THE GLOBAL SELLOFF CONTINUES BECAUSE THE MARKETS HAVE GRASPED THE INEVITABLE. BUT DO THEY GET why THE INEVITABLE IS BEING SO RELENTLESSLY PURSUED?
The Slog offers an alternative interpretation of recent financial market events, in the aftermath of a Fed rate rise….and its effect on Emerging Market debt and investment.
Despite Chinese gun-ge-fat-choi closing markets there this week, today (Monday) has seen a virtually unbroken sea of red across the world’s bourses. Most of the media commentators continue to focus on the Chinese slowdown and the price of commodities – especially oil. But are those factors causal or consequential?
There is evidence that the markets have more foresight than they’re given credit for. But perhaps even they don’t grasp why the US authorities aren’t acting upon the same insights.
There is a common contemporary narrative that goes like this:
‘Far too much of the deep poo the Earth’s econo-fiscal system is in stems from the inability of the 1% + 2% + passive acceptor 12% to bother about the difference between possibility, probability and inevitability.’
At first sight, there is a laudable logic to that. Among the 12% of hangers-on, it’s a combination of ignorant smugness, selfishness, and just not being very bright. Among the 3% – and even within that, there’s an enormous wealth and power gap between multi-millionaire and billionaire – I doubt if anyone knows the exact incidence of psychographic factors in play. Psychopathy, sociopathy, megalomania, frontal lobe syndrome, obsessive greed and simple stupidity all play their part….but whatever and however they dictate behaviour, the overwhelming result is perpetual crisis.
Whether it’s based on zero foresight or zero emotions about bad outcomes for the 97% is fascinating, if only because that will predict what the goons are most likely to do next. I suspect the stupidity/ideology issue predominates among the 2%, and a frightening proportion of the 1% would be certifiable if their money wasn’t protecting them from such a fate.
Perhaps ideological naivity drove Yellen and her Fed Board to up rates before Christmas. That this would create dollar-denominated debt problems for the Brics was not probable, it was inevitable. And given the long history of venal lending policies among the banking community, what was also highly probable was that those fine folks would apply the brakes to emerging market lending.
For once, since around 2003 EM lending has represented enlightened self-interest, in that economic investment creates wealth, and wealth creates new customers. But also, of course, it creates new competitors who, in short order, throw millions of Western employees out of work.
The bombproof 3% don’t care about that: first of all, it means they can get cheap, educated labour offshore, and that means bigger bonuses and dividends plus higher share prices while drivelling on about greater West-East wealth equality. In fact, all it produces is a new axis of inequality based on capital v labour rather than geography. Wealth does not trickle down in Asia any more than it does in EuroAmerica.
The total amount of dollar-denominated credit in bonds and bank loans to EMs – their governments, companies and households – was $3.33trillion at the end of September 2015, down from $3.36trillion at the end of June. It helps the layman see why a one-quarter per cent rate rise does matter, because one trillion is what we (occasionally incompetent) maths professors call a very large amount indeed – and 3.3 times that is even bigger.
So thinking for a fraction of a nano-second about that, Western banks which are obviously very solid in a sort of wobbly-shakey way decided the risk of new EM lending was too great. Now the Bank for International Settlements has confirmed this abrupt halt in the investment flow: and it warns (quite correctly) that this is only going to make things worse, in that the emergers will stop emerging and start collapsing.
The BIS released this capital flight data, but it only confirmed many other sources reporting tighter local EM credit conditions plus a sharp reversal of First World capital flows. The Institute of International Finance pointed out in January that developing markets had seen net capital outflows of an estimated $735bn during 2015. Not huge yet, but it is the first time it’s happened in nearly thirty years.
By last Thursday, even Frou-Frou Lagarde and her Iyemeffers were warning of a developing world credit crisis, and thus a further slowdown in the global economy. And the IIF popped up with even more menace to say that liquidity contraction in the direction from central to local banks engaged in EM lending ‘now presents more of a threat to global growth than the slowdown in China and falling oil prices.’
See Noddy push a domino over. See Big Ears frown as a second domino wobbles. Hear Mr Plod warn that the third domino spells Disaster with a capital D.
Now, you could argue that Janet Yellen raised rates because the US and global data suggested It was Time. I wouldn’t, but anyway she did. You could even argue that she thought growth in the emerging world could cope with a small rate rise.
But why didn’t she realise that the investment would stop flowing there as the credit risk increased….especially as she was already hinting at further rate rises, perhaps starting in March? I mean, I’m sure she’s a busy girl and all that but whatTF else in the way of Big Stuff does she have to think about?
And why – knowing how turning off the investment tap would exacerbate the problem – did the banks do it anyway?
