Emerging Market Mayhem: Gross Warns Of "Debacle" As Currencies, Bonds Collapse

Tyler Durden's picture

Things are getting downright scary in emerging markets. Just ask Bill Gross:

Or have a look at this week’s headlines:

And on, and on. 

One particularly alarming case that we’ve been keen to document lately is that of Brazil which, you’ll recall, is "up shit creek without a paddle" both figuratively and literally. For one thing, as Goldman recently noted, there’s not a single period in over a decade "with a strictly-worse growth-inflation outcome than that of 2Q2015." In other words, "since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015."

And here is what that looks like on a scale of 100 to -100 with 100 being "high growth, low inflation" and -100 being "stagflation nightmare":

This helps to explain why CDS spreads have blown out to post-crisis wides.

For those who favor a more qualitative approach to assessing an economy’s prospects, don’t forget that the Brazilian economy recently hit its metaphorical, and literal, bottom when AP reported that, with the Brazil Olympics of 2016 just about 1 year away, "athletes in next year's Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games." 

So that’s Brazil, and while not every EM country is coping with the worst stagflation in 11 years while simultaneously trying to explain away rivers of raw sewage to the Olympic Committee, the combination of slumping commodity prices and the threat of an imminent Fed liftoff are wreaking havoc across the space. Consider the following from Bloomberg for instance:

Central bankers in commodity-dependent Andes economies aren’t even considering interest-rate cuts to revive growth, even as prices for oil, copper and other raw materials collapse.


That’s because the deepening price slump is also dragging down currencies in Colombia and Chile -- a swoon that’s fanning inflation and tying policy makers’ hands. Fixed-income traders have now ratcheted up cost-of-living expectations for Colombia and Chile after their tenders sank more than 10 percent in the past three months.


"It’s causing a headache," Luis Oscar Herrera, the chief Andean region economist at BTG Pactual SA, said by telephone from Santiago. "All the Andean countries have headline and core inflation above their target ranges."


In an interview with local newspaper La Tercera published Sunday, Chile central bank President Rodrigo Vergara said rate cuts are completely off the table as the sinking peso fuels price acceleration. That’s even after Chile’s economy shrank 0.07 percent on a seasonally adjusted basis in the first five months of the year, buffeted by the nosedive in copper prices. Chile is the world’s biggest exporter of the metal, which has tumbled 26 percent in the past year.


In other words, central bankers are grappling with slumping export-driven economies and FX-pass through inflation or, more simply, bankers are caught between a "can’t cut to boost the economy" rock and a "can’t hike to tame inflation" hard place.

"Inflation [in Colombia] stood at a monthly 0.19% in July, a print above market consensus (0.11% MoM) and our forecast (0.15% MoM) [which] goes in-line with a materialization of the foreign exchange pass-through to inflation in a month where the COP depreciation against the USD stood at 10.9%," Citi said earlier this week, adding that "the transmission still looks small and this has prompted some analysts to consider that there is a delayed pass-through effect which should materialize in the months ahead." In other words: it’s about to get worse. 

More broadly, "developing-nation currencies have fallen to their lowest levels since 1999, and bonds denominated in those currencies have wiped out five years’ worth of gains," Bloomberg notes

Tying it all together, Morgan Stanley says that Brazil has taken "center stage as the great EM unwind takes hold." In short, "a triple unwind of EM credit, China’s leverage and easy US monetary policy" has tanked the space and although Morgan thinks we may be more than halfway through the cycle, the bank "remains wary of new risks, naturally."

Yes, "naturally," because this is the same Morgan Stanley which just two weeks ago predicted that based on the forward curve, the rebound in crude prices will be so bad as to have no parallel "in analysable history." Needless to say, that doesn’t bode well for commodity currencies and neither does a Fed rate hike. So in this environment, who is most exposed? Morgan Stanley endeavors to explain. Here’s more:

Who’s Most at Risk? 


Brazil remains at the centre of the Great EM Unwind. Its salutary but now lukewarm macro adjustment implies a lower risk of a sharp and deep recession that could have turned the second derivative of growth positive sooner. A recession at home when Fed-related volatility shows up could create significant financial volatility. 


Turkey and South Africa remain at risk because they have shown very little adjustment. Indonesia’s macro adjustment continues, particularly now, and this should continue to reduce its exposure and vulnerability. 


Commodity exporters – particularly Russia and Colombia – remain under pressure, driving fundamentals weaker towards a possible change in their model of growth. 


