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Emerging Markets, Oil, Ruble and Strong US Dollar
Russia in 1998 and 2008 Versus Now
1998 and 2008 Versus Now
Strong US Dollar
December 29, 2014 interview
Starts at 3:04
EMERGING MARKETS, OIL, RUBLE and STRONG US DOLLAR
This oil issue and falling ruble is not all about Russia. Russian corporate bonds could end up in US 401Ks.
It’s also more complicated than that.
There are a lot of emerging markets that have borrowed in US dollars and don’t even make as many US dollars as Russia. At least Russia has some capacity to earn US dollars to pay off US dollar debt, and they have a pretty good reserve (savings) position.
Places like Turkey, Mexico, South Africa, and Brazil have enormous US dollar debts and it’s not clear that the corporations, at least, have enough US dollar earnings or that the governments have access to reserves to pay them off. Some of those companies could go bankrupt.
You’re looking at about $9 trillion US dollar denominated emerging market debt.
They’re not all going to go bankrupt, but let’s say 20% go bankrupt and are written off, that would be $1.8 trillion dollars of losses. That’s about twice as big as the $1 trillion sub-prime (and alt-A mortgage) losses in 2007-2008.
1998 AND 2008 VERSUS NOW
The current crisis is similar in the dynamic but different in the details.
In 1998, the Russian default caused a global liquidity crisis. Russia defaulting was just the first domino that caused other dominos to fall.
Russia had an enormous amount of US dollar denominated government and external debt. Now Russia is in a very different position. They do not have the same amount of external US dollar debt. Their reserve (savings) position is fairly strong — including about $50 billion in gold.
Russia has been a major gold buyer, and that gold is a very solid asset.
There’s not going to be a big sovereign default. Russia has enough reserves to pay off its sovereign debt.
The problem is elsewhere — corporate debt and European banks that may own it, and US investors who may own it and decide to sell creating margin calls. There are a lot of things that can ripple around the system.
We certainly haven’t heard the last of this.
STRONG US DOLLAR
The dollar is the strongest its been in about eight years.
The Fed publicly says they have an inflation goal of 2 – 3%.
Right now inflation is about zero and even slightly negative.
A strong dollar is deflationary — the exact opposite of what the Fed says they want.
They’ve hinted at raising interest rates which would make the dollar even stronger.
There’s the conundrum.
The only way it makes sense is if the economy is really strong.
But it’s much weaker than meets the eye. The GDP reports, there was inventory, failure to make seasonal adjustments in 3rd quarter, and Jim believes the 4th quarter of 2014 and first quarter of 2015 are going to be a lot weaker.
That would mean the Fed can’t raise rates because the economy is weak.
Ben Bernanke gave an important speech in Tokyo in 2012 and Janet Yellen has echoed it — they said they are the US central bank and they take care of the US. The emerging markets are on their own.
Jim says it doesn’t work that way. We’re in a globalized world and you can’t be globalized on the way up and somehow separated on the way down.
If this strong dollar causes the emerging markets crisis of the kind Jim’s describing, and it starts to resemble 1997 and 1998, then all these chickens are going to come home to roost back in the US.
The Fed’s not going to be able to wash their hands of it.
Wag the Dog (Drums of War and Back Room Banker Passes)
words and music Elaine Diane Taylor
© 2014 Intelligentsia Media Inc. All rights reserved.
from the album Preparing for the Fall
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns
Here’s a recent really lovely review from a stranger on iTunes:
This album is PHENOMENAL…!!!
Her voice is finer than .9999 GOLD. The lyrics, melodies and energy of this WHOLE album is world-class and a must listen.! Thank you Elaine Diane Taylor. The world is a better place for this album :)
My best wishes for a wonderful holiday season and time with friends and family, remembering and celebrating all the good things — for me it’s family, friends, my guitar, making food for people I love, and spending time in the woods.