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Emerging Market Meltdown May Plunge Global Economy Into Recession

Tyler Durden's picture




 

When the Fed effectively telegraphed its new reaction function last month, the FOMC served notice to the world that it was not only acutely aware of what’s going on in emerging markets, but also extremely worried about the possibility that hiking rates could end up triggering something far worse than the “tantrum” that unfolded across EM in 2013.

The dire scenario facing the world’s emerging economies has by now been well documented.

In short, slumping commodity prices, depressed raw materials demand from the Chinese growth engine, a slowdown in global trade, and a loss of competitiveness thanks to the yuan devaluation have conspired with a number of idiosyncratic, country-specific political risk factors to wreak havoc on EM FX and put an immense amount of pressure of the accumulated stash of USD-denominated reserves.  

For the Fed, this presents a serious problem. Hiking rates has the potential to accelerate EM capital outflows and yet not hiking rates does too. That is, a soaring dollar will obviously ratchet up the pressure on EM FX but then again, because the uncertainty the FOMC fosters by continuing to delay liftoff contributes to a gradual capital outflow, not hiking rates endangers EM as well. 

As we’ve been keen to point out, DM central banks aren’t operating in a vacuum. That is, if a policy “mistake” serves to tip EM over the edge, the crisis will feed back into the world’s advanced economies forcing DM central banks to immediately recant any and all hawkishness. For more evidence of EM fragility and the link between an emerging market meltdown and DM stability, we go to FT:

Emerging economies risk “leading the world economy into a slump”, with lower growth and a rout in financial markets, according to the latest Brookings Institution-Financial Times tracking index.

 

Released ahead of the annual meetings of the International Monetary Fund and World Bank in Lima, Peru, the index paints a much more pessimistic outlook than the fund is likely to predict later this week.

 

According to Eswar Prasad of Brookings, weak economic data across most poorer economies has created “a dangerous combination of divergent growth patterns, deficient demand, and deflationary risks”.

 

 

The Tiger index — Tracking Indices for the Global Economic Recovery — shows how measures of real activity, financial markets and investor confidence compare with their historical averages in the global economy and within each country.

 

The extreme weakness in the emerging market component of the Tiger growth index shows that data releases have been significantly weaker than their historic averages.

 

Divergence is almost as important as a new trend highlighted in the index, however, with India emerging as a bright spot and commodity importers such as Brazil and Russia mired in recession.

 


 

Because emerging economies are now much more important in the global economy and growth rates are still higher than their developed counterparts, global growth is still hovering around 3 per cent, close to its long-term average.

 

The concern, according to Mr Prasad is that the slump in emerging economies’ confidence will infect advanced economist in the months ahead.

Of course the trouble in EM portends a drain in global FX reserves. This is what Deutsche Bank has dubbed the end of the "Great Accumulation" and, all else equal, it's a drain on global liquidity as exported capital from commodity producers turns negative. Here's BNP on what the picture looked like in Q2:

The Q2 2015 COFER (Currency Composition of Foreign Exchange Reserves) report from the IMF contained some key changes. For the first time, the IMF reported the list of 92 countries that are providing reserve allocation data. Importantly China started reporting its FX allocations for the first time, although still on a partial basis, with the goal of increasing the reported portfolio to full coverage of FX reserves over the next two to three years. A full inclusion of China would push the share of allocated to total reserves over 80%, making COFER reserve allocation data much more representative and relevant for analysing EM FX reserve management trends.

 


 

On a valuation adjusted basis, we estimate that total foreign exchange reserve holdings declined by USD 107bn in Q2. The IMF no longer reports the split between advanced and emerging economies but it’s very likely that much of this decrease was due to EM FX intervention. 

In other words, the dynamics that have propped up the global financial system for decades are now unwinding and at a much more fundamental level than what occurred in 2008. Emerging markets are now liquidating their USD cushions and a combination of low commodity prices and hightened political risks threatens to set the world's most important emerging markets back decades. 

Importantly, it's no longer a matter of whether DM central bankers can correct the problem by adopting policies that will serve to boost global demand, but rather if the world's most vaunted central planners can keep things from completely unraveling and on that note we close with the following from the above cited Eswar Prasad:

"The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent, especially when it is acting in isolation and when a large number of countries are resorting to the same limited playbook."


 

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Sun, 10/04/2015 - 21:52 | 6629701 Deathrips
Deathrips's picture

Printing forever makes bad things happen.

Get physical and independent.

 

RIPS

Sun, 10/04/2015 - 21:56 | 6629712 Soul Glow
Soul Glow's picture

The economy is in recession, if it's not in depression.

Sun, 10/04/2015 - 22:04 | 6629741 Johnny_Dangerously
Johnny_Dangerously's picture

what about if the metrics are unreliable?

Sun, 10/04/2015 - 22:09 | 6629755 r3ct1f13r
r3ct1f13r's picture

Then plan for recession/depression.

