FLOWS - Macro Situational Assessement

Fed in no position to pull plug on QE yet.

For all its talk of cutting back on the monetary stimulus, the US Federal Reserve may be in no position to end its monthly bond purchases in 2014, feels Richard Duncan.

After much deliberation, the Fed decided to trim monthly bond purchases to USD 75 billion from USD 85 billion from this month. The original plan last year was to pull the plug on the bond purchases by the end of this calendar.

However, economic data continues to give conflicting signals, with the latest employment figures pointing to weakness in the economy. That could hold the Fed back from tightening the liquidity tap for fear of choking nascent growth.

Duncan expects asset prices to start going down only after the Fed ends its quantitative easing (QE), the technical term for its monetary stimulus.

He expects yen to depreciate in the coming months and Nikkei to move higher.

Below is the verbatim transcript of his interview on CNBC-TV18 India

Q: The World Bank and the International Monetary Fund (IMF) have put out a fairly positive view of the global economic growth in 2014. What is your idea of US growth? Will it continue to be robust and therefore the tapering programme will be maintained as planned?

A: It is important to understand why the economy is showing signs of picking up and that is because quantitative easing (QE) has driven up the stock market by 30 percent last year and also pushed home prices up 13 percent last year. So, that has caused household sector net worth to climb USD 21 trillion from its post crisis low and it is 12 percent higher than it was before the crisis started. This has created wealth effect; its fueling consumption and supporting economic growth.

However, if quantitative easing ends later this year then it’s likely that interest rates will then go up, stock prices would fall, property prices would fall and the US could very well go back into recession. So, for that reason I do not think they are going to end quantitative easing at the end of 2014 as it is suggested. I think it is going to continue on in 2015 and probably beyond.

Q: A word on Europe, we have seen the end of recession or so it seems. Will there be a recovery or do you see the European Central Bank (ECB) indulgence some kind of quantitative easing probably by some other name – long term refinancing operation (LTRO) or some other name?

A: Few days ago Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) warned the global economic crisis is not over and she pointed out in particular the growing threat of global deflation. In Europe the inflation rate last month was only 0.8 percent. It’s well below where the ECB would like it to be and on top of that the European economy remains mired in recession and well below the level of gross domestic product (GDP) that it was before the crisis started.

I do think more stimulus of one kind or another is required in Europe - a further rate cut, more LTRO and ultimately even asset purchases, the way the Fed has been doing.

Q: Given that you are expecting quantitative easing in both these major economic groups. How does this leave asset allocation if the global economy is going to remain reflated? How will smart money move. Does it move back to emerging markets or does it remain in favour of developed markets?

A: The best way to play this in general is when central banks are creating lot of money you can expect asset prices to go up and when they stop creating a lot of money then asset prices are likely to go down. So, the trick is to try to anticipate in advance what the policy makers are going to do and that is what my work revolves around.

I have a video newsletter called ‘macro watch’ and it focuses on predicting credit growth and liquidity and government policy in order to anticipate how those things are going to impact asset prices.

Q: For the next six months what are you advising asset allocators, what should the prudent strategy be now?

A: It varies on country by country basis with Abenomics in full swing the Bank of Japan is creating three times more money relative to the size of Japan’s economy as the Fed is relative to the size of the US economy. So, it seems quite likely that the yen is going to continue to depreciate and the Japanese stock prices will continue to appreciate.

On the other hand in the US, for instance there will still be a lot of excess liquidity during the first half of 2014 because the Fed only intends to taper gradually. Liquidity will only start to become tight in the Q3 and then it will become very tight in the Q4.

So, the trick is going to be to try to anticipate whether the Fed is going to stick with its current taper schedule or whether they going to expand, extend quantitative easing in 2015 because as I expect, and when they announced they will extend in 2015, we will once again see a nice rally in stock prices and we will see bond yields fall and the dollar weaken.

Q: What does this mean for a country like India; foreign institutional investors (FIIs) flows were very robust in 2013. How much do you expect would come in 2014 and what is your assessment of the economy, is that on the mend?

A: The most important driver of the rest of the world is the US economy. When the US economy is growing strongly – that creates growth all around the world. In particular, when the US current account deficit, the trade deficit in other words, when it widens that is good for the rest of the world because the rest of the world can sell more to the US.

But looking out for the next three years it looks as if the US current account deficit is going to become smaller largely because of shale oil revolution; the US is importing less oil and exporting more petroleum products so that is going to mean a smaller current account deficit, less liquidity being thrown on the global economy, less Asian exports going into the US. Therefore it is going to create a difficult environment for the rest of the global economy.

Q: What will be the fund flows into Indian market look like in 2013?

A: I suppose in the first half of the year as people discount what they believe will be the end of quantitative easing - the fund flows will be tight but later as it becomes clear that there will be more quantitative easing than people currently anticipate, the fund flows will revive for India and for other emerging economies as well.

WATCH VIDEO INTERVIEW

STATE OF THE UNION - I Have a Dream!

MARTIN LUTHER KING's "I Have A Dream" speech had:

3 "believes", 4 "hopes", and 11 "dreams"...

STATE OF THE UNION had

10 "believes", only 1 "hope", and a disappointing 9 "dreams"

and in headlines...

