the 1997 Asian Currency Crisis. Previously, international investors poured in some $7 trillion-worth of capital inflows into these emerging markets. This shift in capital outflows for emerging markets has only just begun. The details of the capital flows for 2013 have shown that so far it is retail rather than institutional. The outflows amounted to just over $50 billion. This is also how things started in 1994. Eventually, institutional capital left violently in 1997 to get ready for the birth of the Euro in 1998.
In this case, the leader of the trend has not been institutions, but the retail market investors. It has mainly been this group that has packed their bags and moved back to the USA and European share markets. When the big institutional firms join in, reducing their asset allocation models, then we run the risk of a serious wholesale capital flight as we saw in 1997.

China is starting to slow down and the share markets have established their major high back in 2007 and penetrating the 2013 low in 2014, will warn that China could decline all the way into 2020. The global impact of a wind-down in U.S. monetary stimulus has been greatly exaggerated. Nevertheless, this has fueled the image of a bearish trend for China and the emerging markets in general. We are seeing this manifest also in the currency markets with record lows unfolding in Argentina, Turkey, and Russia. The alternative shift has been into the Swiss, Japanese yen, and US Treasuries. This is a shift in capital flows that is what many see as a sign of global contagion. The bottom-line, they are selling even high-yielding emerging market debt.
Because looking ahead, we see the dollar rally on the horizon and this will accelerate losses in emerging markets for foreign investors. That will cause fears to surface and force the big institutional investors to cut their losses and run as the impact of a rising dollar is mirrored into a collapse in these currency values. International investment is always first-and-foremost a currency crisis. This is true if it is the foreign capital investing in the USA, as in 1987, or Japan back in 1989, Southeast Asia in 1997 and Russia in 1998 just for examples.

The capital flows have clearly shifted out of the emerging market economies and this will force institutions to lower their asset allocation models for this type of investment. This is both a cyclical but also a structural problem for we have serious economic issues in Europe and rising taxation that is simultaneously impacting international investment. Many of the emerging markets in domestic terms appear flat, but in currency terms they appear to be a disaster. The US dollar has risen almost 2% in the last quarter against a basket of these currencies and this sparks the decline in assets and the shift in capital flows. These have been 13 consecutive weeks of capital outflows so far similar to the 1990s.

The key is always currency and what we haven’t seen in emerging markets is major currency devaluation just yet. The serious outflows hitting Argentina can spread as investors often sell everything as groups. We are likely to see continued capital outflows going into September 2014. With the rising civil unrest, this trend is likely to extend into the bottom of the ECM in January 2020.
World Bank has even warned of the risk of a sudden stop in capital flows for emerging markets, a point which was discussed by the International Monetary Fund as well. Clearly, long-term interest rates are subject to a sudden rise of as much as 200 basis points as civil unrest rises. We are likely to see a collapse in capital inflows for this sector by at least 70%. The rise in civil unrest is likely to inspire a contagion to sell everything in the years ahead. When US long-term rates 4%, up from the 2.7% current levels, emerging markets will move into a serious decline.