Mon, 10/05/2015 - 08:12 | 6630354 Jeffersonian Liberal
Jeffersonian Liberal's picture

If the metrics (rather, the manipulation of metrics) are unrelizble, the wise would assume that the reality is worse than the scenario they are painting.

If the reality of the global economic situation were better than they are telling us, they would not have to manipulate the metrics which they are caught doing every time they spin and hide the statistics that give the lie to their cheerleading.

Sun, 10/04/2015 - 22:39 | 6629775 DormRoom
DormRoom's picture

The US economy is not in a recession.  The emerging market implosion is a direct result of the Triffin Dilemma.  And we are entering a new financial hazard in which the US cannot get out of ZIRP without imploding the emerging markets.  With no policy options left,  if they maintain ZIRP, they inflate the HY bonds and ETF bubble, which will implode domestically within the next few years.

Thus the US Fed is straddle between the binary outcomes of the Triffin Dilemma.  Save the world, doom the US.  Doom the world, save the US.  This is the next crisis because it is a structural problem, and no institutition can resolve it because they are internally supporting the flawed system. 

Politically, the US will not give up its uni-polar power because of its USD reseerve currency hegemony.  If anything the collapse in global financial markets will ressurect US Isolationist policies, and leave Europe struggling with its own identity crisis as it enters financial calamity concomitant with an increasingly non-homogenous population.

The binay political choice of extremisism on the Left or the Right will be manfiested on all continents as a direct consequence of the binary economic outcome resulting from the Dilemma.  Reflexivity, indeed.

Sun, 10/04/2015 - 23:29 | 6629907 Tall Tom
Tall Tom's picture

Do you really believe that the rest of the World is going to sit idle while we take actions that repress them back into the standards of living of the early Twentieth Century?

 

How naive can you be?

 

You know that these Nations do have armies and they are armed with Nukes...

 

And revenge is a bitch.

 

Is that a reflexive enough of a response for you? 

Mon, 10/05/2015 - 01:19 | 6630027 pachanguero
pachanguero's picture

Living in Asia, Thailand to be exact I must say that you are spot on.

Nice post...

Mon, 10/05/2015 - 02:34 | 6630091 goldpercent
goldpercent's picture

I'm currently debating between a dull 6 figure job in NYC with a cool boss or fuck knows in Thailand.   I've been to Thailand a few times and like it.  I don't have any major obligations and a decent amount saved.  Fuck knows in Thailand is looking good.  Strangly NYC, which I know well, concerns me more than Chiang Mai, where I have close to zero experience.  I'm a tech guy who is comfortable with the unknown and living small. Any thoughts? Sorry to ask as you don't know me from dirt.

Mon, 10/05/2015 - 05:49 | 6630223 Nage42
Nage42's picture

CM was the place to be 2-5 years back, now it's following the usual "gentrification" arch, cue religious zealotry to get involved in everyone's life...

Thing about Thailand is the corruption is endemic, and that's poison to free-enterprise, so many good businesses just get sat-on cause they make money and there's just too much police/military around with no funding source... so guess where they get their money from (if it's not drug trafficing outright).

IMHO, Vietnam is where it's at right now (prolly in the north around Hanoi), but it'll follow the same arch, so why not get ahead of the curve, prolly Burma, or if you are much braver, emerging hybrid business/banking/communication businesses in the more stable African countries... and by "more" I mean "slightly."

 

Learn self-defence (Krav or Kali), keep your wealth stealth (the most expensive thing you should wear would be a $5 pair of sunglasses, you'll "lose" 2 of these a week to the environment), offshore trust/foundation structure, have a RTW ticket with flexible start-end points (check Oneworld originating in Europe).

 

Good hunting.

 

Mon, 10/05/2015 - 12:51 | 6631467 goldpercent
goldpercent's picture

Thank you for the insight.  Those are really good points to consider.  I have lived in such a lala land of personal safety my whole life, so it is really important for me to think about the personal defense angle.  Fortunately I come from the punk school of dress, so I generally don't exude wealth.  I lived in bedstuy back in the '90s and nobody identified me as a worthy mark.  I really enjoyed the couple of weeks I spent around Hanoi so I will give that some more thought.  Burma has peaked my interest for a number of years.  I think I'm gonna book a trip to Burma to see it with my own eyes.  As for Africa, the cultures' food and aesthetics have never grabbed me, but in truth I'm relatively ignorant of them.  I'll be looking into the RTW ticket now.

Mon, 10/05/2015 - 06:37 | 6630260 obelisks
obelisks's picture

don't be too complacent regarding the fact that Thailand is under military rule and they keep postponing the promised general election.

You should read this article which gives an overview of the current situation

http://www.reuters.com/article/2015/09/30/thailand-politics-idUSL4N11T36Y20150930

Mon, 10/05/2015 - 12:52 | 6631498 goldpercent
goldpercent's picture

That is something I need to consider more.  I had always felt that Thailand had a certain amount of liberty because their police are so underfunded, but as Nage42 pointed out, that cuts both ways.

