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The Fed Kills Emerging Markets For Profit
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
DPC Herald Square, New York 1903
Emerging markets are about to get hit by a whopper of a double whammy. And if I were you, I wouldn’t be too surprised if it takes on epic proportions.
The exposure that emerging markets, countries in the less wealthy parts of the globe, Asia, Eastern Europe, Africa, Latin America, have to the west has grown at a very rapid clip since, let’s say, Lehman. These countries were hit hard by the western crisis, but found what looked like a sugar mountain afterward when western interest rates plunged to zero and beyond, which provided them with both of the seemingly beneficial sides of what will now become their double whammy.
First, western money flowed, make that flooded, into their economies at unparalleled levels, driven by a chase for yield instigated by the difference between ultra low interest rates in the west and much higher rates beyond. For emerging countries, this has been a boon beyond belief. No matter how corrupt or poorly organized they may have been or still are, most showed nice growth numbers for a few years. It wasn’t really a carry trade in the literal sense of the word, but it was close. And it’s now coming to an end.
Second, and likely to work out even much worse, the ‘emerging governments’ borrowed those cheap US dollars using anything not bolted down, including their national treasures, as collateral, and they now face a doubling, tripling, quadrupling etc. of the interest rates they have to pay on those loans. Which looks about like this (and something tells me this could well underestimate reality by a considerable margin):
Janet Yellen is about to announce rising rates, and whether it’s tomorrow or in 6 months is not that relevant in all this, it’s expectations that rule the day. Emerging markets will first be hit by outflows of western investment – or rather casino – capital, just because of the fear in the markets of what Yellen will do, and then get the second whammy when rates move from 0.25% to 1.25% and then some.
We see the initial jitters today. Or rather, they’re not the initial ones, just the first ones to come from people other than western investors.
What sticks out that the western press has very little attention for the ‘other side’s’ point of view. Still, here’s the Indonesian FM with a pretty clear message for someone who sees his country being suspended by its balls:
Asia May Need to Sacrifice Growth to Cope With Fed Rate Hike
Asia’s developing nations may have to sacrifice some growth next year and focus on keeping their economies stable amid potential fallout from higher U.S. interest rates, Indonesian Finance Minister Chatib Basri said. Capital outflows are a threat facing emerging markets as the prospect of the Federal Reserve lifting rates lures funds, Basri said [..] In Indonesia, where the benchmark rate is already at its highest since 2009, policy makers may have to tighten further to preserve the nation’s relative appeal to investors, he said. “In the short term, some emerging markets may have to choose stabilization over growth,” Basri said. “You cannot promote economic growth when dealing with this issue. It will exacerbate the situation.”
The U.S. dollar has appreciated as the Fed edges closer to its first rate increase since 2006, while Indonesia’s rupiah has dropped for five straight weeks amid global funds pulling money from local stocks in anticipation of higher U.S. borrowing costs. As some of the world’s fastest-growing economies adapt to changing policy at the Fed, their contribution to global expansion might weaken, Basri said. [..] The prospect of higher rates in the U.S. is the single biggest challenge facing Indonesia’s new government, Basri said.
Basri has called for the incoming government to focus on narrowing the budget deficit, raising fuel prices and luring foreign investment. In Indonesia, where the key rate is at 7.5%, policy makers may have to hold firm to prevent funds from flowing out of the country, Basri said.
“Maybe the tightening cycle will continue, from both the fiscal and the monetary side,” he said. Such a step “is not really conducive to promoting economic growth,” he said. Indonesia also needs to diversify its base of investors, the finance minister said. Relying more on domestic bond buyers would help, he said. “If global liquidity becomes tighter because of this tightening policy at the Fed, it will be more difficult for a country like Indonesia to get foreign financing,” Basri said.
Not that all investors will leave. If only because the emerging market countries need to raise their base rates even higher.
Investors Bet on Asia Despite U.S. Rate Threat
A consensus is emerging among investors that some Asian markets can do well even with the prospect of higher U.S. interest rates on the horizon. Fund managers see stepped up corporate and economic overhauls by leadership in China and India this year, combined with relatively strong growth in Asian economies compared with the rest of the world, as reasons to be bullish. Investors choosing Asia have been rewarded in the past three months. The MSCI Asia ex-Japan index is up 2.4%, topping the 0.4% gain in emerging markets globally and comparable to the 2.6% increase in the S&P 500.
