Macquarie: Emerging Markets Are Not Facing a 1997-Style Crisis—They’re Facing Something Worse – Bloomberg Business 09-16-15

Salient to Investors:

Viktor Shvets and Chetan Seth at Macquarie said:

  • Emerging markets and economies are in a worse situation than in the 1997 Asian financial crisis because they now face far longer, more painful and insidious disease with limited or no cures or exits, punctuated by occasional significant flare-ups.
  • The effect of the 1997 crisis were mitigated by excessively loose monetary policies and China’s integration into global trade, which helped all markets recover quickly. However, this is not the environment facing economies in the next 5 to 10 years: long-term structural shifts, driven by the deflationary progress of the Third Industrial Revolution, is aggravated by overleveraging and overcapacity.
  • Turkey, South Africa, and Malaysia are at most risk, while China, the Philippines, and South Korea are at least risk. Brazil and Russia are at lessor risk but their low exposure to external debt could be undermined by slumping commodities and slowing trade.

Read the full article at http://www.bloomberg.com/news/articles/2015-09-16/macquarie-emerging-markets-are-not-facing-a-1997-style-crisis-they-re-facing-something-worse

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Why Hedge Fund Hot Shots Finally Got Hammered – David Stockman’s Contra Corner 09-06-15

Salient to Investors:

David Stockman writes:

A growing chorus of investors blamed last week’s stock market sell-off on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

Hedge fund performance has benefited from broken capital markets rigged by the Fed. Thesecasino gamblers bought every one of the 30 identifiable dips in the SPX since the March 2009 low, confident that the Fed would intervene to keep the stock averages rising. A few ten thousand punters have made trillions in return for little economic value added.

Bridgewater profited by buying more stocks when prices were rising and equity volatility was falling, and more bonds when prices were dipping and equity volatility was rising as investors retreated to fixed income securities. Pumping out volatility and milking the market on alternating strokes is only possible when the regularity of market waves are unnatural, engineered by a Fed held hostage to the casino gamblers. However, bond prices in August did not rise like they were supposed to when the stock market dropped 12%, so Bridgewater’s entire profits for the year were wiped out in a few days. Bridgewater now pleads for QE4, while Goldman Sachs said the latest jobs report calls for no rate increase in September, despite the failure of 80 months of ZIRP.

China’s 20-yr long, $4 trillion cumulative bids for US treasuries and DM fixed income securities has now become “offers”, and which will prove to be one of the great financial pivots of history. China bought US debt to peg the RMB exchange rate and keep its exports humming, but eventually was forced to let the RMB slowly rise against the dollar, drastically accelerating global fund inflows into the Chinese economy. Deng’s naivete unleashed a credit monster that sucked in capital and resources from all over the globe into a domestic spending boom that was inherently unstable. To prevent the RMB exchange rate from plunging and inciting even more capital flight, the PBOC has now shifted into reverse in a large, sustained and strategic way.

If the market holds above next week’s retest of the SPX 1967 low, the Fed will likely announce a “one and done” move in September, and if the market does not hold this low, then the Fed will defer its rate rise: both outcomes will cause a short-lived, half-hearted rally, but not another leg higher in the phony bull market because the global “dollar short” is unwinding and China’s house of cards is cratering, causing economies to plunge throughout the China supply chain.

Read the full article at http://davidstockmanscontracorner.com/why-hedge-fund-hot-shots-finally-got-hammered/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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What next for the global economy after China market woes? – BBC News 08-25-15

Salient to Investors:

Global growth is changing but we are not on the verge of a global recession. UK and US growth is solid, and the Eurozone is staging a weak recovery.

China’s stock market drop says little about the health of the Chinese economy and matters little to investors outside China, because foreign ownership is very limited, and to Chinese investors, who are a tiny subset of the Chinese people.

Independent analysts estimate China GDP at closer to 5%, still a healthy rate of growth for an economy which is now much bigger. If growth is 5%, then global growth is not in danger. If it is 3% or lower then the markets will fall more.

