For most of the past few years, emerging market stocks and bonds were among the favorite investments of everyone from hedge funds to pension funds to retirees. 

Now, not so much.

The next two charts (courtesy of Saturday’s Wall Street Journal) show the huge recent run ending in January, to be replaced by a full-on rout. 

What happened? Well, it turns out that a big part of the apparent success of economies like Argentina and Indonesia came from their ability to borrow in international markets – frequently in US dollars – and use the resulting cash to build roads, bridges, airports, and soccer stadiums — that is, things that imply visible progress. Visitors came, saw all the “modernization,” went home impressed and hit “buy.”

But then US interest rates started to rise and the dollar spiked off of its recent lows. Treasury bonds suddenly started to look attractive relative to EM securities, while all those EM dollar debts began to look onerous rather than wondrous. The hot money decided to leave, putting downward pressure on EM currencies (which makes dollar-denominated debt even harder to pay off) and forcing EM central banks to tighten monetary policy and raise rates. 

The result? Contraction where once there was limitless growth, and instability where there was rock-solid continuity. Emerging markets have been here before, of course, and history teaches that it will get worse before it gets better.

History also teaches that trouble on the periphery frequently moves towards the center to threaten developed world institutions that were buyers of all that EM dollar debt. Hedge funds, pension funds, bond funds, global stock funds, and major-bank prop trading desks, are all on the hook for Brazilian, Argentine, and Mexican paper, which means – history again – that US taxpayers are actually the ones on the hook. 

So watch for apocalyptic headlines as the 1% softens the rest of us up for yet another transfer of wealth from middle to top.

With the US dollar gaining strength across the currency market and Treasury yields coming off significantly, it’s easy to conclude the underlining the investor mood of risk aversion is pushing those looking for safety into the US Dollar – R Zurrer for Money Talks

The dollar collapse thesis – which ends with all fiat currencies achieving their intrinsic value of zero — doesn’t preclude some thrills and chills along the way, in which some currencies fall faster than others and wreak havoc on various parts of the global economy.

This might be one of those times, as instability in the Middle East, Europe, and parts of Latin America sends worried capital pouring into the US, pushing the dollar up from its recent lows:

This may not look like much of a spike in the historical scheme of things, but it actually is, because a handful of developing countries have, for reasons that defy both history and common sense, decided to borrow trillions of US dollars. Now, with the dollar appreciating versus their local currencies, they’re having trouble making the suddenly-much-more-expensive interest payments.

Why would a country whose money is the peso or the real conclude that it’s a good idea to bet that their currency will appreciate versus those of other countries for decades to come? Who knows? But they’ve done it, and big banks around the world have enabled them. 

Here’s a chart from Bloomberg showing that the foreign currency debt of emerging market countries has nearly tripled since 2008, to more than $8 trillion (most of which is denominated in dollars, with some euros tossed in for diversification), which they now have to pay back regardless of where the dollar goes relative to the currency in which their governments collect taxes or their corporations make sales. 

And here’s an excerpt from the Bloomberg article that included the above chart:

Emerging-Market Stress Just Begun as Record Debt Wall Looms

Emerging-market companies and governments straining to deal with the rising cost of borrowing in dollars face increasing pressure as a record slew of bonds come due.

Some $249 billion needs to be repaid or refinanced through next year, according to data compiled by Bloomberg. That’s a legacy of a decade-long debt binge during which emerging markets more than doubled their borrowing in dollars, ignoring the many lessons of history from the 1980s Latin American debt crisis, the 1990s Asian financial crisis and the 2000s Argentine default.

Even since the 2013 taper tantrum, the group’s dollar debt has climbed in excess of $1 trillion — more than the combined size of the Mexican and Thai economies, Institute of International Finance data show.

“We look to be in for a pretty rough patch near term,” says Sonja Gibbs, senior director for capital markets in Washington at the IIF, an association of the world’s biggest banks. “The sharper the rise in the dollar and rates, the greater the near-term contagion risk.” Rising U.S. rates will have a knock-on effect even in local debt markets, she said.

 

China has far and away the most dollar debt coming due through next year among emerging markets. Though much of the debt is also owned by Chinese investors, strains have become clear in recent weeks, with some companies unable to issue at their preferred amounts and maturities, and others, unusually, marketing floating-rate notes.

Despite having defaulted in the early 2000s, Argentina has issued so much dollar debt that it ranks No. 4 on the list — a testament in part to the impact that unprecedented U.S., European and Japanese monetary stimulus had in spurring a global hunt for yield since the 2007-09 financial crisis.

