• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

Who Are The Biggest Losers From The EM Crisis

Tyler Durden's picture


Some very relevant observations from Louis Gave of Evergreen GaveKal

Who Will The Emerging Markets Crisis Adjust Against?

In last summer’s emerging market sell-off, India was very much at the center of the storm: the rupee collapsed, bond yields soared and equity markets tanked. The Reserve Bank of India responded by raising rates while the government introduced harsh restrictions on gold imports. Promptly, the Indian current account deficit shrank. So much so that, in the current emerging market (EM) meltdown, India has been spared relative to most other current account deficit emerging markets, whether Turkey, Brazil, South Africa or Argentina. And on this note, the inability of the Turkish lira, South African rand, Brazilian real, etc. to hold on to gains after recent hawkish moves by their central banks is problematic. Markets won’t be calmed until there is clear evidence these countries’ current account deficits can improve. But how can these adjustments happen?

The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate.

When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus.

Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia...? There are really five candidates:

  • China, again? That seems unlikely. Instead, China’s policymakers continue to do all they can to deleverage, despite the cost of a slowing economic expansion. Moreover, mercantilism still rides high in the corridors of power in Beijing and so the willingness to move to a current account deficit is simply not there.
  • The US, again? As discussed in our recent book (see Too Different For Comfort), the Federal Reserve’s attitude since the global financial crisis has consistently been one of: “the US dollar is our currency and your problem.” The Fed has been happy to print and devalue the US dollar, leaving other countries to deal with the consequences. The days of the US acting as the backstop in the system are now behind us.
  • Oil: In the past, collapsing oil prices have come to the rescue during emerging market crises. Of course, this accentuates problems for the EMs dependent on high energy prices for their growth, but is a boon for others (including India, China, Korea, Turkey). Unfortunately, for now, energy prices are not falling, with some more localized markets, like US natural gas, seeing a surge amid record cold snaps.
  • Japan: Japan, which has been such a non-player for twenty years, is once again finding its feet. However, it is doing so by exporting its deflation through a central bank orchestrated currency devaluation. How this “beggar-thy-neighbor policy” will help the struggling emerging markets is hard to see, except perhaps through a) capital flows from rich Japanese savers into by now higher yielding EM debt, or b) import substitution on the part of threatened emerging markets where the end consumers will perhaps replace high priced US dollar/euro denominated imports of manufactured goods for cheaper yen denominated ones?
  • Euroland: The currency zone’s slight trade surplus is largely due to Germany. However, Germany’s exports to Turkey, Russia, Brazil, etc., will likely suffer as domestic demand implodes in these countries. In this sense—the euroland will be the likeliest candidate on the other side of the EM current account adjustment. Unfortunately, odds are this will take place through falling European exports rather than rising European imports and/or rising EM exports to the eurozone. This is not a good harbinger for global growth.

In short, either oil collapses very soon, or the US dollar shoots up (with Janet Yellen about to take the helm, is that likely?) or we could soon be facing a contraction in global trade. And unfortunately, contractions in global trade are usually accompanied by global recessions. With this in mind, and as we argued in Eight Questions For 2014, maintaining positions in long-dated OECD government bonds as hedges against the unfolding of a global deflationary spiral (triggered by the weak yen, a slowing China, busting emerging markets and an uninspiring Europe...) makes ample sense.

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Thu, 01/30/2014 - 18:59 | 4385807 kliguy38
kliguy38's picture

Global Growth??? huh..... I guess its Germany again......take their gold then kick um in the nuts......hehehehe.......they must like pain

Thu, 01/30/2014 - 19:07 | 4385827 wee-weed up
wee-weed up's picture

VIX just spiked at the close. Sombody knows something...

Thu, 01/30/2014 - 19:16 | 4385845 knukles
knukles's picture

Lemme see here...
SAfrica need somebody to buy more of their somethings ...
Like maybe Kruggerands?

Yeah, Kruggerands.
And Diamonds


Thu, 01/30/2014 - 19:21 | 4385859 Herd Redirectio...
Herd Redirection Committee's picture

SA is tapped out.  The mines are over 3km deep and there has been minimal CapEx the last 15 years.

Thu, 01/30/2014 - 19:46 | 4385910 q99x2
q99x2's picture

The new mega gold deposits off the coast and deeper underground are matters of National Security. They are not going to open them up for production until necessary.

Thu, 01/30/2014 - 22:53 | 4386393 HardlyZero
HardlyZero's picture

or the IMF explains without external finance long-term and their short-term assistance...no go.

The mega-corporations and the IMF are picking and choosing...EMs probably worrying what's next.

Thu, 01/30/2014 - 19:02 | 4385815 SAT 800
SAT 800's picture

Contagion, bitchaez ! how do we know these banking/currency problems are going to stay isolated, and "foreign"?  We Don't. We'll just have to wait and watch and see if this is the time when the wobbly Jello Bunny falls off the table or not. Whee !

Thu, 01/30/2014 - 19:10 | 4385831 whatsinaname
whatsinaname's picture

How do we know ? Because Gold Man Sacks said so. Did you not read the Memo on yahoo finance ?

Thu, 01/30/2014 - 19:06 | 4385821 666
666's picture

The biggest losers are the citizens. The biggest winners are the bankers and politicians.

Thu, 01/30/2014 - 19:07 | 4385824 piliage
piliage's picture

How does that over valued euro taste now Angela? Gonna sell a bunch of mercs and BMWs in turkey and china this year? Me thinks not. The karma gods are laughing...