And here's the complete breakdown by risk factor:

But wait, there's more. The bigger picture problem (i.e. looking beyond the current downturn in commodities and the looming Fed hike) for EMs revolves around slumping global trade, a topic we've discussed at length (here, for instance). As WSJ notes, the downturn in trade which many had assumed was merely cyclical, may in fact be structural and endemic:

Central to this emerging-market slump is the unprecedented weakness of world trade, which has now grown by less than global output for the past four years, unique since World War II. Apart from a brief recovery in 2010, global trade volumes since the start of the global financial crisis have fallen well below the levels in the 1990s and early 2000s.


What is more, the boost to the global economy from trade has been weakening: A dollar of trade today delivers less than half the boost to global output that it did between 1986 and 2000, according to the World Bank. For emerging-market economies, which have historically been highly dependent on exports, this presents a major challenge.


Until recently, most investors assumed this slowdown was primarily cyclical and trade would pick up as developed markets in the U.S. and Europe recovered. 

But it is now clear that there is also a significant structural element to the weakness in trade, reflecting changes in the global economy.

This structural shift in the pattern of global trade has profound implications for the economic models of many emerging markets. Trade has been one of the main engines of higher living standards. In the past, they could rely on currency devaluations to improve their competitiveness and help pull their economies out of the mire. But this time may be different: There may no longer be the demand for what they produce.

So where does all of this leave us? Well, that remains to be seen, but if we truly are in for a prolonged period of lackluster global demand and depressed trade, we could begin to see a wholesale shift in which the markets formerly known as "emerging" quickly descend into "frontier" status and after that, well, cue the "humanitarian aid" packages.

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kliguy38's picture

BTFD OF COURSE!!!........BUYBUYBUY.......stick your head in the noose......they won't pull the lever on you.....heheheheheheh

Deathrips's picture

If its not in the bottom of the lake ...or river..it should be defendable in your posession.


Paper promises from liars are worthless.



halfasleep's picture

"Risk assets at risk." Lulz. Thanks cpt. obvious WTF do you think they call them risk assets MFer?

free shit plz's picture
free shit plz (not verified) halfasleep Aug 6, 2015 3:39 PM

A little late grossy, tyler and his fanboys have been screaming global market meltdown for 6 years now.

Arnold's picture

You're pretty snotty for a nube poster, but correct.

Lots of stick saves and not the charting types.



Handful of Dust's picture

Evidently, Gross failed to receive Barry's email .... " Everything is Awesome ! "

Oh regional Indian's picture

Sitting as I am in an EM (India) I can tell you things are NOT GOOD here. 

Every trick they have uesd in the west is now being used here.

Just one example, from Today, Indian Pension funds will be playing the stock markets. They could only invest in fixed income securities till recently.

Of course they are spinning the "potential returns" story, but all is it is setting up another money spigot for a failing model and market...

Like that....

cookie nookie's picture

None of this data bodes well for gold.  It just doesn't.  We are in a deflationary dead-zone.  I can see gold dip to less than 300.

HenryHall's picture

>>  I can see gold dip to less than 300.

I hope so. I'll certainly be buying it if it does!

Aloysius Snuffleupagus's picture

But unlike ZH the thing he predicted actually did happen and occurred sooner than he predicted (Bunds short of a lifetime). So the EM meltdown could happen sooner than he thinks.

stocktivity's picture

"There may no longer be the demand for what they produce"

That's all you have to understand from the article.

in4mayshun's picture

With less than 1% of the population owning any substantial amount of precious metals, I think I'll accept the odds of some thug trying to guess who owns gold/silver...and weapons.

MrSteve's picture

Search out the Argentinian story on how their collapse in 2000 played out. My takeaway was that thin gold rings, 10 or 12K were the king of street currencies. Large gold coins are too much gold and can't be used for trade / barter situations. Look into cheap wedding rings as another stash.

Daize's picture

The moment you cash in a gold coin to buy something, everyone in a hundred mile radius will know mate :P

August's picture

Fortunatelly, your Mongolian and Ecuadoran bank balances are secure, as those institutions have been thoroughly vetted by Mr. Simon Black himself.

Safe as houses!  Or at least BoA.

Occident Mortal's picture

This is vicious or a virtuous circle depending on where you sit.


Commodities blow out, which hurts commodity currencies, strengthens USD and blows commodities out further.


Capital flight into USD and into UST is going to take enormous hold for 2015/16.


Just as the Fed looks to exit UST.

KnuckleDragger-X's picture

The EM's would be in better shape except they bought into the bullshit all the big players have been spewing for years..."You fucked up, you trusted us".....

