Fasten your seat belts, 2015 is going to be extremely turbulent if the US Fed keeps tightening monetary policy.
Such is the addiction of the global patients now, that unless the Federal Reserve prints dollars again -- which they won’t as long as the US GDP is recovering robustly -- the withdrawal symptoms from cheap money injections are going to be manifest as massive volatilities in emerging markets and ricochet back to the developed world, as they are already doing. Witness the latest stock market falls not just in the emerging markets but also, to some extent, in the developed world on the back of the collapsing price of commodities including oil, which has now gone below the psychologically important $50 threshold and is still falling. The euro has also been falling and is at a nine year low against the super strong US dollar. The rocketing strength of the dollar, relative to other commodities and currencies, is the nub of this emerging markets financial crisis to be manifest in stages.
The impact on emerging markets of this oil price decline -- see the last ATCA 5000 briefing titled "2015: Why's the Oil Price Collapsing? Answer: $8+ Trillion Carry Trade" -- is going to be unprecedented in scale, scope and synchronicity as several countries, companies and banks grapple simultaneously with declining commodities including oil, national currencies, massive budget deficits, damaged bond markets and epic debt defaults. The Asia crisis of the late 1990s with LTCM to boot could now be potentially repeated globally and on a much bigger scale because of the perceived tightening of US monetary policy and the super-strong and fast rising US dollar.
As already pointed out by ATCA 5000, there is $8 trillion -- and further leverage -- in the process of step by step repatriation from Emerging Markets as the Dollar Carry Trade unwinds. Some of those dollars will stick around but some will keep peeling off, and as a result there will be many financial earthquakes in stages including most commodities and oil, several national currencies, sovereign and corporate bonds, non performing loans at banks, bankruptcies and chaos in national and international financial markets. This is a Global Financial Crisis Mark II save America to begin with unless LTCM-2 happens. Then all bets are off. The Fed may then intervene by starting another round of Quantitative Easing yet again. There is another possibility that if the turmoil in the emerging markets affects growth in the developed countries -- North America, Europe and Japan -- the verbal narrative espoused by those central bankers may project further loosening of monetary policy.
What are your thoughts, observations and views? We are keen to listen and to learn.
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