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Developing Crisis in the Developing World

by John Rubino on June 15, 2013 · 28 comments

Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis.

But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. As Prudent Bear’s Doug Noland explains in his most recent Credit Bubble Bulletin:

Meanwhile, the “developing” market Bubble continues to unwind. As leverage comes out of the commodities, currency “carry trades” and developing stocks and bonds. And as capital flight becomes a more serious issue, the marketplace must ponder the consequences not only of what a faltering Bubble means for scores of markets and economies, there is as well the issue of developing central banks having to sell from their trove of Treasuries and bunds and such to finance a surge in outflows (“hot” and otherwise). There’s even this new dynamic where Treasury yields rise on days of global currency and equity market tumult. It’s been awhile…

I suspect that the global jump in yields (and CDS and risk premiums) has more to do with de-leveraging than it does with tapering worries. This dynamic has caught many by surprise. The speculators anticipated cleverly exiting their leveraged MBS and other trades based on their expectations for Fed policy. Now, there’s a tremendous amount of unanticipated market uncertainty.

Japanese policymakers have really mucked things up. The Nikkei sank 6.5% Thursday and was down 1.5% for the week. Perhaps it’s a little early to pronounce the BOJ’s “shock and awe” monetary experiment a failure. The yen rallied 3.5% this week against the dollar. Against the Philippine peso it was up 4.5%, versus the South Korean won 4.1%, the Indian ruppee 4.3%, the Malaysian ringgit 4.0%, the Indonesian rupiah 3.2%, the Argentine peso 3.9% and the Brazilian real 4.2%. Indonesia raised rates to support its weak currency. The yen “carry trade” (sell yen and use proceeds to buy higher-yielding instruments globally) is doling out painful losses – forcing the unwind of leveraged trades across many markets. I wouldn’t be surprised if the yen short is the largest short position in modern history. The yen bears are now running for cover – causing all kinds of havoc in the currencies and securities markets.

“Emerging” Asian markets are in the middle of an unfolding financial storm. Friday’s 2.1% gain cut the Philippine equities loss for the week to 9.2%. Even with Friday’s 4.4% recovery, the Thailand stock exchange ended the week down 3.4%. South Korea’s Kospi dropped another 1.8%.

Latin America is as well caught in troubling dynamics. Brazil’s currency (real) traded to a four-year low against the dollar this week – despite currency interventions and the removal of taxes on financial flows and currency derivatives. Brazilian equities were hit for 4.4% this week, increasing y-t-d losses to 19.1%. Mexican stocks dropped 2.4%, boosting y-t-d losses to 10.2%.

The Shanghai composite dropped 2.2% in a holiday-shortened week. China pegs its currency to the U.S. dollar, so we can’t look to the performance of the renminbi for much of an indication of flows or mounting financial market stress.

I have posited that China is in the midst of an historic Credit Bubble. I have over the years tried to explain how interrelated their Bubble is to ours. Our mismanagement of the world’s reserve currency led to 20 years of huge Current Account Deficits. A significant portion of the Trillions of associated IOU’s have made it onto the balance sheet of the People’s Bank of China, especially over recent years. And no Credit system and economy has gone to greater excess during the post-2008 global reflation. It was the “fledgling” Credit Bubble spurred to “terminal phase” excess.

If the “developing” economy Bubble has passed an important inflection point, then China is vulnerable. If “hot money” is leaving EM [emerging markets] then China should be susceptible. And, let there be no doubt, when China finally succumbs global economic prospects really dim – and prospects for some fellow EM economies turn downright dismal. Recall how the tightening of subprime finance gravitated to “Alt-A” and then worked its way to the “conventional” core. And when housing in general began to falter the bottom fell out of subprime.

This week provided a bevy of notable China-related headlines: From the Financial Times: “China Debt Auction Failure Raises Liquidity Fears;” “Fresh Data Highlight China’s Sluggish Growth.” From Bloomberg: “China Debt Sale Fails for First Time in 23 Months on Cash Crunch;” “China Local Debt Audit ‘Credit Negative,’ Moody’s Says;” “China’s Leaders Face Test of Growth Resolve After May Slowdown;” “China Export Growth Plummets Amid Fake-Shipment Crackdown.” From Reuters: “Fitch Warns on Risks from Shadow Banking in China;” “China Estimates Fake Trade Invoicing at $75 billion in Jan-April;” “China State Auditor Warns Over Local Government Debt Levels.”

