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The Emerging Market Growth Model Is "Broken"; RIP EM
It’s that time of year again, when every sellside macro strategist peers into his or her crystal ball in a completely futile effort to predict the direction the global economy economy will take in the year ahead.
As everyone knows, the only thing more difficult than forecasting the weather is forecasting economic outcomes (economics is, after all, merely a pseudoscience and not one that the general public has much faith in at that), and as we’ve joked on several occasions, getting it wrong is almost part of the economist’s job description.
That said, some trends are undeniable and many times the best way to “get it right” (so to speak), is to look for broken stories. As Salient Partners’ Ben Hunt recently discussed in an interview with RealVisionTV, when the story is broken, you can bet the waters ahead will be choppy even if the longer-term outlook isn’t necessarily as dire. Well, if there’s any story that’s definitively broken right now, it’s EM.
As we’ve documented exhaustively, the emerging world is facing a perfect storm of collapsing commodities, depressed demand from China, the incipient threat of a Fed hike and thus an even stronger USD, the yuan deval, and acute idiosyncratic political crises (Brazil, Turkey, Malaysia). Heading into 2016, some might be wondering if it may be time to reevaluate the situation on the way to dipping a toe or two into EM in hopes of getting in at the bottom. With that in mind, we bring you the following excerpts from Citi on EM’s “broken growth model.”
First, there’s the notion that we have entered into a new era characterized by lackluster global trade that’s structural and endemic rather than cyclical and transitory. Throw in China’s deceleration and you’ve got a real problem:
Emerging economies’ growth prospects look damaged in several respects. The central fact facing EM is the negative external shock that results from weak global trade growth and the collapse of Chinese import growth. This brings to an irreversible end the period of rapid, investment-led Chinese growth and strong global trade growth which had supplied EM with a once-in-a-generation positive external shock during the years between 2002 and 2013.
And then there’s the idea that fiscal policy is hamstrung by a market that, in the wake of the EU debt crisis, is no longer tolerant of soaring debt-to-GDP ratios:
Fiscal policy is tight across EM because private capital markets seem quite intolerant of rising public debt levels in EM (note Brazil’s fate). Even in countries that are actively trying to loosen fiscal policy — Indonesia, or Korea, for example — the loosening is quite modest.
Additionally - and we’ve seen this in Brazil - the private sector is already overleveraged, meaning the credit impulse is likely to be subdued. Also - and China is a good example here - banks may be reluctant to lend in an environment where borrowers are clearly over-extended and can’t, in some instances, service their existing debt.
In addition, domestic credit conditions remain tight in many countries across EM, because many countries already have had a domestic ‘credit boom’, and this means that risk appetite is low in domestic credit markets across EM.
So, all the three main sources of GDP growth — exports, public and private domestic spending — are constrained. The persistence of this problem has led us, alongside many other forecasters, to underestimate the EM slowdown consistently over the past four years (Figure 1).
And “plenty of financial vulnerabilities remain:”
One important difference between this crisis and previous ones in the 1980s and 1990s is that EM crises in the past were more or less entirely located in the balance of payments, while this crisis has more diverse roots: it is as much about a crisis of growth as it is about weakness in the balance of payments. But it is true that there are important balance of payments fragilities in EM. Some countries (eg South Africa) have stubborn current account deficits, and a number of countries – Brazil, Russia, Turkey, China, India, Indonesia – saw their corporate fx indebtedness rise sharply in recent years.
Finally, no one is “out of the woods” despite how “cheap” EM FX has become:
This is because of two remaining threats. One is the consequences of “Fed lift-off”; and the other from China. Higher US rates do still threaten capital flows to EM, largely because some of the ‘excess’ inflow to EM in the past five years will have had cyclical characteristics, and could therefore be vulnerable as US rates rise.
The bottom line is that when you look out across the space, it's not just that the growth model is, as Citi puts it, "broken." You also need to consider the fact that three of the world's most important emerging markets are on the verge of an outright collapse.
There's Brazil, which is stuck in a stagflationary nightmare exacerbated by an intractable political crisis that may well end up plunging the country into a depression (see Q3 GDP data out on Tuesday).
There's also Turkey, where a maniacal leader hell bent on consolidating absolute power in the Presidency has plunged the country into civil war and now seems prepared to push NATO into an armed conflict with Russia.
And of course there's China, were decelerating growth, an unstable equity market, persistent capital flight, and a looming private sector debt crisis threaten to destabilize the world's engine of growth.
Set all of that against a backdrop of depressed global trade and still lackluster demand, and one by one, we could see the world's "emerging" economies backslide into "frontier" status.
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Good, it should've happened 7 years ago...
But it did.