Of course, lots of people would say “Because all bankers think about is themselves” and yes, they would have a well-evidenced personality track-record to go on there. But does this mean that they can’t see the next domino coming – that all those juicy debt ‘assets’ on the balance sheet will turn into unrepayable write-offs as the EMs spiral down into credit crunch? And once the word is out among the caring community on Wall Street that a bank is in schtuck, the fourth domino goes down when intra-bank liquidity dries up?
Economies shrink, banks fail, oil demand falls further, and Chinese slowdown turns into Dead Stop.
You have to admit…..carry on as we are, and this starts to look like the fast lane to Crash2 and beyond.
Insane? Undoubtedly. But is it insane for everyone? I’m not so sure.
For once, even I am led down conspiracy alley: but I’m venturing there on the sound Sherlock Holmes principle that when you have rejected every other theory as lacking logic, then what’s left is it. Except that in this case, you just don’t want even countenance it – let alone believe it.
I wrote at the start of this piece that when new markets emerge, the downside for American business is that new competitors emerge to remind everyone that US goods remain expensive in global terms. As long as Washington-sur-Wall Street has domestic goods demand and the EMs by the balls when it comes to debt, this is a circle it can square by doing to many others what it’s been doing to Argentina and Venezuela: that is to say, preparing them for full-on economic colonialism. Venezuela in particular is phenomenally rich in high-value raw materials with a desperate population that would cut wage demands bigtime to get things back to normal.
However, if alternatives to petrodollar power and US banking systems reach get off the ground and shoot quickly to maturity, then this particular Air Force 1 has no engines.
The China-led Asian Infrastructure Investment Bank (AIIB) officially approved some 65 nations in 2015 as prospective founding members, with Sweden, Israel, South Africa, Azerbaijan, Iceland, Portugal, Hungary and Poland included early on. The AIIB is the first Asian-based international bank to be independent from the Western-dominated Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank. Other countries who have joined in cross all alliances from NATO to SEATO: other countries accepted as AIIB founding members include China, India, Malaysia, Indonesia, Singapore, Saudi Arabia, Brunei, Myanmar, the Philippines, Pakistan, Australia, Brazil, France, Germany and Spain. In July Russia signed up….and to Washington’s undisguised horror, the UK did in December.
I think it very possible that someone or something at the top of the US Establishment has “decided” that unless the US economically colonises EMs before the alternatives to it are up, out of the nest and flying, then the Land of the Free is doomed.
Given that as a backcloth, recent decisions by the Fed and the developed world banking system suddenly don’t look quite so psychopathically suicidal. And even some moves in US Middle East general and oil arena policy make instant sense.
Working hard through Soros to undermine Hungary and Poland. Sanctions to neutralise Russia and drive the oil price down. Watching from the sidelines as Saudi Arabia implodes. The concerted attack by vultures on Argentina. The gradual appointment of Goldman Sachs alumni to key banking and governmental positions in the EU. The steady stream of Davos propaganda insisting that China is not in trouble. The bankrolling of – and extreme pressure on – Recep Erdogan to create migrant problems for the EU. Bringing Iran back into the fold to pump even more oil out there. Dumping a rate rise on Brazil when its slowing economy and debt burden balance was at a delicate stage. The self-designated War on Terrorism to be inflicted on the rest of us even if more liberty is lost in the ‘attacked’ countries than among the jihadist attackers.
It is, let’s face it, much easier to colonise a basket case than a powerhouse – in economic terms.
This is precisely what Hungarian leader Viktor Orban both opposes and fears.
Qiao Liang – a heavy hitter Major General in the Chinese People’s Army – said this in a recent address to the Communist Party bigwigs:
“The U.S. has conducted a hidden imperialism through the U.S. dollar and has made other countries its financial colony…The Americans only have this one way to survive now. We call it the U.S.’s national survival strategy. The U.S. needs a large amount of capital flowing back to sustain its daily life and its economy. If any country blocks that capital flow, it is the enemy of the US….America has too much invested in keeping its hegemonic position. It does not want to share power with other countries…”
Yes, it sounds like the usual nutter ravings of a Communist military hothead: but is Qiao wrong?
There is an internal logic to what he says. That is, if America can profit from cheap native labour…viz, not really importing at all, but cheapening the supply of goods from capital sources it owns – when ‘offshore’ effectively means ‘bought colony’ – then it can continue to thrive indefinitely.
But the one thing this version of US success depends upon is failure everywhere else.
I don’t know any of this to be fact. I merely point out that, as informed extrapolation, it fits the policy facts better than any ‘explanation’ of whatTF is going on offered by fiscal, financial and economic authority figures.
But then, the key words here are geopolitical strategy. And I never met any trained ‘ist’ capable of working out why the power drive trumps every economic theory yet invented.
There is a race against time going on here between the Wallington Street bubble, and those keen to create a healthy alternative to it. I don’t think the markets see that – I just think they know what the prosecution of this policy is going to cost….and they don’t want to be the ones to pay for it.