The price of Chinese sovereign Credit default swap (CDS) “insurance” jumped from 92 to 113 in three sessions, before dropping back down to 98 on Friday. Chinese interbank lending rates have recently spiked higher – and there were even reports of several borrowers forced to pay up for increasingly scarce liquidity. There were debt auctions that did not go smoothly. The currency forwards market is showing some atypical downward pressure on the renminbi.

Many believe this newfound tightness in Chinese money markets can be easily resolved by liquidity injections from the People’s Bank of China. And perhaps Chinese monetary and economic managers still have things under control. If so, the same clearly cannot be said for many of their fellow “developing” policymakers. Capital flight is always extremely difficult to manage. I worry that the world has never faced the possibility for such destabilizing flows and speculative de-leveraging. To be sure, global markets have never been as dependent upon the power of central bankers. And in my mental tallies of risk and complacency, I never envisaged they could so elevate in tandem.

So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash — which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond.

If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on. Can the Fed stop this? Not unless it wants to buy up not just all the newly-issued Treasuries as it does now, but the trillions of dollars of bonds that might be dumped once things really get going.

It’s important to understand that we’re here because for years the developed world in general and the US in particular have been exporting their problems to the developing world via monetary policy. We fund our overspending by creating a bunch of new dollars,  many of which flow beyond our borders looking for higher yields. They land in, say, Brazil, pushing up both local asset prices and the exchange rate of the real. So individual Brazilians see their cost of living rise while Brazilian exporters are priced out of global markets. This is the currency war that Brazil’s government has been complaining about.

Then the hot money flows back out, causing a different set of problems for a country that has spent the past decade trying to adjust to excessive capital inflows. The result: some seriously fragile banks and over-leveraged companies and investors, any of which could trigger a nationwide crisis.

The same general process is at work in other major emerging markets, with each in its own way now posing a threat to the global financial system — at the pinnacle of which sit the S&P 500 and the Treasury market, looking an awful lot like Southern California real estate circa 2007.

  • QEternity

    The real fireworks will come the day we see the eventual blowback against the monetary counterfeiters at the FED. Maybe it will be the loss of petrodollar status, maybe it will be the interjection of the remnimbi as a gold backed currency. Either way, our abuse of world currency status is growing thin on the rest of the players. They may not be able to abandon the USD, but it will become far less welcome in the future.
    Buy real assets for the long term.

    • Bullfrog

      Could not agree more. The days of the Dollar centric system are rapidly coming to an end. For more discussion and expert analysis visit frogpots.com

  • Tom

    I think most here agree there’s no real recovery and the markets are distorted by liquidity. A financial crisis alone won’t bring down America. It would also take a crisis in leadership. That just arrived. The NSA scandal means they’re spying on everyone; allies and enemies alike and have admitted sharing some information with large corporations. It will only get more intrusive and dishonest.

    Historically, centers of world commerce were crossroads on trade paths. Damascus on the Silk Road, Hong Kong in Asia. These points offered safety, equal treatment and no tariffs . They had rules of law and this built trust. Great cities and nations resulted. The
    NSA scandal is far more important than the serious crime of spying on
    Americans. They’re spying on everyone and probably favoring insiders and domestic firms with information. Business data, military information and the emails of political leaders are all being grabbed. Microsoft and Apple products all likely have NSA back doors. Can anyone seriously believe this won’t be abused.

    Imagine a technology business overseas or a brokerage or a government. They can’t be sure they can trust America (I know I don’t). They’re spying on reporters, disappearing whistle blowers, giving guns to drug cartels and starting one war after another. When the Guardian releases more stories trust will be shattered.

    I can hear foreign leaders saying, “Hmm, $17T in debt and a phony economy and they’re maybe stealing our trade secrets and business communications. We need to back away from these guys and get our financial house in order or we could be blindsided and go down with them.” I think your dollar collapse is getting closer, John.

    • January24


      I agree with what you’ve said. I think the Obama Administration has been absolutely awful for the U.S. — and in particular for U.S. business. Obama is utterly clueless about the serious need to get the obstacles out of the way so that business can operate. Having an actual bias against business, he has never understood that without a healthy business climate, America is dysfunctional.

