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In the recent months, there has been an acceleration in the process of deleveraging in the financial futures markets. While the hard asset markets sent out a clear signal of a pro-cyclical, deleveraging phase up ahead, as early as December 2013, the financial asset markets took as much as 5 quarters to show signs of concern. I had been advocating a high beta deleveraging bias on my shows all through 2014 and upto mid 2015, the implications of the markets turning tail hasnt really hit home for many. The turmoil in the middle east due to falling oil prices is approaching flash point. Russia is taking the heat on falling commodity prices and largely also due to its presence in Crimea. Greece is almost forgotten like it was a bad dream. Yet, its implications will be still felt a decade from now. Maybe bravado from the fact that easy money is propping financial assets markets, inspite of hard asset markets crumbling, will persist for a while more. Maybe these concerns will even ease out over time (how? I wonder). The Chinese markets roller coaster ride was another rude jolt to the equilibrium in the market place.
But what really concerned me was the unraveling of Brazil (forget Cyprus, Greece and Puerto Rico. Brazil is a giant). Brazil was stuck in a mid-income trap and the same was confirmed without any doubt, years ago. This phenomena occurs when the citizens of a nation are stuck in a middle class lifestyle, no matter how much overtime they put in, no matter how many expense cuts they resort to. This big ticket producer of commodities and a leading exporter of natural resources is tethering on the brink of defaulting on it's external debt, because the prices of the goods it exports have collapsed. While we may brush off these concerns as they are pertaining to the LatAm (Latin American) region, there is trouble brewing closer home. Malaysia is undergoing problems of its own. Now that's South East Asia - as close as it gets. Lets not get into the nitty gritties of what happens to the Malaysian economy if / when push comes to shove. Lets think of the collateral damage, if Malaysia feels the political / economic heat. In the eye of the storm is PM Najib Razak, the 6th PM of Malaysia. The brain behind the peace accord between the Philippine Govt and the Moro Islamic Liberation Front (MILF). So pronounced was PM Najib Razak's influence in bringing about this accord, that even the Sultan of Malaysia was sidelined. Philippines is the worlds 45th largest economy and is resource rich in Mica, Copper, Rice, palm oil to name a few exportable commodities. As the MILF agreed to lay down arms on the intervention of Najib Razak, there was no mistaking that Razak had secured a long term berth in any future negotiations between the Philippine Govt and MILF.
Should PM Najib Razak be dislodged from the seat of power or Malaysia undergoes political and / or economic turmoil, ertswhile PM Mahathir Mohammed is gunning for Razaks head, and Mahathir still has a loud voice in the Malaysian polity, chances are, trouble will spill over to Philippines too. Wait, the plot gets thicker. Malaysia secured assured business with Philippines for it's facilitation of the peace accord. Against the competition of the Chinese who are eager for Philippine rice, copper and other natural resources. The probability of the Chinese appearing to stir the pot cannot be ruled out. Looking at the present condition of the Chinese economy, Beijing will welcome assured long term supply of natural resources on sale prices. So if you thought troubles in Brazil, Puerto Rico, Cyprus, Greece and Spain would not really affect you too much, they have arrived in S. E. Asia. Stay sharp !
Have a profitable day.
Vijay L Bhambwani