The Fed said Wednesday that it remains on track to end its bond-buying stimulus program in October. It is widely expected to raise interest rates next year. Higher interest rates in the U.S. can hurt Asian assets by drawing investment money into U.S. assets and away from Asia’s markets. Despite the concerns over U.S. interest rates, investors say they are selectively investing in Asian markets that they see as cheap and where economic fundamentals have improved or where they believe reforms are on the way. Investors continued putting money into Asian emerging markets last month, according to the latest data on money flows from the Institute of International Finance.
Still, the world’s smaller economies are plenty afraid.
Wary of Another ‘Tantrum,’ Emerging Economies Prep for Fed Rate Hike
As the Federal Reserve debates the timing of a potential interest rate increase, some policymakers in the developing world aren’t taking any chances. Officials from Indonesia to Hungary say they’re trying to curb their reliance on foreign investors in case an eventual Fed rate increase sparks another broad retreat from emerging markets. “Everyone is getting prepared” for a U.S. rate increase, Mauricio Cardenas, Colombia’s finance minister, said in an interview on Tuesday.
Mr. Cardenas said his government has worked to shift its borrowing from foreign to domestic buyers, on the view that locals are less likely to sell en masse based on shifts in global monetary policy. “I don’t think it fully insulates us from an increase in interest rates in the U.S., but it certainly protects us,” Mr. Cardenas said.
Years of low rates and stimulus from the Fed, deployed in an effort to jumpstart growth in the U.S., had the side effect of sending investors piling into developing world assets. The rock-bottom interest rates available in the U.S. essentially made the higher returns promised by bonds and stocks in countries such as Brazil and Turkey more attractive.
But what happens when that flow reverses? Global markets got a taste last year during a so-called “taper tantrum,” as investors fled emerging markets in anticipation of a reduction in the Fed’s stimulus efforts.
One more then, because you enjoy it so much:
Fed Dims Emerging Markets’ Allure
Fears of higher U.S. interest rates are prompting fund managers to cut back on investments in emerging markets. For now, investors still are moving into developing markets, though the pace has moderated. Emerging-market stocks and bonds received $9 billion from investors in August, compared with an average $38 billion a month between May and July, according to the latest data from the Institute of International Finance. But after months of heavy buying in such places as Brazil and India, lured by the prospect of higher returns than in the Western world, investors are taking a more cautious stance. Chief among these money managers’ concerns: that the recent rally in emerging-market stocks, bonds and currencies could be derailed as the U.S. Federal Reserve gets closer to raising interest rates.
The Fed, by raising its rates and relinquishing its downward pressure on the US dollar, is about to kill off most of the emerging markets. That’s a whole lot of misery in one pen stroke. That’s a whole lot of millions of people who will see their dreams of better lives shattered, just as they were beginning to think they had a chance.
It’s how the game is played. The weak must be sacrificed so the strong be stronger. It’s like a law of nature. From some point of view, at least. For me, it looks more like ‘we’ have found another way, and another victim, to keep ‘our’ game going a bit longer. There is no way this just happens, in some accidental kind of way. There is a reason the Fed raises both interest rates and the US dollar inside the same timeframe.
Short emerging markets. Play it well and their misery can make you a fortune. Isn’t that what life is all about?
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This is ass backwards.
That's what I was thinking. Lots of people all over the place totally freaking out at the prospect of the Fed raising it's funds rate, that's for sure. Implied message: please never raise rates.
How about the effect of raising rates on the US "Recovery?" On the Federal Budget tax receipts and interest expense?
You mean FOR FUN AND PROFIT......better
fun and PROFIT! no....POWER AND CONTROL YES!
real WORRY SIGNS for the market right now too. Have a look at the russel chart here ==> http://bit.ly/1B4K0wk
That is another way they control us, through their scams there. THey hammer the market down, get all the dummies short, and then weeks later we are at new highs. ITs a scam, but alot of people in here get done for too.
I think the aveage ZERO HEDGER loses money by this. But this is a bull market, so the scam will go on into 2015. Buy da dips guys. :-)
The problem is not the debt.
The problem is the combination of private-money (fractional lending) and interest (usury), stupid!
That is not the problem. The problem is forcibly saving those failed institutions when the fractional lending system backed up on them and marked them for death.
Saving them is part of their business model; once they could not keep robbing the real economy, and the world through debt and usury.
Any monetary system subject to interest ultimately terminates itself under insoluble debt. If interests are not prohibited, every economy is destined to collapse.
Focus on the real problem and forget the side-show.
