One of the market’s favorite prognosticators has just called for a big financial crisis. Mark Mobius, 81, veteran investor, thinks that EMs are going to plunge, and that the normalization of interest rates and monetary policy will cause a crisis. “There’s no question we’ll see a financial crisis sooner or later because we must remember we’re coming off from a period of cheap money … There’s going to be a real squeeze for many of these companies that depended upon cheap money to keep on going”, says Mobius.
FINSUM: Emerging markets are currently having a rough time and the rise in rates is going to be turbulent, but calling for a Crisis seems a bit premature.
Investors need to take notice, a bear market is arriving. Trade wars and rising rates have been plaguing equity markets, and US indices seem to have already seen their peaks. But while the US market is still holding on, investors need to take notice that both China and emerging markets are both flirting with bear markets, with China crossing into one this week. The threat of a trade war and a strengthening Dollar are both weighing on international stocks, and are threatening to crimp economic output. Morgan Stanley is warning of a big drop in the MSCI emerging markets index. According to the Bank’s strategy team, “This is a dangerous market … We now think we’re heading to an outright bear market”.
FINSUM: If there is a global recession coming, it seems like one that will start overseas and filter back to the US. The big question is whether that recession will lead to major asset meltdowns, such as in corporate debt.
The Chinese stock market is now in a bear market and there is a great deal of pressure on its currency. Last time there was this much pressure, in 2015, the market broke, with stocks plunging and the yuan devaluing by 7% over the year. US stocks even plunged in fear. Now, the situation looks like it might occur again, causing some to call the yuan the next “big short”. The currency is already down almost 1% since Friday, and is in negative territory for the year. A burgeoning trade war with the US is adding pressure.
FINSUM: So the one big support for the yuan is the current strength of the Chinese housing market, which has been strong recently (a big contrast to 2015). That seems like it will keep a blow out from happening.
Investors, be worried about the Fed, and not for the reasons you think. While all the market’s focus has been on how quickly the Fed will raise rates, what could really cause problems is the Fed’s unwinding of its balance sheet. According to the Indian central bank, this unwinding is sucking Dollars out of the system and causing a Dollar liquidity squeeze. According to Urjit Patel, the governor of India’s central bank, this Dollar-squeeze means “a crisis in the rest of the dollar bond markets is inevitable”, with a growing “possibility . . . a ‘sudden stop’ for the global economic recovery”.
FINSUM: It sounds like emerging markets are going to have increasing trouble issuing Dollar bonds, which could definitely throw a wrench into the recovery. Maybe this is how the Fed sparks a global recession and not just an American one.
Many advisors may have an interest in bitcoin, if not from an investing perspective, then at least from student-of-the markets perspective. With that in mind, we wanted to share a chart we found in Bloomberg today. The chart shows where the major growth in bitcoin trading has been this year. In other words, the regions that really drove the wild gains the cryptocurrency has seen this year. The top four countries are China, Nigeria, Colombia, and Venezuela. The idea is that countries which strict money controls, or less stable political and currency environments see more attraction to bitcoin.
FINSUM: The bitcoin rally has really been a product of emerging markets, which is a key factor for understanding its potential durability. We think this supports the idea that bitcoin may be able to maintain its price for some time.