A Big Kahuna Shaping Up

There is an unmistakable rhythm to the universe, played over and over again until time burns beneath the unlaboring stars. In 1997, the Pan-Asian credit bubble burst and economic carnage ensued. In 1998, oil prices and commodities in general fell off the cliff. The ruble collapsed with it and Russia defaulted. Venezuela was in free fall. No one can predict the future, but the stage looks set for a repeat in 2015 and 2016.

This is equivalent to the narrative of emerging markets driving global growth post-2008 winding down. Money is flowing to investments in the developed world. Check out the delta between emerging market debt and US high yield CDS indicies. We are on the cusp of things really falling off the cliff. Again.

The emerging market narrative portrayed a world where the most important source of economic growth was not mature, developed states with failing commitments to rule of law and strong incorruptible institutions. The driver of planetary growth is emerging markets.

In emerging markets political insecurities are the ultimate driver. But speaking about authoritarian regimes as a crude and unvariated mass is a trap. There is a wide palette of shades between a communist state and a banana republic. The state rules the market. It always has. Only the tools differ, depending on the politics.

Credit is afraid that instead of looking outward and being expansive, emerging countries will turn inward and be defensive. When this happens, they close borders, stop immigration, promote protectionism, more subsidies. From there, it is a light step to default.

It is far easier to express this view now.


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