If the Fed ever could raise rates, they would have. Since they can't (federal debt, interest rate swaps), we have ZIRP and QE, which has now been replaced by the Feds reverse repos.
strannick
Because, otherwise, US will turn into a 3rd world.
Sez the Peronista, unironically...
Jonathan Cahn's latest book - 'The Mystery of the Shemitah : ....' is a must read.
Shemitah years have predicted with 90%+ Accuracy all recessions / depressions and major economic contractions.
This time will be no different. It will begin September 25th, 2014 and run until September 13th, 2015.
What the book notes is it would be impossible to orchestrate all the variables to cause these contractions they are done by the 'unseen hand'
On the prophetic note - will we see the long prophesied Japanese quake this October? The one that crashes the world markets, and causes a 30 foot warning Tsunami to hit the shores of California? It is supposed to happen in the fall when the leaves begin to turn and fall to the ground. Within two weeks of this event we are supposed to see a MASSIVE QUAKE HIT CALIFORNIA - it Wipes out the NASDAQ, it causes portions of Los Angeles to slide into the ocean, and it brings about a banking holiday - to be called 'The Obama Freeze'
Jonathan Cahn is a con man.
And under some type of schizophrenia by believing and spreading nonsense.
We know you are sick, but what affliction spurs your belief in and apparent compulsive need to spread your own brand of nonsense?
Bendromeda Strain,
First: If you believe the Bible to be the word of God, then, there’s a human being telling you that he “unlocked the mystery of the bible” I would think that person has some type of schizophrenia, wouldn’t you?
Second: If you're interested in an in-depth review of The Mystery of the Shemitah from a biblical perspective, you can find it on The Alliance for Biblical Integrity website.
http://www.biblicalintegrity.o...
Here is a brief summary review:
The Mystery of the Shemitah, which went to its second printing the day it was released, builds on the concepts and theories Jonathan Cahn first presented in The Harbinger, particularly those in the chapter also titled “The Mystery of the Shemitah.” The author’s theory is that God has visited warnings and / or judgment against the United States according to a seven-year cycle going back many decades. Although this reviewer agrees that America is deserving of God’s judgment and a call to repentance is definitely in order, the foundational premise of this book is biblically flawed from the outset. The Shemitah (Jewish Sabbath year) was an obligation given specifically and exclusively to the nation of Israel, and there is no biblical support whatsoever for the idea that God would either require any other nation to observe the Shemitah year or that He would impose a Shemitah-type judgment according to a seven-year cycle on any nation, including Israel itself.
Furthermore, none of the overwhelming number of assertions and fact-claims throughout the book concerning economic trends, financial statistics and historical events are documented whatsoever, raising the question of the source of the author’s information, the accuracy of that information, and why this most basic and necessary aspect of any research-based non-fiction book is completely missing. The burden of proof for such assertions and claims should never be on the reader if an author is to be taken seriously. In addition, the integrity of any publisher is rightly called into question when an author doesn’t cite his sources.
The bottom line is that, unfortunately, the significant problems that plague The Harbinger have possibly been exceeded in this book and so should give pause to anyone who takes the Word of God seriously.
Dave James
Director, The Alliance for Biblical Integrity
http://www.biblicalintegrity.o...
http://www.biblicalintegrity.o...
I don't know what inflation is like in Indonesia, but 7.25%, one could live on with a million in the bank.
The Fed tried to destroy our emerging light, I would like to ream their ass backwards.
Agreed. Is ZeroHedge hiring writers from Bloomberg now?
Pure speculation on Raul's part.
The Indonesian Finance Minister needs to talk with "Not-in-my-lifetime" Bernanke about the timing of the Fed's rate increases.
The Fed. isn't raising rates. EOS> End Of Story
The Fed doesnt want to raise rates....may not have a choice. The is not GOD.
it is not they do no want to, it is just structurally, they cannot . period.
When you can't win with the current rules, change them. Calvin ball bitchz it's the future.
True. The Fed can't raise interest rates at this point without causing a systemic collapse, but we have an inherent value that cannot be destroyed or even be defined by any bankers or TPTB. They can never destroy an idea or the word that created us.
No worries. Rates aren't going anywhere. You can't pay the interest on $18trn with rates anywhere above zero.
Didn't Peter Schiff point out the other day that Yellen can never raise rates above zero, because the phony economy of the U.S. would collapse, and the only thing she can do now is vary the amount of official or unofficial QE? So if U.S. rates can never rise, the investors are incorrect in their assumption, since this time really is different.