      I think his using the IRS as his personal attack dog to “get” those he perceives as his political enemies is just as egregious and damaging to America as the spying. The Obama Administration is an all-round disaster.

      • eugene12

        Glad you wrote that. Here I been thinking the US economy has been dysfunction for decades. Woe to me, I’ve been so mislead. Here I’ve been watching the flight to offshore banking, the greatly favored corporate tax system, the incredible salaries, the constant business lying/manipulation, the enormous military/industrial complex, etc. In fact, I now know I’ve been living in an utter fantasy my entire life. Oops, just the last two presidential terms. The rest of my life I was well grounded in reality.
        Are you, seriously, for real?

        • January24

          Blah, blah, blah, Eugene.

          Your heroes Roosevelt and Lyndon Johnson screwed America over by fantasizing that government could do everything for everybody.

          It can’t. We’re broke. The end.

        • Bullfrog

          Everything you mention is frustrating but in my opinion just symptoms. Symptoms of a paper money system. It helps promote all these problems by having too much power in Washington and Finance… it isn’t going to end well.

      • Bullfrog

        Obama is certainly not helful, but in my opinion this stage was set a long time ago. What we are witnessing is the end game of the paper money system. This is what allows all the government growth or food for the beast. All this talk of the end of gold is nonsense. The central bank paper pushers can’t stop now otherwise a complete collapse will occur. Instead we will see more of the same.. more government growth.. more outrageous behavior… more poverty for the masses. For more analysis please visit frogpots.com.

        • January24

          I talked to one of my stockbrokers last week. He had just come from a meeting with people who he considers to be among the smartest, most connected people in the financial world.

          He said that they agree with your assessment that the central banks have absolutely no choice as to whether to keep printing more money. If they stop, the entire system will collapse like a house of cards.

          And here’s a surprise — considering that this guy makes money by either buying or selling stocks or bonds for his clients. He told me to keep my money in cash. (Or physical gold, which should go without saying. And not in a bank safe deposit box because when the collapse comes, a deposit box at a bank will be anything but safe.)

          There’s no question that America (and the rest of the Western nations) screwed themselves by trying to do absolutely everything for absolutely everyone. The Democrats (mostly) wanted to be Big Daddy for one and all — starting with Roosevelt and continuing with Lyndon Johnson. Now government is this huge, wasteful, unproductive mass — just like a cancer, killing the host.

          The only question is: What will the landscape look like from here on out? Will we have Japanese-style deflation for years on end? What’s your prediction.

          • Bullfrog

            There are good arguments on both the deflation and inflation sides. I would put myself in the inflation camp. However, we will probably see both at the same time. The main point most people need to think about is if the stock market keeps going up it is just a reflection of the dollar going down… or if the market busts again like 2008 (which could easily happen) you will have less dollars.. Either way the majority of folks are going to be wiped out.

            Prediction- much higher consumer prices as people around the world figure the US treasury market is a ponzi scheme and send the dollars back to the US. Price controls will be placed causing all kinds of shortages. Capital controls are certainly on the way. Sadly, more and more people will demand the government “do something” and the government will… further worsening the problem and the productive people of society will have a huge target on their backs. Interests rates will soar due to all the new currency digits being created which will kill the American phoney economy based on borrowing and spending rather than saving and production. In short, I see something truly historic coming.. and something most are not aware of or prepared for.

          • January24


            How right you are with your comment, “I see something truly historic coming — something most are not aware of or prepared for.”

            I agree with you that consumer prices for basic items — especially food — will go much higher.

            Beyond that — which is a thing that seems inescapable — I think it’s difficult to predict even the immediate future since the global economic situation is unprecedented.

            I am interested in your comment about the possibility of our seeing both inflation and deflation at the same time. I think that’s more likely than anything and would like to hear your thoughts about how that might play out for average people in their day-to-day lives.

