Five years after the 2013 “taper tantrum”, the world is on the brink of yet another emerging market meltdown whose twin epicenters are now Istanbul’s Bosphorus and the Argentine pampas. There is now a tangible risk of contagion in the asset class, a ghastly replay of 1998 and, yes, 2008. I got MBA (Master of Bubblelogy and Amnesia!) in Wharton but got my true education trading the global markets during Mexico ’94, Thailand/Indonesia in ’97, Russia in ’98, Turkey and Argentina in 2001 and the GCC since the Emaar IPO. This time the wolf is here. Here’s 12 reasons why:

1. King Dollar is in the early stages of another major bull run as Italy emerges as Europe’s next systemic risk.
2. The spread between 2 and 10 year US Treasury bond notes has flattened to 48 basis points even while a June FOMC rate hike is certain. An inverted yield curve is a disaster for emerging markets since it means recession risk in the West is imminent.
3. The sheer scale of Fed monetary tightening since December 2015 has a multiplier effect in the emerging markets.
4. Oil importing emerging markets face a triple whammy due to $78 Brent. Note the plunge in the Indian rupee to 68 as oil is 70% of New Delhi’s current account.
5. Emerging markets are dangerously leveraged due to the post Lehman decade of negative real interest rates, which generated a $14 trillion tsunami of dollar debt borrowing. As LIBOR rises, these overleveraged chickens will come home to roost as credit Frankensteins.
6. Internal debt, banking crises and corporate debt blow ups are now inevitable in emerging markets. This will create fiscal black holes, as in Brazil and India.
7. With Pompeo as America’s top diplomat, Gina as its top spymaster (actually spy mistress!) and John Bolton as NSC chief hancho, the case for another geopolitical collision between Israel and Iran in Syria/Lebanon is certain. The resurrected ghosts of July 2006 will send shock waves across the Middle East and the provinces of black gold.
8. Russia is in recession again, thanks to sanctions. I expect a López Obrador (loony left!) victory in Mexico and a populist backlash in Brazil. This means emerging market growth rates fall and public finance deficits widen.
9. The US trade deficit to China can only shrink if Chinese exports to the US decline, a disaster for the Pacific Rim’s Asian tigers.
10. Distress in Egypt/North Africa and sub-Saharan Africa has been amplified by botched devaluations, terrorist threats from Madhugiri state in Nigeria to the Nile Delta, pandemic risk (Ebola/Congo) and austerity programs against IMF diktat. Financing to sub-Saharan Africa is as fragile as a desert mirage in 2018.
11. Apart from Saudi Arabia, GCC markets face growth pressures, a vicious property bear market and a protracted bank cash crunch. Not even a 45% rise in oil prices has led to a bull market in the UAE or Oman even while Saudi equities are up 15% in 2018. Why?
12. As a Pakistani and an obsessive student of the East India Company’s imperial shadow on my country and family’s past, I am horrified by the sheer scale of the developing world’s borrowing and financial dependence on China. Any threat to the Chinese growth model will spell disaster for the dark alleys of the Third World, rebranded charitably but inaccurately as “growth markets” by Abraaj Capital before its own growth was aborted by the misuse of funds scandal. If government to government loans from China are included, emerging market debt liabilities rise by 20%. This is all floating rate debt that can never be repaid.

I expect another 1980’s style intercontinental default wave in the emerging markets. Entire countries and banking systems will go bankrupt or, as my Chicago futures trading cronies used to put it, belly up. I predict the mother of all debt restructurings. Thirteen, Argentina tells me the linkage between internal debt held by gringos and post Macri, post Paris Club sovereign borrowing is a recipe for financial disaster. Yet I can name a dozen countries in the same boat as Argy Bargy. Fourteen, imagine a world that needs $500 billion in IMF bailouts? Will Trump’s America First xenophobes ever agree to a dozen IMF bailouts? Do horses fly. Net net, get real, get out! Remember George Santayana. Those who refuse to learn the lessons of history are doomed to repeat them. Sad but true!

​Wall Street – King dollar’s safe haven surge has only just begun!

The US Dollar Index’s 4.5% rise since mid-April has myriad causes.