Turkey has the largest foreign debt load relative to gross domestic product, and perhaps not coincidentally has one of the worst-performing currencies against the dollar this year, down about 21 percent. Only Argentina’s peso has done worse among 24 emerging nations tracked by Bloomberg — another country that ranks high on the debt metric.

The rapid build-up in debt over the past decade has alarmed some — including Harvard economist Carmen Reinhart, who made headlines saying emerging markets are worse off today than during the 2008 crisis and 2013 taper tantrum.

“This is not gloom-and-doom, but there are a lot of internal and external vulnerabilities now that were not there during the taper tantrum,” Gibbs said last week.

Why should Americans care if Turkey or Argentina defaults on their bonds? Because institutions all over the world bought those bonds in more innocent times (see Here’s When Everyone Should Have Known That Argentina Would Implode), and have built share prices, pension payouts and arbitrage strategies around them. If the bonds blow up, so do a lot of banks, hedge funds and pension funds. 

And if the resulting global anxiety sends even more flight capital into the dollar – pushing its exchange rate up even further and making emerging market debts even harder to manage – we might be looking at a negative feedback look with systemic implications.

“A curious” event that took place about a month ago, aggravated by other “Big Changes” like the US considering tariffs on German, Japanese, North Korea cancelling the summit then virtually begging to reinstate, home prices “skyrocketing” while home sales fall, Bitcoin tumbling on news of DOJ probe into price manipulation there’s more Big Change coming – R. Zurrer for Money Talks

Something curious took place one month ago when the PBOC announced on April 17 that it would cut the reserve requirement ratio (RRR) by 1% to ease financial conditions: it broke what until then had been a rangebound market for both the US Dollar and the US 10Y Treasury, sending both the dollar index and 10Y yields soaring…

… which led to an immediate tightening in financial conditions both domestically and around the globe, and which has – at least initially – manifested itself in a sharp repricing of emerging market risk, resulting in a plunge EM currencies, bonds and stocks.

Adding to the market response, this violent move took place at the same time as geopolitical fears about Iran oil exports amid concerns about a new war in the middle east and Trump’s nuclear deal pullout, sent oil soaring – with Brent rising above $80 this week for the first time since 2014 – a move which…

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Those still hoping for Bitcoin $200,000 were given a serious setback by a $200. drop in 20 minutes, possibly by a single seller. Trading this morning at $8,069. Bitcoin is a long way from its alltime intraday high of $19,750. – R. Zurrer for Money Talks

Did a single seller move the price of bitcoin $200 in 20 minutes?

The price of bitcoin took a dive Tuesday, falling by more than $200 in under 20 minutes, a move that could have been the result of a single seller unloading a sizeable amount of the digital currency.

The balance of wallet 3D2oetdNuZUqQHPJmcMDDHYoqkyNVsFk9r — an anonymous digital account which is valued at $1.49 billion — fell by 6,500 bitcoin Tuesday, with the average sale price sale being $8,146.70, a total value of just over $50 million, according to bitinfocharts. 

The sale comes a day after the third-largest wallet, which famously purchased over $400 million in bitcoin in February, let go of 6,600 bitcoin at an average price of $8,026. All told, the two whales dumped over $100 million of bitcoin within 24 hours.

As expected, online forums lit up, speculating on what or who was behind the sharp move lower. 

“Holy hell, these dumps out of nowhere. I was looking at some alts, then I check back to bitcoin and BAM it dropped $200 instantly,” one Reddit user wrote. 

Initial reaction was to point the finger at New York Attorney General Eric Schneiderman, who announced he was launching an inquiry into 13 cryptocurrency exchanges, seeking information including exchange fees, volume data and procedures around margin trading. 

However, that news broke nearly four hours before bitcoin’s move lower.

Previous selloffs in bitcoin have been blamed on sizeable single-user selling, with the most famous case being the Mt. Gox sale on March 7, when its trustees announced they had liquidated over $400 million in bitcoin and bitcoin cash. 

Significant selling seems to be the flavor of the month. On April 12, the second-biggest bitcoin wallet sold $38 million of the No. 1 digital currency. 

Early Wednesday, a single bitcoin BTCUSD, +2.19%   was worth $8,111.56, up 2.5% after battling to hold above the $8,000 mark, having got a boost late Tuesday on upbeat remarks from International Monetary Fund Managing Director Christine Lagarde.