The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire.
They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.
Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots.
The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.
China’s trade surplus swelled to the highest on record in November, as imports unexpectedly tumbled.
Both sides of this report were negative, calling into question some recent reports suggesting the economy had stabilised in the fourth quarter.
Chinese exports increased just 4.7 per cent from a year ago last month, missing estimates for an 8 per cent increase and slowing from an 11.6 per cent pace in October. The weak print reflects a weak recovery in the global economy.
Imports fell 6.7 per cent from a year ago, versus expectations that they would rise 3.8 per cent. This is the more dramatic news, indicating consumption in the world’s second largest economy could be much lower than thought.
As a result of falling imports, the monthly trade surplus rose to $54.47bn – the highest in 14 years of Bloomberg data – from $45.4bn the month before.
“There is nothing safe anymore, because the money-printing distorts all asset prices,” is the uncomfortable response Marc Faber gives to Thai TV during this interview when asked for investment ideas. Faber explains how we got here “massive money-printing and ZIRP creates a huge pool of liquidity that does not flow evenly,” as it washes from Nasdaq stocks to real estate to emerging markets and so on. Each time, “the bubble inflates and then is deflated as the capital (liquidity) floods out.” The Fed, based on the doubling of interest rates since they began QE3 “has lost control of the bond market,” Faber warns; adding that while he expects some “cosmetic tapering,” the Fed members and other neo-Keynesian clowns will react to a “weakening US and global economy,” and we will be a $150 billion QE by the end of next year, as the world is held hostage to US monetary policy.
The interview is interspersed with Thai translation but is well worth the time (starting at 1:25):
Surveys set to show global manufacturing on the rise
* Fed under fire for fumbling forward guidance
* U.S. Congress set for debt showdown
A clutch of surveys this week is likely to show the global economyslowly picking up even as new and old uncertainties combine to test the optimism of businesses and consumers alike.
Purchasing managers indexes (PMIs) for the euro zone, China and the United States are all forecast to climb further away from the boom-bust line of 50. Germany’s closely watched IFObusiness sentiment index is also expected to show a gain.
Gross domestic product in the euro zone remains 3 percent below its 2008 peak and unemployment is at a record high, but the 17-member bloc is set to expand for the second quarter in a row after 18 months of contraction, according to Bert Colijn, an economist with the Conference Board in Brussels.
Even the construction industry, which crashed when the financial crisis struck, appears to be bottoming out.
“The outlook continues to improve for Europe in general,” Colijn said. “The fact that we’re seeing a momentum change at the moment is a positive signal.”>> Read More
European and Asian equities and ‘risk-on’ currencies have all benefitted as the post-payroll asset rally gained momentum. I think the move has a decent chance to last till Christmas. Tapering will be announced next week, the ‘tapering isn’t tightening message’ will be repeated and policy uncertainty will decrease. The Fed is on hold until the second half of 2015, the ECB for even longer, the Chinese slowdown is having a vacation (thanks to some shadow banking) and it looks as though military action in Syria will be avoided. Have the global economy’s structural problems gone up in a puff of smoke? No, but that’s not the point right now.
The U.S. trade deficit widened 13.3% to $39.1 billion in July.
Economists expected it to have expanded to $38.6 billion.
The trade gap with China widened to a record $30.1 billion from $26.6 billion.
“The global economy showed signs of recovery in July, with business confidence and activity data surprising on the upside in both the euro area and in China,” wrote the economists at Bank of America Merrill Lynch before the report.
President Vladimir Putin warned the West against taking one-sided action in Syria but also said Russia “doesn’t exclude” supporting a U.N. resolution on punitive military strikes if it is proved that Damascus used poison gas on its own people.
In a wide-ranging interview with The Associated Press and Russia’s state Channel 1 television, Putin said Moscow has provided some components of the S-300 air defense missile system to Syria but has frozen further shipments. He suggested that Russia may sell the potent missile systems elsewhere if Western nations attack Syria without U.N. Security Council backing.
