Brazil

It was an ominous beginning to what is poised to be a most tumultuous year. Market participants are quickly coming to appreciate that China does in fact matter. Few understand why. Most – from billionaires to fund managers to retail investors – will “Do Nothing.” This has worked just fine in the past – repeatedly. Not understanding and not doing anything will be detriments going forward.

Central Banks have employed virtually all of their ammunition including policies that would have been considered "nuclear" in 2008. And the debt bubble is $20 trillion larger than it was in 2008!

The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

For most investors, the major story of 2015 was the expectation and eventual fulfillment of a rate hike, signalling the start of tightening monetary policy in the United States. This policy is divergent to those of other major central banks, and this has translated into considerable strength and momentum for the U.S. dollar. Despite this strength, the best performing currency in 2015 was not the dollar. In fact, the top currency of 2015 is likely to be considered the furthest thing from the greenback.

Once China set the Yuan fixing some 0.5% lower, the biggest drop since the August devaluation, all hell broke loose and unleashed a global selling panic after China's stock market was promptly shut down less than 30 minutes into trading, then European shares dropped the most in more than 4 months as Asian equities plunges, as did US stock futures, the dollar weakened against the euro and the yen; crude plunged to fresh 12 year lows. Gold rose.

To be sure, there were already a number of concerns about the upcoming Olympic games in Rio. For instance, last summer we learned that thanks to a lack of sanitation infrastructure, Olympic athletes are almost certain to come into contact with disease-causing viruses in the water. In the latest embarrassment, power to the stadium that will host the Olympic track and field events was cut off after a dispute between the government and a soccer club ended in a $250,000 unpaid utility bill.

Default Rate Highest since 2009, US Distress Ratio Soars.

We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever. The butterfly effect - the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part - is on center stage.

The S&P 500 first crossed yesterday's levels in August 2014 - that is 501 days ago, confirming our belief that the stock market casino has just begun its descent has only been further reinforced. In terms of the fundamental economic and financial rot now coming to the visible surface, the analysis we presented last week is even more timely now.

From EM darling to depression, it's been a rough ride for the "B" in BRICS. As we kick off 2016, analysts are growing increasingly concerned that Brazil's economic downturn could well be deeper and longer than anyone expected. The market's collapsing expectations are summarized in one stunning chart.

"The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance."

On the heels of a tumultuous weekend that saw Saudi Arabia cut diplomatic ties with Iran after the Saudi embassy was torched by protesters angry at the execution of a prominent Shiite cleric, CDS spreads for the kingdom have blown out to six-year wides while the implied odds of the riyal peg finally breaking are hitting new record highs.

A lot of people were expecting some really great things to happen in 2015, but most of them did not happen.  But what did happen? A global financial crisis began during the second half of 2015 threatens to greatly accelerate as we enter 2016. This is what the early stages of a financial crisis look like, and the worst is yet to come.

With markets wrapped up for 2015 now, reviewing the performance of asset classes last year shows that it was one where negative asset class returns were aplenty, while those finishing in positive territory were few and far between. Indeed, of the 42 assets we monitor in Figure 5, just 9 finished with a positive return in Dollar-adjusted terms over the full year.  At the other end of the scale there were some notable losers.

• China stocks tank, triggers circuit breaker (Reuters)
• Stocks Slump Across Europe and Asia Following Shanghai's 7% Crash (BBG)
• China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)
• Iran says Riyadh thrives on tension after relations cut (Reuters)
• Saudis and Bahrain Face Off With Iran in Worst Clash Since 1980s (BBG)
• Syrian rebel group backs Saudi move to cut ties with Iran (Reuters)