NoVa's picture

+100 for Otter Flounder reference


IMO, the EM FX toilet flush will really begin after the Fed puts into effect the rate hike.  Dola up, everythinig else down

38BWD22's picture



Peru data point: Sales for us are doing just fine.

Sophist Economicus's picture

Nope. Dollar will have a momentary rise as capital comes here (looks like it could be past tense at this point) and then goes back once the U.S. Markets crack. Sovereigns don't have much US denominated debt, only their citizens/corporates. They won't try to prop up dollar, they are all incentivized to see the dollar fall to take pressure off indebted businesses with USD loans. Given huge balance of payment imbalance the U.S. Has with rest of world, the dollar will collapse

OldPhart's picture

Dear zero hedge,

neighbor's house is on fire, shit's exploding, three cars are on fire, and two trees nest to my fuckin' truck are endangerd.

I'll comment tomorrow some time.  We're a bit busy here.


[edit] Holy fuck!  This guy had some serious ammo!!!!

Bill of Rights's picture

I welcome the Mayhem...bring it.

bunnyswanson's picture

Mayhem - Elderly, women who live alone, handicapped , children, beautiful young girls and the few good men who try to be heroes will pay the high cost of the mayhem.  The men...prison labor or quick death.  Do you understand the situation you are in such a hurry for?  This is why we maintain infrastructure.  To protect them...unless you like stepping over the remnants of the night before, when no one is looking...to see the bruised, bloodied dead bodies on your way to the office.

FredFlintstone's picture

good insight and it is important to keep these "visuals" in mind going forward.

Dr. Engali's picture

So, Bill, tell me how you're not going to profit again from this call.  Inquiring "investors" want to know.

new game's picture

grab the short end, missed the big move on the long end. flight to a stinking pit soiled shirt...

guess it beats an oily greese rag...

Omega_Man's picture

so... where to invest in human aid?? sounds bullish.....

max2205's picture

USA AID.  Let's deliver some syphilis 

PFO's picture

It's over boys, The Blessed Virgin Mary has called not one, but two black swans:



If She says anything remotely sounding like, 'short the phonebook', run for the hills!!!!


Headbanger's picture

Yeah.. And if His Noodliness says "Spare Thine Parmesan"

We're in really hot Pasta sauce!!!


willwork4food's picture

Thank God she's not saying " WE'RE ALL OUT OF BEER!!"

ZoroAustrian's picture

'threat of imminent Fed liftoff'?  'unwind of loose US monetary policy'?

whatever, Tylers, this whole shitshow has US funny money at its core and you've just joned the chorus of Wall Street analysts falling over themselves with glee to talk about other people's problems

if I have to read another article about how China is screwed because they save and invested too much (if misdirected), while it's just peachy in America because all we do is consume, my last vestige of sanity may be lost ...

Terminus C's picture

China neither saved, nor "invested" capital.  They ran the same 3 card monty debt game as everyone else.  The difference is, they don't have reserve currency status.  China is fucked because of too much funny money, like the rest of us.

Systemic indeed.

new game's picture

so, am i understand that the fed(merica) is fucking over the world with zirp. makes me think they are doing this intentionally and i also wonder who has had enough of this financial gamemanship and the resulting human tradgedy. we shall find out, cause one of these nations might just take matters into their own hands, just guessin...

dogfish's picture

I buy dollars they weigh one troy ounce,the constitutional dollar.

CHC's picture
CHC (not verified) Aug 6, 2015 2:15 PM

Where in the hell is Nuland - anyone know?

willwork4food's picture

She's too busy sucking Netanyahu's dick at the moment.

Omega_Man's picture

Clinton Foundation.... bullish

August's picture

Thanks for mentioning The Clinton Foundation.

The Clinton Foundation may not represent the salvation of humanity that we all once hoped, but it sure as hell is a perfect sign of the times... and fucking hilarious too.

"Give money to the Clintons. For a better tomorrow."

buzzsaw99's picture

btw - something doesn't add up. they are losing 10.9% per month against the usd but inflation there is only 0.19% per month? don't think so.


gross doesn't know shit anymore. ever since he stopped "shaking hands with the gubbermint" [sic] and the fed dealt him out of the inside information game he looks downright dipshitty.

divedivedive's picture

I'm an old man and not as sharp as I once was - please help me out here.

In Mexico (today) I can get 3.62% on something like a 1 year CD. I'm lucky if my US cash is earning 0.10%.

If the Fed raises rates by 0.25% in Sept. should I move my monies from Mexico to the US ?