The interview Tuesday night at Putin’s country residence outside the Russian capital was the only one he granted prior to the summit of G-20 nations in St. Petersburg, which opens Thursday. The summit was supposed to concentrate on the global economy but now looks likely to be dominated by the international crisis over allegations that the Syrian government used chemical weapons in the country’s civil war.
Putin said he felt sorry that President Barack Obama canceled a one-on-one meeting in Moscow that was supposed to have happened before the summit. But he expressed hope the two would have serious discussions about Syria and other issues in St. Petersburg.
“President Obama hasn’t been elected by the American people in order to be pleasant to Russia. And your humble servant hasn’t been elected by the people of Russia to be pleasant to someone either,” he said of their relationship.>> Read More
September promises to be one hell of a month for the global economy.
Congress comes back from vacation this month to a full plate of fiscal time bombs that will need to be defused in a very short period of time.
This is a fight that Americans have gotten used to in recent years.
But economist Nouriel Roubini warns that investors are becoming too complacent. In a new piece for Project Syndicate, offers an interesting metaphor to describe the Republican party’s stance on the budget:
… yet another partisan struggle over America’s debt ceiling could increase the risk of a government shutdown if the Republican-controlled House of Representatives and President Barack Obama and his Democratic allies cannot agree on a budget.>> Read More
It has been a while since Albert Edwards updated the world on his macro and market thoughts. He finally does so today with a tour de force on the crash in the emerging markets, which for him exposes the “idiocy of one of the key investment themes since the 2008 Great Recession – namely that with developed economies burdened with excessive debt and in the throes of multi-year deleveraging, investing in emerging markets would not only produce superior returns but was also less risky. Regular readers will know we have long railed against this idea, having dubbed the BRIC story a Bloody Ridiculous Investment Concept.“
He links what is happening now to his “call at the end of last year that the EMs were heading for a balance of payments crisis and would see a currency debacle similar to 1997 was met with total indifference. We still find the same disregard to our call for a renminbi devaluation.”
Continuing the litany of vindication, Edwards next observes that the “global economy and markets have been far, far more vulnerable to a resumption of the 2008 crisis than the happy-clappy consensus would have us believe. At the moment, investors think that problems are isolated to a few EM countries that have allowed their current account deficits to get out of hand. I see this as the beginning of a process where the most wobbly domino falls and topples the whole precarious, rotten, risk-loving edifice that our policymakers have built.”
Naturally no crash prediction will be complete without some fond reminiscences on the most historic crash of all: 1987.>> Read More
The global economy could be hurt if the withdrawal of funds from emerging markets picks up ahead of an expected reduction in the U.S. Federal Reserve’s monetary stimulus, a Bank of Japan board member said on Thursday.
Yoshihisa Morimoto also signalled that Japan’s government needed to proceed with a planned two-stage hike in the sales tax as part of efforts to fix its tattered finances, or face a severe market backlash.
The former utility executive stuck to the BOJ’s assessment that Japan’s economy was headed for a moderate recovery, but noted headwinds such as geo-political risks in the Middle East and market volatility caused by expectations the Fed could start tapering its bond-buying programme as soon as next month.
“Market participants are withdrawing funds from emerging and resource-rich nations on expectations (of Fed’s tapering) and may continue to do so,” Morimoto said in a speech to business leaders in Morioka, northeastern Japan.
“The global economic recovery remains fragile, so there’s huge uncertainty on how a sharp outflow of funds could affect financial markets and global growth,” he said, in the starkest warning to date by a BOJ official on the potential risk for a bigger capital withdrawal from emerging economies.
The Indian rupee and Turkish lira have both hit record lows against the dollar, the Indonesian rupiah has fallen to four-year lows, and other currencies have fallen sharply as investor sentiment has soured on emerging markets.>> Read More