1. The Italian election annihilated the political center and produced the worst possible coalition scenario of the far left (Five Star) and the far right (Northern League), two populist, anti-Euro parties that won 54% of the vote. Italy has a de facto bankrupt banking system, a 130% public debt/GDP ratio, vast regional inequalities (Milan and Calabria are different planets, as are Lombardia and Veneto from Sardinia) a toxic Mafia presence and a fiscal nightmare. Now its politicians want to renege on the fiscal/pension reforms imposed by Berlin and Brussels in 2011. This is the nightmare scenario for the Euro and the Euro is 57% of the US Dollar Index.
2. The Italian-German Bund debt spread has surged, as has Italy’s risk of sovereign default. The Euro’s fall to its SNB’s floor against the Swiss franc at 1.20 is an ominous message of systemic risk. There is no way the ECB can begin quantitative tightening in September. A premature end to Dr. Draghi’s asset purchase program could literally trigger a Greek style sovereign debt crisis – only on a far bigger scale. Italy has the third largest bond market in the world. If Italy goes bad, Planet Forex will script the requiem for the Euro and the dream born in the Treaty of Rome. The safe haven bid in the US dollar has only just begun.
3. The US-China deal averts an immediate trade war, though it is mathematically impossible for the US trade deficit to fall $200 billion on higher Chinese imports of US energy and agribusiness products. Chinese exports to the US will have to fall, a real risk to growth in Japan, South Korea, Taiwan, Singapore and Malaysia. Net net, this means lower Asian currencies against the US dollar.
4. The correlation coefficient between the greenback and Uncle Sam debt yield has risen in the past month with a vengeance. Japanese inflation data shows Governor Kuroda’s 2% inflation target is a central banker’s midsummer nights fantasy. This means there is no chance that the Bank of Japan will exit its zero bond yield policy in 2018. Shinzo Abe is mired in a political scandal and yet another LDP factional night of the long knives. The path to 110 yen, a target I outlined a month ago, was inevitable given US Treasury-JGB yield spreads, Fed-BOJ monetary tightening timetables and the political time bomb that now haunts Abenomics.
5. The risk of emerging markets contagion is all too real as I watch the Turkish lira and the Argentine peso meltdown. There is $220 billion in external debt issued by non-financial Turkish corporates. There is $14 trillion of debt outside the US held by non-American banks. Deutsche Bank has $25 billion in equity capital and $1.7 trillion in liabilities. Is there a Lehman scale banking time bomb in Europe? Is the Pope Catholic? The world is on the precipice of a major funding and debt crisis. The US dollar is the world’s natural safe haven currency as the US banking system is the only true credible deposit insurance scheme for savings when the lights go out in Europe.
6. I was stunned to see the Canadian dollar trade as low as 1.2980 (NAFTA?) even though Brent crude surged to $80 a barrel. When petrocurrencies fall while Brent hits four year highs, I get nervous. I remember the bitter memories of 2007 when I seriously thought that we were doomed to relive the Great Depression. Every postwar US recession has been preceded by a surge price of crude oil. Will the recession of ’19 be any different?
7. The financial markets now ignore the US trade and budget deficits and focus on relative US economic outperformance versus Europe. This is the reason the Fed Funds futures contract implies three more rate hikes in 2018 and two rate hikes in 2019. King Dollar is back from its post-election Trumpian netherworld and King Dollar will now kick (rhymes with) glass! My next target? 1.08 Euro.
8. The Turkish lira has plunged to 4.80 lira against the US dollar despite central bank rate hike that is anathema to Erdogan. The AKP’s top economics honcho Mehmet Şimşek will fly to London to reassure terrified investors. Too little, too late. A financial crisis and deep recession is now inevitable even as Erdogan goes to the polls to seek reelection on June 24th. The Ottoman Empire died amid a tsunami of foreign debt. A deadly endgame awaits the world on the Bosphorus.