China is wise to partially uncouple the renminbi from a rising dollar because the dollar is likely to continue rising and other Asian currencies are weak. Chinese manufacturing data last week was poor but other data, especially consumption, is healthier.

The lowest commodity prices since 1999 are either signalling a slowdown in growth or increase in supplies. Lower fuel and food prices boost real household disposable incomes. Low commodity prices are an almost unambiguously good thing for the developed world, but not for the emerging world.

Saudi Arabia’s attempt to drive higher-cost US shale producers out of the market by keeping its production high has failed.

US shale production was powered by high oil prices, no longer an engine, and easy credit, still an engine.

Supporting stock prices is not a Fed responsibility, so to delay hiking rates in September may damage its credibility and make the eventual task harder.

Read the full article at http://www.bbc.com/news/business-34053879

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Back to Fundamentals in Emerging Markets – Project-Syndicate 08-13-15

Salient to Investors:

Dani Rodrik at Harvard said:

  • Emerging markets may be seen to be in deep trouble but do not deserve the doom-and-gloom treatment they are getting. Stronger economic headwinds ahead will make it easier to distinguish countries that have strengthened economic and political fundamentals from those that have relied on false narratives and fickle investor sentiment.
  • The 3 key growth fundamentals of developing economies are acquisition of worker skills and education, improvement of institutions and governance, and structural transformation from low-productivity to high-productivity activities. Countries that rely on steady, economy-wide accumulation of skills and improved governance may grow less fast but they are more stable and more likely to converge with advanced countries eventually.
  • China grew by filling factories with uneducated peasants, and so generated an instant boost in productivity. China’s political and institutional challenges are much greater than those of democratic India so offers much higher uncertainty for long-term investors.
  • India’s medium-term growth potential is well below that of China in recent decades because skill-intensive services absorb only a tiny portion of India’s largely unskilled labor force, so it will take many decades for overall productivity to rise significantly.
  • Brazil’s political crisis demonstrates democratic maturity as prosecutors are able to probe the highest ranks of Brazilian society and government without political interference – a sign of strength more than weakness.
  • Turkey’s corruption has gone untouched and so will cause greater long-term damage.

 

Read the full article at https://www.project-syndicate.org/commentary/emerging-market-growth-by-dani-rodrik-2015-08

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Still Chop, Chop, Choppin’ At The Fed’s Front Door – David Stockman’s Contra Corner 08-06-15

David Stockman writes:

Wall Street believes the sideways market of the last 6 months is a healthy market correction in time, not price, and that markets cannot go down unless there is a recession and that none is remotely in sight.

We are in month 74 of the current recovery, beyond the 61-month average for post-war business expansions. The 105 month expansion of the 1960s took nearly 3 years of sub-par economic growth to stabilize the macro-economy and purge inflation. The 91 month expansion of the 1980s and 119 month expansion of the 1990s were largely fueled by cheap mortgage and consumer credit: the historically stable ratio of household debt to wage and salary income of 75%-80% prior to 1980 rose nearly vertically during the next 25 years to its peak in 2008. Households are not remotely in a position to re-leverage.

The US economy is saturated with $59 trillion of total public and private debt and faces unprecedented headwinds from the global economy. None of the prior post-war business cycle expansions were accompanied by the frenzy of construction, investment, borrowing and speculation by China and supplier base that we have seen since 2008.

Huge global excess capacity means gale force deflation as China and its supplier base attempt to ship materials and goods at any price to service their huge debt created over the last two decades. The modest contribution to US GDP from exports since the Great Recession is over. Global deflation will devastate US exports because China and the EM economies are entering a prolonged period of plunging demand for capital goods and raw materials.

The extended scramble for yield in EM debt will now turn into panicked flight as losses and cash shortages mount for EM borrowers; meaning the dollar has only begun its rise. The drying up of demand for exports and impending flood of dumped imports of steel and related industrial goods will curtail domestic capital spending. CapEx spending in the domestic oil and gas patch and other extractive industries is falling off a cliff, and government sector spending is hobbled by peak public sector debt. Business inventories are rising to pre-recession levels.