"Set all of that against a backdrop of depressed global trade and still lackluster demand, and one by one, we could see the world's "emerging" economies backslide into "frontier" status."
El peace prize winning presidente is making sure all emerging eCONomies are being bombed into the Stone Age so they can be rebuilt later.
What do we care how the EM's are doing, America is great.
http://money.cnn.com/2015/12/01/news/companies/atlantic-city-casinos-moo...
indeed..
"What do we care how the EM's are doing..."
That is an excellent question. Why do we care indeed.
We care because the world is globalized, America will go down with the rest.
China bent them over, but we supplied the Vaseline.......
A tag-team match!
When does the Shemitah smack-down happen?
Dollar debt crisis folks . A repeat of the 70s / 80s pump & dump for Brazil. Much bigger this time around. Brazil looks fucked unless it defaults.
WWhat the Fuck are these supposed markets emerging from? Cut the bull and call them pass poor countries. And the dos may rather be called submerging markets f it
Our political, economic, and financial systems are all based on growth forever.
Nothing grows forever.
Our systems are based on very old ideas and pyramid schemes and if the birth rates fall in the developed world, see Japan first then the rest of the western world after, then this debt explosion will follow as night follows day.
Yes it was always a ponzi scheme and yes it's always been unfair.
That's still not the problem.
The problem is things are changing in ways they have not changed before.
Specifically:
Lower developed world birth rates
The accelerating value erosion of physical and later mental labor.
This explains why debt levels have hit strosphereic levels even the FED who is an agent of the elite knows it's pushing the envelope but they have no choice under the old system this is the only way to preserve /prolong a dying system.
No one has a CLUE what to do about what I just mentioned because no one has ever dealt with it before to this extent.
And it's just warming up and accelerating.
So to have any hope of wandering out of this mess these issues have to be dealt with but of course it's not going to be possible let alone easy as people seek to preserve the old with all their might which is exactly what people do when change comes.
We can either cull the population "not my idea or wish and it's morally reprehensible to even contemplate", jubilee "would be a good idea in some form no matter what" and start over on the debt pyramid scheme "please no" or we can evolve to a new set of systems that work both in growing, stable or even declining birth rate enviroments "I'd prefer that we chose the one that matches our reality most closely please" that's it.
“Then there’s the idea that fiscal policy is hamstrung by a market that… is no longer tolerant of soaring debt-to GDP ratios”.
Now, there’s a good idea; the final “idea” should be that the concept GDP, as now composed, is a completely useless tool.
For, while it purports to measure total production of a society, two of its components actually measure destruction of capital.
One of these components is “investments” – plant, machinery or software; these are examples of consumption of capital – not production of capital. The money and resources expended on them are no longer available to anyone else. They are entered on accounting ledgers as delayed expenses, with the anticipation that they will be “expensed” (or recovered) annually over the next 5-30 years.
In other words, the money and resources represented by such investments are lost forever – unless the business in question can recover such money and resources over those 5-30 years.
If ineptitude or lack of foresight intervene, we are looking at a massive write-off of capital.
Then there is the component of government spending, which represents money spent on toilet seats, munitions and attendant bribery that will never be seen again – except what is stashed in off-shore banks… and that as a minus.
These two components mean that, fully, 35% of the US GDP index is pure fluff.
There is more: those street gangs and drug cartels, the federal government’s – and China’s – role in arming, protecting and forming alliances with such gangs and cartels… and a dozen or so other items. They all point to a conclusion that a vast operation is being perpetrated… I began this Part 2 (of my examination) with the question, ‘What financial shock do Judeo-Bolsheviks plan?’ (Part one and Part two) Do they plan to inflate the dollar to zero… push stocks to a PE ratio 300, then slam them to a ratio of single digits or even minus numbers… repudiate the federal debt… replace Federal Reserve bank notes with Treasury bank notes…?’ And, how do China’s ghost cities fit into this unprecedented operation?
And, why are Endocrine Disruptors present almost everywhere in the American environment… do they form a kind of chemical warfare… and for who’s benefit?
Consider all these government-provided facts and you see that a concern with a fairy tale (the GDP) does nothing more than take our attention away from something much worse.
Pretty much the entire military is negative production, not only in the sense the "products" have no consumer value, but also in the sense they destroy existing goods and goodies (even if mostly in other parts of the planet... for now).
In fact, if you examine GDP carefully, the percentage of GDP that isn't productive is absolutely enormous.
Here in Thailand we are headed into the abiss. I'm watching the biggest property bubble the world has ever seen hit the wall.
The rising USD which is killing the carry trade is going to blow this place to hell.
Best time in the world to be a renter. I'm seeing my cost go down every month.
Cheap beer and cheap women.
Maybe I'll put the savings in a new Harley.....
If your into eating real and quality foods, they're important!