Macro Ideas – Mahathir’s Malaysia is no financial fairy tale

As investors learnt the hard way in Pakistan, Russia, Qatar, Iran, South Africa, Lebanon and Brazil last year, political risk can eviscerate an emerging market bull run. Yet fairy tales are also created by political events, as the election of Mauricio Macri in Argentina or Narendra Modi in India attests. Frankly, I was stunned by the victory of 92 year old Mahathir Mohammed, father of my Wharton classmate Mirzan, as Prime Minister in the recent Malaysian general election. I have never invested in Malaysia after a traumatic experience in the late 1990’s and was aghast at systemic corruption in a de facto UNMO one party state. Capital controls, ringgit bond market dominated by offshore funds and expensive domestic valuations made it impossible for me to buy Malaysian equities. My interest in Malaysia was Langkawi and Penang (Love Georgetown, won for the British Empire by Lord Cornwallis after the shame of Yorktown!), never the Bursa in Kuala Lumpur.

The defeat of Najib Razak and the Barisan Nacional coalition for the first time since independence in 1957 is a testament to the disgust the electorate feels at the $5 billion stolen in the 1MDB sovereign wealth fund, whose political and financial shock waves span the globe. It is a bad sign that the opposition victory did not trigger a buying wave in either Malaysian equities or the ringgit. Investors are obviously as clueless as I am about the next act in Southeast Asia’s latest political soap opera. Of course, given the currency meltdowns on the Bosphorus and the Argie pampas, I am not exactly enthusiastic about owning emerging markets. Note even Emaar Properties is down 25% since last September. When the US dollar, LIBOR and US Treasury bond yields all rise, property in emerging markets becomes a no brainer short.

The cliché that financial markets hate uncertainty holds true in Malaysia. It is ironic that Mahathir Mohammed has emerged as the leader of bumiputera political revolt in Malaysia, given that he created the authoritarian state/crony capitalism culture as Prime Minister in the 1980’s. Mahathir destroyed the political career and even personal reputation of his protégé and current ally Anwar Ibrahim. I was thrilled to meet Anwar at a CLSA investment conference in Bangkok and Asia’s top fund managers gave him a standing ovation after he spoke passionately about “reformasi”. In the twilight of his life, Dr. Mahathir wants to atone for jailing and libeling Anwar in 1998, the year George Soros led the speculative attack against the ringgit, baht, rupiah and won. Anwar will finally succeed Mahathir as the next Prime Minister of Malaysia, a political fairy tale that took me back to Benazir Bhutto’s win in 1988 after a miserable decade of military dictatorship.

Dr. Mahathir’s economic populism is a source of risk. His promise to restore subsidies on gasoline and raise the minimum wage while promising to axe a 6% GST tax will be a disaster for the Malaysian ringgit, under pressure by King Dollar and lower Chinese exports to the US in any case. This spells a sovereign credit downgrade to me. Mahathir has also targeted the multibillion dollar Chinese infrastructure projects Najeeb and his cronies so loved, since baksheesh from the Middle Kingdom is a sure path to riches in the Dragon Empire’s vassal states. This will hit investor flows and pressure infrastructure stocks in the Kuala Lumpur Bursa. The new government has also targeted Najib Razak’s foreign bank accounts, cronies and patronage networks. A political witch hunt of the Malaysian elite is not exactly a reassuring prospect to me. The 1MDB scandal has led to private bank closures, indictments and arrests in Switzerland, Singapore, the US and the Middle East. The return of the Jedi Council will mean protracted political, economic and diplomatic turmoil in Malaysia. It does not help that the Lim Eng, the next Finance Minister, was jailed twice by Mahathir when he was in power as Prime Minister. The latest rumour in KL is that 17,000 cronies of Najib Razak will lose their grace and favour public jobs.

Malaysia has grossly underperformed Vietnam, Thailand and Indonesia, my preferred Southeast Asian stock markets. I doubt this changes until Anwar succeeds Dr. Mahathir and unveils a non-populist economic blueprint. Malaysia is also an expensive emerging market at 17 times current earnings, 350 points above the MSCI EM valuation multiple. The latest US Iran sanctions will also hit Malaysia though $78 Brent benefits Southeast Asia’s only crude oil exporter. For now, I limit my interest in Malaysia to Penang and Langkawi!