Most households are not in a position to increase their leverage and can only spend what they earn. Consumers are reaching the end of their spending limit is evidenced by the sharply falling 3-month rolling average of withholding taxes.

Read the full article at http://davidstockmanscontracorner.com/still-chop-chop-choppin-on-the-feds-front-door/

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Fareed Zakaria GPS – CNN 02-22-15

Salient to Investors:

Fareed Zakaria said:

  • There are 1.6 billion Muslims in the world of which perhaps 30,000 are members of ISIS.
  • Sheri Berman at Barnard College says ideologies succeed when they replace failed ideas. ISIS has benefited from the failure of Pan Arab-ism, Republicanism, nascent efforts at democracy, economic liberalism and secularism.

Graeme Wood at Yale said:

  • Obama’s approach to ISIS is correct but denying ISIS has any Islamic character whatsoever is wrong and leads to misguided approaches.
  • ISIS is much more focused on Muslims in Iraq, Syria, and the immediate surroundings. ISIS hates Arab rulers more than they hate Israeli leaders so it is less of a direct threat to the American homeland but is a big threat to Middle East stability.

Shadi Hamid at Brookings said ISIS’ approach to Islam is a distortion and ignores centuries of medieval Islamic tradition – it is distinctly modern and reacting against what it dislikes in the world.

Peter Beinart at City University of New York said:

  • America has done best when it has defined its enemies narrowly. We allied with communists like Yugoslavia and China against the Soviet Union and never declared war on fascist Spain in WWII.
  • ISIS is not as great a threat as many fear so Obama’s approach is the right one.
  • Obama’s dispute with Netanyahu goes to the core of how they see themselves historically – Netanyahu as Churchill in the 1930s warning of Nazis, and Obama as Nixon in the 1970s with opening up China.
  • If the nuclear deal with Iran fails, and we have new sanctions, we will be on a path to war.

Peter Zeihan said:

  • In economic growth, what really matters is demography, geography, and topography, which is why almost all of the successful ones civilizations developed around navigable waterways.
  • The US has over 17,000 miles of navigable waterways, more than the rest of the world combined. China and Germany have 2,000 miles. Water transport costs 1/12 of what it cost to move things by land even assuming you have the infrastructure in place. Adding in interstate roadways, ports, and everything, it is a 50-1 advantage.
  • The Intracoastal Waterway, half of American water frontage, is protected. Texas has more combined port potential than all of East Asia. The three largest ports in the world are San Francisco Bay, Puget Sound and Chesapeake Bay.
  • The US is the only rich country in the world that is not aging fast like Japan and even Germany.
  • In the developing world, rapid urbanization has been good for economic growth but has made children a luxury good, so birth rates have collapsed. Indonesia and Brazil are aging at 3 or 4 times the rate in Western Europe.
  • The global trade system is dependent on the US, which does not really use it.
  • The US is the least involved international economy as a percentage of GDP and much of that is disappearing – US oil imports have dropped from 12 mbpd to 2 mbpd and within 2 years will be zero. Shale production costs are below $50 a barrel so the oil [price war is pushing out Russian Siberian crude or North Slope crude or Albertan or North Sea crude.
  • Oil prices are decoupling so there will not be a global price and a Middle East crisis will mean more expensive Middle Eastern oil but not West Texas crude.
  • Japan, China, and Germany et al all prospered over the last 70 years because the US set up a free trade system and defended the global commons with its Navy, which is 4 times more powerful than everybody else’s combined. That relationship and US commitment is ending and we are entering a new world which will be responsible for patrolling its own system along with resulting resource wars.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript

at http://www.cnn.com/TRANSCRIPTS/1502/22/fzgps.01.html

China to Let World in on Gauge Showing State of Economy – Bloomberg 10-21-14

Salient to Investors:

  • Zhu Haibin at JPMorgan Chase said the lack of good unemployment data is the main reason why China still focuses so much on GDP, and since China is more concerned about employment and inflation, it refrains from big stimulus. Zhu said China’s current registered unemployment rate is untrustworthy and unusable.
  • Ding Shuang at Citigroup said all eyes will be on the new surveyed unemployment rate, which will be as important as it is in the US. Ding said a monthly jobless rate could be a real economic barometer because GDP data is only released quarterly and because the direct survey minimizes distortions by local officials to glorify their performance.