          • Bullfrog

            When I say inflation and deflation I am saying higher and lower prices which isn’t the true definition but more symptoms of the money supply up or down. (Deflation) – financial markets I believe will crater like 2008 but it will be different because the dollar will go with it next time. Look at the Asian currency crisis of the mid 90’s or Argentina.. the man on the streets saw the financial markets and his currency collapse in price (his savings) but the cost of living skyrocket (inflation). Also, anything that has been leveraged up like certain real estate could/will also face headwinds as interest rates rise rapidly. So different pockets of the economy will experience rapidly changing prices. We have had 3 decades of the financial sector booming… and like you said farming languished. That is all going to get turned on its head. As the dollar comes under pressure you have 6-7 trillion dollars outside the US that could come rushing back here. Obviously, there are too many variables to say anything with certainty. I have been a financial consultant til recently for 16 yrs. I left because of my feelings we are headed for disaster. My advice would be to not play this paper game any longer. Exchange your paper for wealth now. You could also see financial assets like IRA/401k/bank accounts get Cyprused. The system is insolvent and it will become more and more political. For more info check out frogpots.com

          • January24

            Thank you for that, Bullfrog. I believe that is the best synopsis I have read recently (anywhere) about what is just ahead.

            I know another guy — a very knowledgeable stockbroker at the end of his career — who sees things in very much the same way.

            What wealth would you recommend? I’m assuming real estate? And what besides that?

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  • cannon

    Yeah…blame it all on Obama. Do you people really believe that this one man has all of that clout? He is being controlled by the same elites who have been controlling this country and all of it’s presidents now for many many years. How can you all be so naive? As if this one black man just came out of nowhere and singlehandly dismantled the entire United States of America, give me a break. Get your heads out of the sand and look around and study and see what is really going on and what has been going on long before Obama who is simply the last puppet that the elite chose to oversee the dismantling caused by thier own evil and greed and deception.

    • Antiehypocrite

      I blame obama only so far as saying he knew going in what the deal was. Therefore he is either a conman or he sold his soul to the devil

      • January24

        Obama is demon-possessed.

      • Bullfrog

        I think he could have been the best ever president. He had the chance to level with the American people in 2008-09 and set this ship on the right course. Instead he did the exact opposite and the only way this ends now is total currency and social crisis.

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  • http://theyenguy.wordpress.com/ theyenguy

    Indonesia, traded by the ETF, IDX, has been one of the countries that has seen a hot money inflow, and now is seeing a hot money outflow.

    Indonesia, IDX, rose this week as Lilian Karunungan and Kyoungwha Kim of Bloomberg report Indonesia is consuming foreign currency reserves at the fastest pace in Asia as policy makers struggle to contain the rupiah’s plunge, a sign to PT Mandiri Sekuritas that the central bank will pare intervention. Reserves dropped 5.7% in a year to $105 billion in May as Bank Indonesia sold dollars to bolster the rupiah. The rupiah fell to 5.6% below the local spot rate in the offshore non-deliverable forward market yesterday. Defending the currency helped reduce reserves to the equivalent of 6.6 months of imports, the worst ratio in Asia after India.

    The implications of a global financial meltdown and world wide economic breakdown are ominous.
    Please consider that God’s idea of economy is one of empire, specifically a territory where a sovereign or sovereigns rule in dominion providing seigniorage, that is moneyness, as well as ethics, that is regard for the person or property of another, or alternatively, iniquity, where poneros, that is bad, evil, and wicked influence is exercised over people.

    Economy comes via and is based upon the promises of God, such as the one of Genesis 35:11, where God said to Jacob, that is Israel, “I am God Almighty. Be fruitful and multiply; a nation and a company of nations shall proceed from you, and kings shall come from your body”. The promised nation is the United States, the company of nations was the British Empire, and the kings are the saints, ruling in heavenly places with Christ.

    The Apostle Paul relates in Ephesians 1:10, that Jesus Christ, God’s Son, has been appointed to rule over God’s economy bringing every age, epoch, era and time period to completion producing fullness therein.

    God’s paradigm for the past age was Liberalism; it was based upon the fiat money system, which governed from the creation of the Creature from Jekyll Island, that is the US Federal Reserve in 1913, to May 24, 2013, when fiat money died, on the failure of carry trade investing and credit, on the rise of the Interest Rate on the US Government Note, ^TNX, to 2.01%, providing an age of investment choice, as well as clientelism and dependency, where people trusted in central bank intervention, based upon the rule of law of democratic nation states, to provide credit liquidity, for carry trade based wealth making opportunities, such as nation investment, ie the Philippines, EPHE, Thailand, THD, the Russell 2000, IWM, or leveraged buyouts, PSP, IEP, DLPH, or regulatory capture, PJP, JNJ, or housing development, ITB, DHR, or retail sales, XRT, COST, KIRK, the list of these goes on, and on. Predators, that is those with animal spirits of a bear, lion or leopard, preyed on people; examples include Jimmy Baker, who served five years in prison for his crimes; my mother loved him, and invited him into our home, saying “its time to watch our show”, and sent him a donation monthly.

