Brazil

If you follow geopolitics, you might have noticed that many of the world’s emerging markets are beset with fractious political dynamics, violence, protests, and any number of other tail risks that could at any time mushroom into black swan events with ramifications for the developed world. As we head into 2016, it’s worth taking stock of the geopolitical events that have shaped EM in 2015 and it's also worth cataloguing what we know about the landscape for the coming year.

"Emerging economies’ growth prospects look damaged in several respects. The central fact facing EM is the negative external shock that results from weak global trade growth and the collapse of Chinese import growth. This brings to an irreversible end the period of rapid, investment-led Chinese growth and strong global trade growth which had supplied EM with a once-in-a-generation positive external shock during the years between 2002 and 2013."

The third stock market collapse of this century is near at hand. The global economy is in the midst of an unprecedented commodity deflation and CapEx depression - the payback for 20 years of lunatic monetary stimulus and credit expansion. Yet the central banks are powerless to stop the payback. When the Fed announces a rate increase after 84 months of dithering next week in the face of GDP growth that has already decelerated to barely 1% this quarter the jig will be up. Monumental money printing has failed. Soon there will be no place to hide - not even in the Tremendous Ten.

It is only logical that a day after the S&P500 surged, hitting Goldman's 2016 target of 2,100 more than a year early because the US manufacturing sector entered into a recession, that Europe would follow and when Eurostat reported an hour ago that European headline inflation of 0.1% missed expectations of a modest 0.2% increase (core rising 0.9% vs Exp. 1.1%), European stocks predictably surged not on any improvement to fundamentals of course, but simply because the EURUSD stumbled once more, sliding by 40 pips to a session low below the 1.06 level.

"At first read, the report recalls an obituary. There is no room for any growth in the coming quarters. The situation is really, really bad."

• Global Stocks Edge Higher on Expected ECB Stimulus (WSJ)
• Moment of truth as Puerto Rico faces crucial debt payment (Reuters)
• Obama urges Turkey to reduce tensions with Russia, stresses support (Reuters)
• Russian Media Takes Aim at Turkey (WSJ)
• Support Grows for U.S. Commando Raids to Fight Islamic State (BBG)
• Yuan Drops as SDR Approval Seen Prompting PBOC to Reduce Support (BBG)

It’s an unfortunate truth that, when people are worried about the future, they often put their faith in politicians to somehow make everything better. The hard truth, however, is that if we have a savior, he is the man in the mirror. If we are to be saved, we alone must do the research, make the plans, vote with our feet, and establish our own liberty.

It is Pedro's "courage to write" what Bernanke conveniently forgot to add in his memoir, that makes this review so much more memorable than the generic sycophantic tripe written by his "access journalism" peers.

Last night’s Asia action brought another warning that the global deflation cycle is accelerating. Iron ore broke below $40 per ton for the first time since the central banks kicked off the world’s credit based growth binge two decades ago; it’s now down 40% this year and 80% from its 2011-212 peak. This implosion of demand cannot be remedied with another round of central bank money printing because the world is already at peak debt. Accordingly,  global corporate profit cycle is heading into a deep downturn, just as the equity markets go into a final spasm of levitation based on a handful of big cap stocks.

Last week's arrest of Latin America's most prominent investment banker sent shares of BTG Pactual plunging as investors pulled a third of their money from the firm's fixed income funds. As shocking as Andre Esteves' detention most assuredly was, analysts say the real risk may stem from the investigation into Rousseff's "guy" in the Senate, Delcidio Amaral, who was also detained last Wednesday. As Bloomberg reports, Amaral's "arrest not only delayed government efforts to resolve this year’s budget dispute, but it also dispelled a long-held belief that sitting lawmakers are all but untouchable because of a quirk in Brazilian law that affords politicians special treatment in criminal investigations." 

Without a rerun of last Friday's Chinese stock market rout, European traders could focus on what "really matters", namely how much of the ECB's upcoming 20 bps rate cut and €20 billion QE expansion (with Commerzbank saying Draghi may even hint at Europe's QE3) is priced in, and whether the ECB's actions are just modestly priced in, or more than fully, and just how big the "sell the news" event will be.The result: the Euro falls to a new 7 month low, the dollar spot index hits a new all time high, and European stocks and US futures stage another remarkable overnight comeback on the usual low volume levitation and central bank intervention.

If America is so 'exceptional' why is it the world's leader in needing to 'change'...

• Russia Takes Aim at Turkish Economy Amid Fighter-Jet Spat (WSJ)
• ‘Commercial scale’ oil smuggling into Turkey becomes priority target of anti-ISIS strikes (RT)
• Russia-Turkey Ties Are Headed Into a Deep Freeze (WSJ)
• France signals softer stance on Assad after Russia talks (FT)
• China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks (BBG)
• China Stock Bulls Hit Breaking Point as State Dials Back Support (BBG)
• China's Bond Stresses Mount as Two More Companies Flag Concerns (BBG)

On Monday, Mauricio Macri, the son of Italian-born construction tycoon Francesco Macri, beat out Cristina Kirchner’s handpicked successor Daniel Scioli for Argentina’s presidency in what amounted to a referendum on 12 years of Peronist rule. Now, Macri faces a trio of daunting tasks: i) restore central bank liquidity, ii) implement a new FX regime, and iii) tackle the ballooning budget deficit. The most most pressing concern: the central bank is literally out of dollars. 

Why Now?