Sunday, August 23, 2015

New York Times; "Investors Race to Escape Risk in Once Booming Emerging­Market Bond [funds]"; Time to pay close attention

"[Some] ] large mutual funds that helped fuel rapid growth in developing countries have begun hastily retreating from those investments, contributing to the recent sharp decline in global markets.

In the last week alone, investors pulled $2.5 billion from emerging ­market bond funds, the largest withdrawal since January 2014.

The world’s fastest growing economies ...have been propelled by soaring commodity prices, robust currencies and access to cheap loans, primarily through the sale of high ­yield, high­ risk bonds.

...“The growth rates for many of these countries were vastly overstated,” said Dani Rodrik, a professor at the Harvard Kennedy School of Government who has studied the impact of foreign capital flows in developing economies.

“It was all very unsustainable.”

The selling spree has raised concerns ...that could make it difficult for individual investors to withdraw money from their mutual funds.

...If investors ask to be repaid all at once — as happened in 2008 — a run on ­the ­bank scenario could unfold because funds would have difficulty meeting the demands of people wanting their cash back.

[When the Federal Reserve lowered interests rates to about zero], ...more nimble — and fickle — bond investors stepped in. [US] dollar ­based lending to companies and countries outside  the United States had increased since the financial crisis — doubling to over $9 trillion.

...this growth was coming not from global banks but from American mutual funds buying the bonds of emerging market issuers.

American mutual funds 
purchased by relatively older folks
looking to maintain standards of living
after the Federal Reserve motivated them to switch to riskier investments
by lowering interest rates,
and now many may likely have their asses handed to them,
which will be directly attributable
to Fed and financial industry self bail outs,
which didn't save the rest of the economy.

...Among the many beneficiaries of this [US dollar based] largess were commodity ­driven borrowers such as the state­ owned oil companies Petrobras in Brazil and Pemex in Mexico, the Russian state­owned natural gas exporter Gazprom, and real estate developers in China.

...Russian train companies easily sold [US] dollar bonds, despite the fact that their revenues were earned in rubles. Even Ecuador, a country that defaulted in 2008, was able to raise $2 billion last year.

Brazil, China, Malaysia, Russia, Turkey and others have sold more than $2 trillion in bonds, mostly to American mutual fund companies, since 2009.

As this money flowed into their countries, financing skyscrapers in Istanbul and oil exploration in Brazil, economies and currencies strengthened.  Now the reverse is occurring, led by a slowing Chinese economy, and as that money heads for safety, local currencies are plunging.

Bonds denominated in US dollars fall further in value
if the currency of the issuer falls, 
as more money would be needed to convert to US dollars
to pay principal and interest payments.

...if bond investors sell these positions in a panic at more or less the same time[...?]

...a bond ­selling panic can spread quickly.

...What worries many regulators and economists is how much mutual fund money is now tied up in hard­ to ­sell bonds — an amount that far exceeds the exposure investors had to these markets in earlier emerging market crises.

...“People are saying, ‘I want out,’ ”

...“It is difficult to see the bottom with all these depreciating currencies.”

AUG. 22, 2015
Essentially what the Federal Reserve has done by lowering interest rates and leaving them low, is to have exported inflation to emerging markets by channeling American investment flows to higher, riskier yielding issuers, which when quickly withdrawn, can cause economies to implode.

Like Greece.

When many investors look up how much has been lost so far, money may be withdrawn in a panic, which would make the US dollar rise even more, creating a negative feedback loop.

Negative feedback loops are bad.

Self fulfilling prophesies they can be, especially when many who weren't paying attention actually take a look at their month end statements, and freak out.

The blame should be placed on a bought and paid for elected US government, regulators, the Federal Reserve and the financial industry which the Fed bailed out without accountability.
"...The illusion of stock-market stability is fading, and the Last Great Bubble — faith in central banks — may be starting to pop.

...the global growth and inflation story is dramatically reversing. It turns out quantitative easing did absolutely nothing for the economy, and it turns out that Europe’s own version of QE simply isn’t working to boost reflation hope.

For too long, market participants have been sucked into the idea that the S&P 500 is the money market ...

Lower for longer has now become an excuse for too long to buy U.S. markets and believe that risk does not exist when central banks “have our backs.”

The narrative may be on the verge of a significant change.

...we must begin to question what is so wrong with the environment that has resulted in [the Fed] not having raised rates yet.

...the U.S. stock market turned from a discounting mechanism of the future to yet another failed vehicle for stimulus under the guise of the “wealth effect.”
"...Some currencies, like the Malaysian ringgit and the South African rand, are hitting multiyear lows against the dollar.

...The dollar bull run earlier this year raised concerns about countries with large amounts of dollar-denominated debt, because refinancing that debt was becoming more expensive. The size of that debt in EM doubled in five years...

Analysts expect no let-up in the capital flight.

...“There is not enough liquidity right now so if a sell-off in currencies is extended to other assets it would likely lead to carnage,”

...All this activity is taking place in pretty thin markets, so a big question is how the market responds when the holiday period is over..."