Saturday, June 13, 2015

1997 Deja Vu: The Hot Money Is Fleeing Submerging Markets

Don't worry, the money will flow to Netflix

BBG: June 12, 2015
"The MSCI Emerging Markets Index declined for 12 straight days through June 9, the longest losing streak since 1990"
"Traders have pulled $26 billion from emerging-market funds this year, surpassing the total of $24 billion in all of 2014, the data show...The MSCI Emerging Markets Index declined for 12 straight days through June 9, the longest losing streak since 1990, amid concern rising borrowing costs in Germany and the U.S. will lure capital away from developing nations"

EM bonds (local currency):




The widely embraced all-important Idiocratic assumption that all risks are uncorrelated, is about to get tested
The assumption that all risks are uncorrelated would imply statistically that the probability of a combined "event" across all vectors - economic, financial, geopolitical, social, environmental is extremely low. A Black Swan, "no one saw it coming" type of event. However, in the real world, almost all risks are correlated to varying degrees, meaning that individual event probability statistics are totally meaningless and to the exact contrary, the probability of a combined event converges on 100%, given enough time. More importantly, as we learned in 2008, the subprime event was not confined to the U.S., it spread globally overnight with the Lehman failure, because under the Globalization paradigm, all risk assets are highly correlated. A scenario totally lost on the Idiocratic assumption. 

BBG: June 12, 2015
$6.8 Billion pulled from China Stock Funds
The money didn't flow to the U.S. in 1997 or 2007 (below), but I'm sure it will work this time...
Shanghai Composite with S&P 500


The fate of global markets is in the hands of Chinese day traders leveraged to the absolute maximum:

Via Zerohedge:





The noose is wrapped as tightly as possible. Ready for the bungee jump off the bridge.