Meltdown

The similarities between the current crisis and that which unfolded in 1997/98 were so readily apparent that many analysts began to draw comparisons and that may have added fuel to fire over the past week. Now, there seems to be a concerted effort to calm the market by explaining that while there are similarities, there are also differences. And while some of the world's imperiled EM economies may be in better shape to defend themselves this time around, when attempting to cope with a meltdown it may be more important to look at where things are similar and on that note, here’s some color from Morgan Stanley and BofAML.

By starving investors of safe return, activist Fed policy has promoted repeated valuation bubbles, and inevitable collapses, in risky assets. On the basis of valuation measures having the strongest correlation with actual subsequent market returns, we fully expect the S&P 500 to decline by 40-55% over the completion of the current market cycle. The only uncertainty has been the triggers.

On the heels of China's "failure" to send the PBoC to the rescue with an RRR cut over the weekend, battered EM assets were hit hard again on Monday as stocks, bonds, and currencies all went into panic mode as the global meltdown gathers pace.

Are there any conditions now that are actually better than those of 2008? Or are conditions now less resilient, more fragile and more dependent on unprecedented central bank interventions?

"Regional buyers need a lot of conviction to step in front of this speeding train [especially] in context of a rapidly changing economic environment."

Moments ago, without any specific catalyst, US equity futures just plunged when in thin, illiquid tape, a seller took out about 30 consecutive bid levels and as of last check, the ES was down as much as -48 to just 1923, or 2.5%, after being down a modest -13 minutes ago.

Is it any wonder that with "personal finance experts" such as these, that the personal finances of America have never been worse?

"People are beginning to realize the Chinese government is not omnipotent and omniscient. In fact, like many of us, sometimes they don't have a clue."

The eventual outcome to all this is captured brilliantly in this quote by Ludwig Von Mises, the Austrian economist: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." The credit expansion happened between 1980 and 2008, there was a warning shot which was soundly ignored by ignorant central bankers, and now we have more, not less, debt with which to contend.

As the great EM unwind continues unabated, we’ve noted that in some hard-hit countries, the terrible trio of falling commodity prices, decelerating Chinese demand, and looming Fed hike has been exacerbated by political turmoil. Now, we turn to Malaysia where an already tenuous situation just got worse as PM Najib Razak is now facing calls for a no-confidence vote amid allegations he embezzled some $700 million from the country's development fund.

Central bankers are watching Marx's dictum all that is solid melts into air play out in global stock markets with a terror informed by the scalding memories of 2008's global financial meltdown.  The herd must be turned away from selling by any means available, and at this point, that means coordinated buying by all the world's Plunge Protection Teams.

For all those who need validation that they are part of a big hedge fund hotel club, which implicitly means there are few if any incremental fast money buyers left, and wish to know the top hedge fund holdings, here is a list of the 50 stocks which according to Goldman "matter the most" to hedge funds, the stocks which appear among the largest 10 holdings of hedge funds.

Even before the latest shot across the bow in the escalating global currency wars, EM FX was beset by falling commodity prices, stumbling Chinese demand, and a looming Fed hike. And while, as Barclays notes, "estimating the global effects China has via the exchange rate and growth remains a rough exercise," more than a few observers believe the effect may be to spark a Asian Financial Crisis redux. For their part, BofAML has endeavored to compare last week’s move to the 1994 renminbi devaluation, on the way to drawing comparisons between what happened in 1997 and what may unfold in the months ahead.

To keep the credit induced boom going,policy makers have convinced themselves that more credit and more money, provided at ever lower interest rates, are required. Why then, as The FOMC Minutes just showed, do the decision makers at the Fed want to increase rates? If Fed members follow up their words with deeds, they might soon learn that the ghosts they have been calling will indeed appear — and possibly won’t go away. The sooner the artificial boom comes to an end, the sooner the recession-depression sets in, which is the inevitable process of adjusting the economy and allowing an economically sound recovery to begin.