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Can You Hear the Fat Lady Singing? - Part III
By Chris at www.CapitalistExploits.at
I love what I do! A recent get together filled with blonde stick insects and cologne covered chinos found me subjected to talk about "work at the office":
"What did you do at work today?"
"Oh, nothing much, tried to look down the new girl's top for a bit then I made some phone calls, you?"
"Oh, much the normal, searched the web for our next vacation and found I can get a Filipino bride for a grand."
After only 10 minutes I was ready to leave.
I then received a call from a friend which snapped me back into my world and cemented my decision to leave. This friend has been extremely successful trading Asian credit and I was eager to get his perspective on emerging market debt and in particular China.
This brings me to my thoughts on emerging market currencies and debt, which I'd like to share with you today.
It all starts with the dollar bull market which we've discussed previously at length. As Brad mentioned earlier this year:
So while the US current account deficit continues to narrow there is absolutely going to be a shortage of USDs. There is $9 trillion of dollar denominated debt outstanding, well considering that it took a number of years to build up this debt, it is going to take more than just a few months to unwind, more likely a couple of years at least. If the US Federal Reserve were to raise rates this year it sure wouldn’t help the cause, rather it would throw accelerant on the smouldering liquidity fire!
After a brief breather, the dollar looks set to take out new highs:

This time around the dollar looks set to take out 100 on the Dollar Index. My thoughts today lie in what this may mean for various emerging market asset classes.
Take a look at the MSCI Emerging Markets ETF:

Support sits at 36 and we're getting close!
This is a function of a stronger dollar. The larger question lies in where the leverage in emerging markets may lie, remembering that the unwinding of the carry trade will be particularly severely felt where leverage is highest.
Taking a step back for a minute and thinking about the events in Europe recently and the events we've just witnessed in China, it's clear to me that central banks are out of control.
Risk lies in with the fact central banks believe themselves omnipotent. This is only half of the problem. The majority of investors believe the central banks are actually omnipotentand that is the other half of the problem. Central bank omnipotence is at an all time high... or is it?
If we look back in history, it's littered, not with successful central bank intervention, but with central bank failures. For every action there is a reaction. Everything is connected. You can't throw a stone into a pond and not get ripples. Similarly you can't have central banks buying assets, or slashing interest rates or any other such action, without consequences for those actions.
Last week I looked back at how the Asian crisis unfolded. That particular crisis was only 18 years ago, yet market participants seem to have forgotten the lessons. We know that central bank intervention in the face of a levered market which is unwinding can often be the precursor to an outright rout.
I then spoke about China earlier this week and how easily and quickly the Chinese central bank stepped in to attempt to stabilise the stock market. That they acted so aggressively is far more concerning to me than the actions themselves. The consequences of this are ultimately a weaker remnimbi, and a weaker remnimbi threatens to exacerbate losses for investors that have been participating in the USD carry trade.
Furthermore, as Chinese growth slows the temptation to slash interest rates and devalue the remnimbi, should it happen, puts additional pressure on competitive emerging market currencies. Countries such as Korea, Malaysia, Thailand, even India. Once again, a stronger dollar vis-à-vis these respective currencies threatens any levered capital invested in the bond markets to seek first to reduce exposures. This means selling the respective currencies and buying back dollars. This self-reinforcing cycle can quickly force margin calls and the global carry trade unwind threatens to get particularly "exciting".
It's not difficult to imagine a scenario where as the dollar bull run gathers steam we may well see more and more emerging markets looking like Greece.
Right now a number of emerging market currencies are looking like they're getting ready to roll over. The repercussions could well be an emerging market bond rout. As such, we've been dipping our toes into shorting the iShares JP Morgan Emerging market bond ETF (EMB) with some long dated options.
If nothing else, it's a heck more interesting than boring cocktail parties...
- Chris
"It amazed her how much people wanted to talk at parties. And about nothing in particular."- J.D. Robb, Holiday in Death
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Eat that watermelon, eat that watermelon, eat that watermelon
https://www.youtube.com/watch?v=b7nQ4_1VW9s
It certainly will be interesting when the USD carry trade ends. It seems like a very one-side trade at this time.