Furthermore, an interest rate rise of, say 5% would destroy the federal government budget. An increase in Japanese interest rates of even 2% would bankrupt Japan. How can both statements be true, that developed world interest rates cannot rise, and that they will rise, and the developing world will be bankrupted?
Hint: the developed world is already bankrupt... both financially and morally.
Beats me Dog, a lot of influential economics types will lose credibility if they do raise rates or if gold does break it's $1180 "definitely the double bottom".
Like when Lance Roberts said QE3 will NOT happen with S&P at all time high.
Things make sense until they defy logic, and they will.
Buy silver.
If Gold drops below $1100 and you can still buy physical, I will eat my words. Hint- I NEVER EAT MY WORDS.
Of course rates can rise. I understand the dilemma but saying that rates cannot rise is just hyperbole.
And, of course, when everyone agrees that they cannot rise is the moment when they are most likely to rise. Its the new normal.
ZIRP, NIRP & finally PIRP - Perception Interest Rate Policy, what is possible is now the only tool left.
The weak are meat and the strong have to eat.
Heavens to Betsy, you mean that the banks are going to pay me more than 0.02% interest?
Does anyone believe the ( have never had real work experience ) FED decide when to raise/ lower rates OR do QE OR Blah Blah Blah? . . . Good NO because Baron ROTHWEILER has a monopoly on such decisions.
Short emerging markets. Play it well and their misery can make you a fortune. Isn’t that what life is all about?
Sounds like this guy has a future with the FED. Create a bubble by decree or FIAT -- burst it with impeccable timing -- rinse and repeat.
Janet Yellen is about to announce rising rates
Janet Yellen is about to shit in her hat and pull it over her ears. The FED lies. They are bankers. That's what bankers do.
She needs two of them hats -- one to shit in and one to cover it up with.
BTW, I didn't downvote you, I was voting for, "Janet Yellen is about to shit in her hat and pull it over her ears. The FED lies. They are bankers. That's what bankers do."
that's what his 2 options are, an upvote or downvote poll: you clicky the up arrow to vote option1, or down arrow to vote option 2
Well, the Yuan will fill the liquid void that the Dollar will leave, adn the Dollar will never come back. Nice plan!
It is totally ass backwards. Banking has always followed trade historically.
And medium of circulation (currency, credit or money) are just that, a medium of circulation, it can be sea shell, fossils, Gold, Silver, or whatever suits the needs of trading partners.
If the Dollar leaves, the Yuan will fill the void naturally as China is the biggest trader of tradable goods and services. And as the Dollar is sucked, the issue is that the void will be filled and the Dollar will never come back the way it was.
I live in Thailand and this is a huge housing/condo buble ready to blow!
this is precisely why the fed will essentially never raise rates. they would kill the euro with their NIRP policy that frankly.... will only get NIRP-er. then there's asia who the USA desperately wants to compete with, but with a usd that's too strong it will never happen. thus the usa will continue to weaken and certainly not raise rates for those reasons either.
The FED will raise rates right after they're done printing money.
http://www.federalreserve.gov/releases/h41/Current/h41.htm
Rates ARE GOING UP, whether you think they are or not.
nonsense. You arent listening to the fed. CONSIDERABLE TIME means exactly that.
BULLSHIT!!!!!
The Fed can't raise rates for a generation, if ever!
Rising rates would implode every asset bubble the Fed has grown and make the crash of 2008 look like a tootsie roll pop. The crash of 2008 itself was brough on (the last catalyst) by the Fed raising interest rates. KABOOM!!!!
Now, that's not to say that rates might not rise without the Fed controlling the onset of higer rates. But no matter whether they rise by Fed action or by some development outside the Fed's control, the catastrophic implosion would soon follow.
The Fed has a 'gun' with a 180 degree curve in the barrel. Point and shoot at emerging markets or anyone else and the blast comes right back at their own head. Period.
Seems like you are the only one that seems to get it. When you are the biggest debtor nation on the planet, raising your own interest payments isn't the go even though they would love to do that.
Why borrow dollars anyway? Too damn unreliable...
<<< Happy times are straight ahead for the US
<<< The Fed cannot keep this together (4eva)
These countries can always default and teach the US megabanks a lesson.
Time to move to a safer country.
Any country voluntarily tying its fortunes to the US deserves to get creamed. May be that'll teach them to make better decisions.