"Asia Crisis, Tech Bubble Burst, Lehman"... And Today

Tyler Durden's picture

While over the past several months many have been focused - finally - on the bursting of China's 3 bubbles (credit, housing and investment), in the context of its 4th burst bubble, the stock market which the politburo is desperately trying to patch up every single day, a far scarier picture has emerged within the entire Emerging Market space, where Brazil has rapidly become a "ground zero" case study for what has moved beyond mere recession and is an accelerated collapse into economic depression, as we discussed previously.

Bank of America notes overnight that "capitulation is already visible in bond/bank/FX correlations and “forced selling” of crowded EM growth trades." Here is what BofA's Michael Hartnett has to say about the EM capitulation/collapse phase:

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 journey from hubris to humiliation in EM has taken roughly 5 years. Back in late 2010, when Sepp Blatter announced that Russia & Qatar would follow Brazil as hosts of the FIFA World Cup, both China & India were on course for >10% GDP growth, EM spreads were significantly lower, and the market cap of EM ($3.7 trillion on December 1st 2010) was twice the market cap of US banks, and exceeded the combined market cap of US tech & health care. Today, the market cap of EM equities is the same, while the combined market cap of US tech, health care and banks is over $10 trillion.


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 (Chart 3).

In other words, while the S&P continues to exist in its own inert bubble, where stocks no longer are able to discount anything and merely float on the sea of $22 trillion in liquidity created by central banks, for Brazil, the correlation between key assets classes reveals that the local situation is on par with the three greatest crises of the past two decades: the Asia Crisis, the bursting of the Tech bubble, and of course, Lehman.


While it is naive to blame much of this on the strength of the US dollar, one thing is obvious, as BofA notes: "Structural inflection points in both EM/DM (Chart 6 & Table 3) have tended to coincide with major geopolitical events and/or policy shifts that have started or ended a multi-year move in the US dollar, e.g. Bretton Woods ‘70s, LatAm debt crisis ‘80s, Asia crisis ‘90s, Lehman 200.8"

So for those who are seeking the inflection point in deciding how and whether to invest in EM, "asset allocation to EM awaits an “event” (e.g. Fed hikes, China deval, bankruptcy/ default) to create narrative of US$ peak & unambiguous EM value)."

For the time being, the dominant narrative is that the US has a ways to go and will go even higher if and when the Fed starts its hiking cycle (even if riots break out among the BRIC nations which, like Brazil, are facing economic devastation).

Unless, of course, the first rate hike is precisely the catalyst that ends the past year's dollar surge, as the market prices in the failure of the Fed's hiking cycle and begins trading in anticipation of the admission of such failure which will lead to an end of rate hikes once the US economy slides into all out recession (the plunge in globla trade is the biggest flashing red light in that regard) and corporate profitability moves beyond GAAP recession into all out depression, ultimately culminating with the launch of QE4 and monetary policy reverting back to square one.

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Gaius Frakkin' Baltar's picture

The dominos are falling...

Bloppy's picture

Ramping up NFLX another $20 will save us all. CNBC says so.



Leftists: MSNBC's Ed Schultz canned for speaking out against Obamatrade



Arnold's picture

Shit canned again? I see a pattern emerging.



(who's Ed Schultz?)


Lin S's picture

Heard PCR interviewed yesterday. Said he used to think the market would bring the pain and the distortions would be sorted out that way (paraphrasing).

But he went on to say the market can't operate due to rampant manipulation, and that the ad nauseum Fed/ECB/BoJ can-kicking will end "through some kind of geopolitical event."

Wish I had a crystal ball to know what it will be, and when it will happen...

ebworthen's picture

ZIRP with QE4 - I suppose that is more likely than a return to sanity and sound money.

ShrNfr's picture

Rising rates in Britain and the US would set up the great mother of all carry trades. I would not sell the GBP or the USD short against the Euro quite yet.

starman's picture

80's was the last growth era where people still bought with their savings.

Late 80's credit card mania took over and ever since it's all credit (debt) fueled "growth".

Business that were 70% are now 15% cash sales!! 

The US is fucking toast!  

chosen's picture

A graph showing two variables, say X and Y, is an X-Y graph, with X usually being on the horizontal axis.  This is the standard way of showing simple bivariate correlation between two variables. The first graph is a simple time series graph of one variable and shows no correlation of anything with anything.  There are some words printed in red where the line is at a low point.     Maybe by correlation, ZH means "r" which ranges from -1 to 1 and is sometimes confusingly called the "correlation coefficient".  To call "r" a "Correlation" is incorrect, as is so much so-called "technical analysis" of the stock market.