Sun, 10/04/2015 - 22:02 | 6629734 Okienomics
Okienomics's picture

I missed it.  Why again are economic conditions in Bothuwasnia and Krapistan a key determinant of U.S. monetary policy?

Sun, 10/04/2015 - 22:06 | 6629744 SSRI Junkie
SSRI Junkie's picture

because of the goat milk and prayer rug derivatives

Sun, 10/04/2015 - 22:17 | 6629785 lasvegaspersona
lasvegaspersona's picture

keep an eye on the situation in Kerplackstan...

Sun, 10/04/2015 - 22:16 | 6629743 ZoroAustrian
ZoroAustrian's picture

yeah, it's the emerging markets' fault - those troubling peons whose toil and resources fill our shelves.

our non-stop consuming and printing and war-mongering had nothing to do with it

 

Sun, 10/04/2015 - 22:05 | 6629747 Grandad Grumps
Grandad Grumps's picture

Blah, Blah Blah, Blah Blah Blah ... etc.

Sun, 10/04/2015 - 22:10 | 6629760 arbwhore
arbwhore's picture

Hyundai, Kia log 23 pct drop in Q3 China sales

http://english.yonhapnews.co.kr/news/2015/10/05/0200000000AEN20151005001...

#recovery

Sun, 10/04/2015 - 22:10 | 6629761 Johnny_Dangerously
Johnny_Dangerously's picture

sometimes a recession is just the laws of thermodynamics tapping you on the shoulder...

we had years of fake wealth and growth derived from new and more interesting ways to securitize debt.

we had years of the US government able to have a consumer-based economy getting oil and gas in exchange for idiotic over-spending and wasteful spending on the military, which itself upheld the "faith" in ink and paper.

Let the big banks fail, stop incentivizing off shoring and insourcing of jobs, punish employers who hire illegals, and tax capital gains like income and wall street financial transactions.

And - is it deflation, really, or disinflation? Is there a difference anymore {I'm asking}.

I certainly, perhaps obviously don't have the answers - but then that's not my job.

And it sure seems like the Central Bankers either don't know what they're doing, and so shouldn't have the power they do, or they *do know* in which case they should be in the dock.

Sun, 10/04/2015 - 22:42 | 6629828 Insurrexion
Insurrexion's picture

 

 

Don't you fucks know that the Fed Fucks don't fucking know what to do?

They 'project' knowledge in order to maintain an image of control. But the market would be terrified to know the truth.

The Fed Fucks don't know what to do. And if what is left of the market realizes this. Down we go. Bitches.

Pray to your God that truth prevails.

Mon, 10/05/2015 - 00:02 | 6629940 arbwhore
arbwhore's picture

American Apparel to file for bankruptcy protection. APP traded at over $1 in December 2014 and now is 11c and probably delist.

 

#recovery

 

Mon, 10/05/2015 - 00:17 | 6629960 coast
coast's picture

they will keep printing money until they are ready for the global monetary reset...Altho, things are not going their way, especially in Syria, so expect WW3 in less than a year...In fact, WW3 has already started.  periiod

Mon, 10/05/2015 - 01:52 | 6630051 Uranium Mountain
Uranium Mountain's picture

Reminds me of the markets...  https://www.youtube.com/watch?v=dG28Yw4uqow

Mon, 10/05/2015 - 02:23 | 6630085 tarabel
tarabel's picture

 

 

What the Fed is undergoing is the loneliness of command on an overcrowded lifeboat, nothng more.

It recognizes that some of the passengers will have to be tossed overboard in order to save the remainder, but it cannot decide who to sacrifice even though its legal duty in this regard is clear.

By the time it does make a decision, the remaining resources will have been depleted by the oversized band of survivors to the point that even more people will have to be sacrificed, which in turn triggers a new round of guilty introspection. And so on.

Having a passive woman academic in charge at this time is not a recipe for disaster but a guarantee of same. Winston Churchill, the real one, used to have a red pen which he used to write upon various memoranda: Action This Day. And then he checked back the next day to see what had been done about it. He didn't dictate what needed to be done, only that something had to be done at once.

Imagine Dammit Janet or Mark-of-the-Devil Barack doing this.

Inconceivable.  

Mon, 10/05/2015 - 09:26 | 6630560 Government need...
Government needs you to pay taxes's picture

Why yes, save .gov first, and anyone who works for .gov, second.  Bomb the rest into oblivion.  Same as it ever was.

Mon, 10/05/2015 - 03:52 | 6630161 Grandad Grumps
Grandad Grumps's picture

The operative word in the title is "may".

Reminds me of a title for an article in the National Enquirer.

No Proof, just "may" ... enquiring minds want to know. Does anyone else think the world would be better off without The Brookings Institute and all of the NGOs? ... just a question. But then again, what would you do with all of the nonproductive elitist spawn?

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