Loved your description of the irrelevant cocktail party! Reminded me of Tom Wolfe's description: social x-rays and lemon tarts. I've been to way too many of those, and now avoid them like the plague. Even if it means pretending I've caught the plague. They're boring and irrelevant except for those who really can win by networking, fewer and fewer these days.
I've been fascinated by the currency markets this year. The US satellite currencies are also falling, along with EM. This is sending the USD up, but that just means it's dying last. Like when a body freezes, the limbs freeze first and all the blood moves in to protect the heart, so the heart dies last -- but you can't call it a healthy body, or a healthy heart, just because the blood is there rather than at the limbs.
I wonder if the Chinese aggression re: their stock market is because they perceived it as a Wall Street attack on their markets. That's what they said at the time, and I believe that is the way they see it. (Maybe that's even what happened.) The rumour was that Wall Street attacked Chinese stock market right around the same time that the BRICS New Development Bank opened for business, as retaliation. The Chinese didn't make these protective moves in 2008, right? But this time they did, along with a lot of rhetoric about how it was a US attack, along with a lot of rhetoric about how the West 'wished' them to fail and their growth numbers would never lie, unlike the West, etc. And the US suffered a few hacking attacks at that time as well. So I wonder if this aggressive protection is b/c that stock market dive was perceived to be part of the WW3 Currency War, which the 'west' has been waging on pretty much everyone else, and the Chinese felt the need to display that such an attack will not work on them?
Anyway, thanks for the focus on the currency wars waging out there. It isn't just emerging markets that are suffering; USD satellite economies are suffering too. It will take a real miracle to turn this around. Bond markets have been most volatile over the last few months, and second-most volatile have been currencies. Last May Wolf Richter posted this article with an Otterwood Capital Management chart, showing how "capital markets are completely backwards":
http://wolfstreet.com/2015/05/18/buyers-beware-capital-markets-completel...
with a chart showing the most volatility in bonds, second in currencies, third commodities, and last, equities. Christine Hughes wrote that "The important thing to take from this chart is that bonds and currencies (blue and red lines) are becoming more volatile than equities (black line).This is completely backwards to how capital markets typically behave. It is stock market volatility that is well known and feared, but we are seeing the reverse unfold". When equities get the memo, as they appear to be getting it now, then the central banks' pretence of control is over. As equities are now the last to get the memo, this 'contained, everything under control' leg of the Depression is about up as the facade starts to crack wide open.
this time it's different
Imagine what would happen to the value of a dollar if US immigration were cut off, and you had to spend your dollars at home?
Be careful what you wish for, you may just get it. The mega-banks and Wall St. are about to get what they think they wanted, unfortunately we get the massive shit splatter. No matter what they say, things are about to get bad and it's becoming impossible to hide it with magic numbers. Santa is picking up coal on the cheap for everyones stocking this Christmas.....
And the Grinch gets a job as a Walmart greeter ..
https://youtu.be/SIgoOP3qUhE
This song's release was just a tad bit early ..
"blonde stick insects"
I wanna know more about the blonde stick insects.
They're cool to look at and poke with sticks, but other than that...
I tried Shorting an American Bank......Lost my bet. Good Luck to You getting the Ball Rolling.
I'm sure there are many more, like me, that are ready for another swing.
As for the long (short) JPMorgan longshot,
I'll "Invest-a-Gate".
What world-changing, god-like kids? Forget the $1K Filipino. Splurge and spend the 10 grand on a Russian or Ukrainian.
http://www.washingtonpost.com/blogs/wonkblog/wp/2015/07/25/gold-is-doomed/
Look son a fuck'en retard...
Tuckfard.
Member for 2 days - which information bureau are you posting for?
So sez the CIA-controlled Washington Post. Bezos and his Bozos.
Thanks for registering yesterday and have such a thoughtful commentary to offer today.
But...Wait for the second leg up and then we can talk again.
Who is bogarting that Blunt?