    Under Liberalism, Crony Capitalism, Socialism, and Greek Socialism, provided economic and political governance, which was based upon sovereign democratic nation states, where sovereign bankers held preeminence, and waived wands of credit, producing a moral hazard based prosperity, where inflationism was in effect through interventionist schemes of the Banker Regime which provided free trade, financial deregulation, Federal Reserve POMO, lowering of central bank interest rates, Quantitative Easing, and Global ZIRP. Political parties had movements and worked their agendas. Liberalism’s dynamo was profit from banking, investment banking, corporate global growth and trade.

    Yet Jesus Christ, operating at the helm of the economy of God, as presented in Ephesians 1:10, in one fell swoop, killed all existing economic and political life by destroying fiat money, on May 24, 2013, by stirring the bond vigilantes to call the Interest Rate on the US Government Note, ^TNX, higher to 2.01%, and the currency traders to start a currency war of competitive currency devaluation against the world central banks, forcing investors to deleverage out of currency carry trade investments.

    God’s paradigm for the current age is Authoritarianism; it is based upon the diktat money system, which has been governing ever since the collapse of Aggregate Credit, AGG, specifically Junk Bonds, JNK, and Carry Trade Investing, ICI, on May 24, 2013 when fiat money died, introducing the age of diktak, where people trust in the diktat of sovereign regional nannycrats, such as, Klaus Regling, Jeroen Dijsselbloem, and Michel Barnier, and sovereign regional bodies such as the ECB, based upon the word, will and way of whoever rises, biting, ripping and tearing others apart, to become the top dog leader and top dog banker, to provide diktat schemes, such as bank deposits bailins, additional taxes, privatizations, sale of a country’s central bank’s gold reserves, capital controls, and measures of debt servitude, all with the aim of enforcing austerity. Its just like you write Infighting is everywhere in Italy now.

    Under Authoritarianism, regional governance provides both economic and political governance, and is based upon the rule of sovereign regional nannycrats and regional bodies such as the ECB, as presented in Daniel 2:25-45. The Banker Regime has been replaced by the Beast Regime, which has characteristics of a bear, lion and leopard and preys on people, overseeing totalitarian collectivism in each of humanity’s seven institutions, and rules in each of the world’s ten regions, as foretold in Revelation 13:1-4. There are no citizens of nation states, rather there are only residents of regional panopticons. Political parties have been replaced by statist public partnerships, where economic cardinals oversee the factors of production and regional economies. Authoritarianism’s dynamos are regional security, stability, and sustainability.

    To effect the complete transfer out of Liberalism and into Authoritarianism, Jesus Christ has unleashed the Four Horsemen of the Apocalypse. The First, is the Rider on the White Horse, who has a bow without any arrows, whose mission commenced in May of 2010 with Greek Bailout I, to pass the baton of sovereignty from nation states to regional governance; something called for by the 300 elite of the Club of Rome, organized in 1968 by the Morgenthau Group, and presented in prophetic writing with publications, World Dynamics, Limits to Growth, and Mankind at the Turning Point

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  • Bruce C.

    Noland thinks that the Fed’s threat of “tapering” is a straw man argument for why the Developing markets are beginning to unwind, and I agree because basically all intelligent and informed people involved have reached the same conclusion at roughly the same time: Things have become dangerously unbalanced and unstable. That would independently compel global investors to begin to sell out of their positions and it would compel the Fed to at least try to taper off it’s monetizations. If so, then even if the Fed does not (for whatever reason) begin tapering the unwinding of the emerging financial markets should continue, if not accelerate. This situation is yet another example of how and why central bank interventions necessarily create imbalances, instability and problems. If the central banks’ efforts were really so beneficial and economically sound then the “free” financial markets would have found a way to manifest them within an inherently stable system.

    As I’ve said before, central planning/banking is like one’s conscious mind trying to control one’s autonomic system.

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