Thu, 01/30/2014 - 19:16 | 4385837 whatsinaname
whatsinaname's picture

A lot of BMWs sold last year in India and bought by rich farmers (enjoying the real estate boom) have now sold them off. Too costly to maintain those cars especially with roads in India. Methinks they will be buying gold with that money. Angela may be miffed though.

Thu, 01/30/2014 - 19:08 | 4385826 TuPhat
TuPhat's picture

I'll go for a little bit of all five.

Thu, 01/30/2014 - 19:10 | 4385830 MunX
MunX's picture

The race to the bottom bitches.

Thu, 01/30/2014 - 21:56 | 4386309 HardlyZero
HardlyZero's picture

Janet will be riding it all the way down.

Thu, 01/30/2014 - 19:31 | 4385850 acetinker
acetinker's picture

Who is this guy?  Is he ZH's version of "contrarian opinion"?  This is an example of if you can't dazzle 'em with brilliance, baffle 'em with bullshit.  Currency arbitrage is but a symptom of a much larger global decline, Charlie.  Quit trying to fix a failed model.

Thu, 01/30/2014 - 19:21 | 4385853 chump666
chump666's picture

First of all the USD/DXY should be way over 84, similar to June 2013, it isn't.  A EM crisis will encourage widespread capital controls which means the outflows won't pour into US/Western markets.  It is more likely that US assets will be dumped than bought.  No one believes that the American economy is all and well.


Bernanke is a sh*t heel

Thu, 01/30/2014 - 19:21 | 4385857 DeficitAlchemist
DeficitAlchemist's picture

They will rerate collectively downwards.. nobody going to volunteer to take their slack Rubble, Peso, Florent all set up for massive moves on the FX rates.. its coming...

Thu, 01/30/2014 - 19:28 | 4385871 kaiserhoff
kaiserhoff's picture

In the past, it's happened by regions.  Makes some sense.

It's a neighbor/competitor's devaluation that really bites you in the ass, but yeah, pretty much all of them.

Thu, 01/30/2014 - 19:26 | 4385866 falak pema
falak pema's picture

In short, either oil collapses very soon, or the US dollar shoots up (with Janet Yellen about to take the helm, is that likely?) or we could soon be facing a contraction in global trade. And unfortunately, contractions in global trade are usually accompanied by global recessions. With this in mind, and as we argued in Eight Questions For 2014, maintaining positions in long-dated OECD government bonds as hedges against the unfolding of a global deflationary spiral (triggered by the weak yen, a slowing China, busting emerging markets and an uninspiring Europe...) makes ample sen

Three ways to lose your bets on the stock exchange. The Sochi games should be fun right when the EM goose starts to cook and Europe feels the need to see the oil price go down. Strong dollar is probably a likely horizon in this roller coaster ride. The question then becomes what happens during the summer olympics of Brazil?  Double Olympian year means records get broken galore...
Thu, 01/30/2014 - 21:53 | 4386302 HardlyZero
HardlyZero's picture

...or...UN and IMF take over the sick and bankrupt EMs.

Thu, 01/30/2014 - 19:34 | 4385880 Iam Yue2
Iam Yue2's picture

Patrick Artus:

"EM sell-off will have lasting implications for currencies."


Thu, 01/30/2014 - 19:40 | 4385896 q99x2
q99x2's picture

I'm preparing for a marathon. If I can't get out of the city by vehicle when the collapse hits I'll be able to travel on foot.

Thu, 01/30/2014 - 19:55 | 4385938 DaddyO
DaddyO's picture

Better take an urban escape and evasion class...

It's much more involved than just being in shape.


Thu, 01/30/2014 - 19:53 | 4385933 itstippy
itstippy's picture

I heard the same refrain from every Mainstream Media financial outlet for five damned years: "BUY THE BRICs!" (Brazil, Russia, India, and China).

"The BRICs are the engines of growth!  Europe, Great Britian, Japan, and the U.S. are stable but stagnant; they can't provide the type of investment returns you need to meet your financial goals.  The BRICs are the answer!  Whatever you do, get yourself some exposure to the BRICs!"

Now what?  

Thu, 01/30/2014 - 20:07 | 4385971 ebworthen
ebworthen's picture

Let me guess...the BRIC's?

Nice pick of a brick wall BTW.

Central Bank hegemony rolls on unfettered.

Thu, 01/30/2014 - 21:53 | 4386144 HardlyZero
HardlyZero's picture

Dismal.   The UN and IMF will eventually be sent in as caretakers (and they will grow), and act as natural resource brokers as buyouts occur.

(Reuters) Former New York City Mayor Michael Bloomberg has been tapped to be U.N. special envoy for cities and climate change, sources familiar with the situation said on Thursday.


Barring any last minute changes, U.N. Secretary-General Ban Ki-moon - who is seeking to re-energize the global climate change debate and boost the United Nations' role - could make the announcement as early as Friday, the sources said on the condition of anonymity.

Thu, 01/30/2014 - 21:41 | 4386268 are we there yet
are we there yet's picture

The productive class could repair america if it were not for the engorged and growing paracitic class of welfare angry birds and politicians.

Fri, 01/31/2014 - 08:08 | 4387208 BlackVoid
BlackVoid's picture

Yes, plz hold government bonds and go extinct.

Fri, 01/31/2014 - 08:07 | 4387212 BlackVoid
BlackVoid's picture

I cannot believe this article is at 4.4.

With the recommendation of holding OECD bonds. LOL. This is not 1992.

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