Today, following another spike in negative news, it appears that the credit markets have finally woken up, and a quick look at Brazil's CDS shows that following today's spike to 314bps, the country's implied default risk is back to levels last seen in April of 2009! We expect more credit market participants to notice the depressionary developments in brazil, and as the country's CDS continue to blow out, many will start asking themselves: is Brazil the next Argentina?
"What can we do?"
"The costs of executing the collateral are very high unless creditors send pirates from Algeria to go and get the vessel."
We have lived through a credit hyper-expansion for the record books, with an unprecedented generation of excess claims to underlying real wealth. In doing so we have created the largest financial departure from reality in human history. Bubbles are not new – humanity has experienced them periodically going all the way back to antiquity – but the novel aspect of this one, apart from its scale, is its occurrence at a point when we have reached or are reaching so many limits on a global scale. The retrenchment we are about to experience as this bubble bursts is also set to be unprecedented, given that the scale of a bust is predictably proportionate to the scale of the excesses during the boom that precedes it. Deflation and depression are mutually reinforcing, meaning the downward spiral will continue for many years. China is the biggest domino about to fall, and from a great height as well, threatening to flatten everything in its path on the way down. This is the beginning of a New World Disorder…
Note that the classic sign of crisis and capital flight, higher interest rates, falling currency, and falling bank stocks are now visible in Brazil (and elsewhere). Indeed, the correlation between Brazilian bond yields and Brazilian financials/BRL turned sharply negative during each of the past 3 systemic crises (Asia ‘98, Tech ‘02 & Lehman ’08) and is doing so again today.
The journey from hubris to humiliation in EM has taken roughly 5 years. As BofAML notes, despite muted asset returns, 2015 has seen the emergence of two big trends: the risk of a bubble in US health care & technology; and the crash in EM/Resources/Commodities. The two trends are best exemplified by the "Map of Hubris & Humiliation" which shows among other things that the market cap of MSCI Russia is currently equivalent to Intel’s, while the market cap of Netflix equals that of MSCI Chile.
Athletes in next year's Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games. An AP analysis of water quality revealed dangerously high levels of viruses and bacteria from human sewage in Olympic and Paralympic venues — results that alarmed international experts and dismayed competitors training in Rio, some of whom have already fallen ill with fevers, vomiting and diarrhea.
With the major US equity markets within 1-2% of their record highs, Gavekal Capital notes that underneath the headline indices, stock markets are extremely tumultuous. Rather stunningly 21% of MSCI USA stocks are at least 20% off their recent highs, and 68% of Canadian stocks are in bear markets, but the real carnage is taking place in Emerging Markets.
Global oil prices have returned to a state of flux. This is hardly news to any who follow the oil markets closely and yet prices continue to drive international headlines. While oil prices are notoriously difficult to predict, it has failed to deter the speculators. There are those warning that the latest dip is a precursor for $40 a barrel, a catastrophe for oil markets in some minds. On the other end of the spectrum are the optimists betting on a return to $100 by 2020. The World Bank has taken a typically middle-of-the-road approach, with forecasts of $57 a barrel in 2015. That said, given Iran’s potential revitalization, Russia’s murky outlook, and U.S. shale supply limits uncertain, prices will be responsive to supply and demand trends; at least in the short to medium term.
On a day when market participants will care about only one thing - how hawkish (or dovish) the FOMC sounds at 2:00 pm (no Yellen press conference today) - Chinese stocks provided the usual dramatic sideshow and traded unchanged or modestly negative for most of the day despite the latest $100 billion injection, the close of trading on Wednesday was a mirror image of what happened in the last hour on Monday, as various Chinese "plunge-protection" mechanism went into a furious buying frenzy and government-backed funds rushed to buy anything that trades in the last 60 minutes of trading in what may be the most glaring example of banging the close yet.
"The rise of China’s currency on global markets is arguably the most significant development in currency trading since the introduction of the euro in 1999."
Bubblevision’s Scott Wapner nearly split a neck vessel today denouncing the US stock market sell-off. It was completely unwarranted, he thundered, because China don’t have nothin’ to do with anything. The collapse of red capitalism in China is exporting gale force deflation to the global economy, meaning that the already evident rollover of world trade is just beginning its descent. So S&P profits are not immune, not by a longshot. One of these days, perhaps soon, even Scott Wapner will get the memo.
The U.S. economy is growing at a painfully slow pace. Greece still threatens the euro. Chinese stocks have just pulled out of a frightening free-fall. Big companies in the U.S. are struggling to boost profits. You might think it's been a rough year for investors, but it's mostly been a smooth ride - and a profitable one. "Things have worked out," scoffs one analyst "and that has emboldened investors." Maybe too much...
Deflation is back on the front burner and it's going to destroy all of the careful central planning and related market manipulation of the past 6 years. Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. After years of suppression, the forces of reality are threatening to overwhelm our managed global ""markets"'. And it's about damn time.