Read the full article at http://www.bloomberg.com/news/2014-10-21/china-to-let-world-in-on-gauge-showing-state-of-economy.html

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Goldman Sees Global LNG Projects at Risk as Demand Growth Slows – Bloomberg 10-01-14

Salient to Investors:

Mark Wiseman et al at Goldman Sachs said:

  • LNG projects in Africa, Canada and Australia face delays or cancellations as global demand slows, US output increases, nuclear reactors restart in Japan, China’s success in shale-gas E&P, and economic conditions in ASEAN.
  • Global demand will compound at 5% annual by 2020, and 4% annual by 2025.
  • The window for US LNG is limited and the US will not be spared from the pull-back.
  • Papua New Guinea has the lowest risks as it expands LNG production.
  • Overseas, Papua New Guinea and East Africa may be the best placed regions to compete on cost competitiveness, while the industry has renewed its focus on capital discipline.
  • Expect strong demand growth in Asia led by China and ASEAN nations – due to strong economic growth, urbanization, and declining local gas supplies – with modest growth from India, South Korea and Japan.
  • China is driving increased gas use, especially in residential and industrial consumption, and transportation. However, gas-fired power generation capacity is not a high priority in China given the lack of competitively priced supply compared with other feedstock.
  • LNG demand in Thailand, Singapore, Philippines, Indonesia, and Vietnam will continue to grow.
  • Read the full article at http://www.bloomberg.com/news/2014-10-02/goldman-sees-global-lng-projects-at-risk-as-demand-growth-slows.html

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Russia Risks Recession as Oil Drop Seen Squeezing Budget – Bloomberg 09-25-14

Salient to Investors:

  • Analysts say the easing of tensions in Ukraine offers little respite to Russia as low oil prices threaten a recession.
  • 58% of 19 economists say Russia needs its main export crude blend to trade at $100 per barrel or more to avoid a recession, while 19% say its current price is sufficiently low to put Russia’s financial stability at risk. The median economist says Russian GDP will grow 1% in 2015 and the probability of recession within the next year dropped to 60%.
  • Russia gets half of its budget revenue from oil and natural gas sales, thus limiting its ability to withstand sanctions.
  • Wolf-Fabian Hungerland at Berenberg Bank said even oil in the low three-digit prices would not unite Russia’s hands because the budget is already ailing and the potential funding needs of the banking system could quickly eat up all free resources, while its rainy day fund is too small to be a game changer.
  • IEA say global oil-demand growth is the slowest since 2011, and non-OPEC oil production is rising by the most since the 1980s.
  • Tatiana Orlova at RBS said Russia can go into recession even with Urals at $110 if Russian borrowers remain cut off from world capital markets for a long time.

Read the full article at http://www.bloomberg.com/news/2014-09-25/russia-risks-recession-as-oil-drop-seen-squeezing-budget.html

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Emerging Market Stocks Extend Rout With Currencies; Ruble Slides – Bloomberg 09-15-14

Salient to Investors:

  • BIS said unprecedented stimulus by central banks and historically low volatility levels across asset classes have made it more likely that emerging markets will destabilize. BIS said governments and companies from Latin America to Asia have boosted borrowing in local and foreign currencies, leaving them more vulnerable when interest rates increase or their exchange rates weaken.
  • John Lomax at HSBC said emerging markets are concerned with the substantial move of the dollar and US interest-rate expectations, while sanctions remain a constraint on Russian equities.
  • The MSCI developing-nation index is at 11.1 x estimated earnings versus 14.9 x for the he MSCI World Index.

Read the full article at  http://www.bloomberg.com/news/2014-09-15/emerging-stocks-extend-longest-loss-in-10-months-on-china-data.html

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