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EM Exodus: Emerging Economies See Half Trillion In Capital Flight
When Janet Yellen and the rest of the Eccles cabal decided to stay on hold in September, the “new” reaction function was all anyone wanted to talk about.
Of course, the idea that the Fed was to that point “data dependent” (versus market dependent) was something of a joke in the first place, but the specificity the FOMC employed when referring to global financial markets still took some observers off guard. The worry for the Fed revolved primarily around the possibility that a hike could accelerate EM capital outflows at a time when a series of idiosyncratic factors (like a civil war in Turkey, a political crisis in Brazil, and the 1MDB scandal in Malaysia) had already pushed the emerging world to the brink of crisis. Enormous outflows from China as a result of the yuan deval didn’t help.
In short, the theory was that even a “symbolic” 25 bps hike had the potential to trigger an EM exodus that would make the taper tantrum look like a walk in the park as a soaring dollar exacerbated an already tenuous scenario playing out across the space.
Now, as we look back at Q2 and Q3, we learn that all told, well more than a half trillion in capital fled EM over six months.
Here’s JP Morgan who calls the capital flight "unprecedented":
Recent capital outflows from EM have raised fears of a potential credit crunch, which if it materializes, could exacerbate the economic downshifting of EM economies. On our estimates $360bn of capital left China during the previous two quarters and an additional $210bn left from the rest of EM.
This of course led directly to a massive FX reserve drawdown and indeed, over the past 18 or so months, the so-called "Great Accumulation" of USD assets has come to a rather unceremonious end. Here are two graphics from Goldman which demonstrate the scope of the build and subsequent unwind:
But for anyone who's concerned about the effect this might have on tightening global monetary conditions or otherwise amplfying a "liftoff", don't worry because while QT may indeed be QE in reverse, Goldman thinks it can't possibly be as "negative" as QE was "positive"given the fact that it's inherently limited by how much EMs have to sell whereas QE is only limited by central planners' collective imagination:
Countering widespread worries about QT, Zach Pandl of our US Economics Research team argues that the impact of EM reserve selling does not amount to QE in reverse. Even if the pace of dollar-denominated asset sales lines up roughly with the Fed’s Treasury purchases over the main phase of QE, the former won’t pack the same punch.
Specifically, QT lacks the signaling value of QE, actually works to weaken the dollar (as does QE), and is finite because reserves can only decline to zero (in contrast to theoretically unlimited asset purchases—a key source of QE’s potency).
Or, summed up...
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Well, what are you wainting for China, start selling those dollars and treasuries.....
They already are...
https://www.youtube.com/watch?v=2docq2bWJE4
Why are they excluding Gold from "change in reserves". We all know that China and Russia are selling US Treasuries and buying tons of Gold.
Answered your own question.
Bonds, stocks, and other liquid assets priced in foreign currencies are part of Foreign Currency Reserves
Gold is separate and apart from dollars. It is not relevant to the number of dollars in circulation.
What I don't understand is how holding bonds in FX reserves sops up printed money. As soon as the bonds are purchased, dollars are given to bond traders and they then circulate, so shouldn't QE have full effect despite EM central bank bond buying? Or is it that bonds are treated as fiduciary media trading on par with dollars so stashing a bunch of UST away is equivalent to stashing a lot of cash away...
plunge
It's those damned suicidal middle aged white guys again!
A thousand cheers for the libtard peanut gallery comprised mainly of well off middle aged guilty white guys and their families ....
...hey! Well off middle aged white guys who feel no guilt living in the Hamptons with their families are people too!!!
Yeah, Krugman, what a douchebag. As if he gives a shit. His faux concern over us was a tad hard to swallow for me, I don't believe it for a second. However I am sure he is getting worried that middle aged white guys beginning to bail out on this shit hole he helped create though.
And taking "all their stuff" with them.
Looks lethal. Good thing those people are an ocean away. Well unless you live in Europe I guess in which case you still have time to kill your family and shoot yourself in the head before all of Africa and the ME empties into your front yard.
There's lots of talk about Europe being destroyed by an influx of aggressive migrants many of whom might be terrorists.
But I can assure you, Europe is probably the last place on earth you want to bring a fight.
If you think the Middle East is volatile and fractured it has nothing NOTHING on what Europeans are capable of doing to other human beings.
Over 90% of all the wars ever fought were fought in Europe.
If the European Union fractures, which it will at some point in the next 25 years then that will mark the irreversible descent into WWIII.
Good point OM. My father was a desert rat in WW2 and when they arrived in Alexandria, they were preceded by one of the scottish battalions by a few days. The scots immediately went out on the town, got drunk and wrecked the place. So the battalions that had just marched in across the desert were denied town leave privileges. My father said some of the most vicious hand to hand fighting of the second world war took place between the scots and the english soliders who'd had their leave denied.
Before they can do any of that, they'll have to come up with some guns.
They could gum each other to death.
The fund has returned -18.77 percent over the past year, -5.50 percent over the past three years, -4.05 percent over the past five years, and 3.95 percent over the past decade. See more JFAMX performance
What if you create so much chaos and destruction the money comes to your shores for safekeeping?
Rates should be higher
The capital flight from EM is a direct consequence of the global demnd collapse and associated currency war and China's decision to depeg and devaluate at least 30% to reach a par with other Asian currencies including yen in next 12-24 months.
The FED rate hike utterances also fuel the hype just to weaken the euro since measly 0.25% makes no difference in the financial system whatsoever but may spur a fear of rate raise of several hundreds of basis points, responding to the real inflation pressures that are being hidden or ignored for years now.
Here is more about rampant "real" inflation reigning in the real economy that scares a shit out of banksters if FED was going to do something about it:
https://contrarianopinion.wordpress.com/economy-update/
Capital flight to... where, exactly?
On Asia EMs Only - It does not matter to the masses under captialist crony regimes with some extracting for generations. There should be a bonfire of their vanities (own currencies). The FX reserves were built on debts. Just the unwinding of debts at the fringes of the dying $ hegemony. As the largest kid in the block is China, just adjust to another (not better) stealthy China hegemony. Human migration wave comes from those who do not accept. Bring it on. Just delightful to witness the cronies squirm; they have no other option but to use force to prolong extractions and expedite the implosions.