• *OBAMA URGES CONGRESS TO RAISE NATIONAL MINIMUM WAGE TO $10.10
• *OBAMA SEEKS TO LIMIT RETIREMENT TAX BREAKS FOR WEALTHIEST
• *OBAMA TO START 4 NEW MANUFACTURING INSTITUTES IN 2014
• *OBAMA TO MEET CEOS THIS WEEK ON HIRING LONG-TERM UNEMPLOYED
• *OBAMA REITERATES CALL TO END FANNIE, FREDDIE `AS WE KNOW THEM'
• *OBAMA ANNOUNCES 12 EXECUTIVE ACTIONS IN STATE OF UNION SPEECH
• *OBAMA TO RAISE FEDERAL CONTRACTOR MINIMUM WAGE TO $10.10/HR
• *OBAMA PROPOSES NEW INCENTIVES FOR ALTERNATIVE-FUEL TRUCKS
• *OBAMA SEEKS TO REVIVE EXPIRED TAX CREDIT FOR BIOFUELS
• *OBAMA SAYS IN STATE OF UNION `GIVE AMERICA A RAISE'
• *OBAMA PLANS INFRASTRUCTURE TAX CREDIT FOR ALTERNATIVE FUELS
• *OBAMA SEEKS TO CREATE BUSINESS ZONES AROUND FRACKING
• *OBAMA SAYS 2014 CAN BE `BREAKTHROUGH YEAR' FOR U.S.
• *OBAMA REITERATES VETO THREAT ON POSSIBLE NEW IRAN SANCTIONS

The 12 Key Executive actions...

The President’s top priority remains ensuring middle class Americans feel secure in their jobs, homes and budgets. To build real, lasting economic security the President will work with Congress and act on his own to expand opportunity for all so that every American can get ahead and have a shot at creating a better life for their kids.

Middle Class Security & Opportunity at Work

Raising the Minimum Wage through Executive Order to $10.10 for Federal Contract Workers. The President will also continue to urge Congress to raise the minimum wage to $10.10 across the nation because no one who works full-time should have to raise their family in poverty.

Creating “myRA” – A New Starter Savings Account to Help Millions Save for Retirement. The President will take executive action to create a simple, safe and affordable “starter” retirement savings account available through employers to help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA account and, like savings bonds, would be backed by the U.S. government.

Building a 21st Century Workplace for America’s Working Families. The President will host a summit on Working Families to highlight the policies that will ensure America’s global economic competitiveness by supporting working families; showcase companies doing exemplary work in this space; and highlight model laws and policies from cities and states across the country in areas such as discrimination, flexibility and paid leave.

Jobs & Economic Opportunity

Launching Four New Manufacturing Institutes in 2014. American manufacturers are adding jobs for the first time in over a decade. To build on this progress, the President will launch four new institutes through executive action this year. These institutes will build on the four the President has already announced.

Government-wide Review of Federal Training Programs to Help Americans Get Skills in Demand for Good Jobs. The President is directing the Vice President to conduct a full review of our federal job-training system to make sure programs are higher performing and driven by the needs of employers which are hiring so that they lead to well-paying jobs. In the coming months, we will help community colleges build partnerships with businesses so that as industries’ skills needs change community colleges can quickly adapt.

Partnering With Many of America’s Leading CEOs to Help the Long-Term Unemployed. Later this week, as part of an ongoing effort that the Administration began several months ago, the President will convene a group of CEOs and other leaders around supporting best practices for hiring the long-term unemployed.

Expanding Apprenticeships by Mobilizing Business, Community Colleges and Labor. This year the President will mobilize business leaders, community colleges, Mayors and Governors, and labor leaders to increase the number of innovative apprenticeships in America.

Increasing Fuel Efficiency for Trucks. The President will propose new incentives for medium- and heavy-duty trucks that run on alternative fuels like natural gas and the infrastructure needed to deploy them, and the Administration will set new fuel efficiency standards for heavy duty vehicles.

Partnering with States, Cities and Tribes to Move to Energy Efficiency and Cleaner Power. The President has directed his Administration to work to cut carbon pollution through clean energy and energy efficiency.

Schools & Education Opportunity

Connecting 20 Million Students in 15,000 Schools to the Best Technology to Enrich K-12 Education. The FCC is making a major down-payment on the President’s ConnectED goal of connecting 99% of students to next-generation broadband and wireless technology within five years. In the coming weeks the President will announce new philanthropic partnerships – including by companies like Apple, Microsoft, Sprint and Verizon.

Redesigning High Schools to Teach the Real-World Skills That Kids Need. This year, the Administration will announce the winners of a $100 million competition supporting redesigned high schools that give high school students access to real-world education and skills.

Increasing College Opportunity and Graduation. Building on the success of the President and First Lady’s College Opportunity Summit, in the coming months the President is asking colleges and universities, nonprofits and businesses to work with him on ways to improve students’ access to and completion of higher education.

And a key paragraph for all (even Tom Perkins?)...

Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by – let alone get ahead. And too many still aren’t working at all.

Our job is to reverse these tides. It won’t happen right away, and we won’t agree on everything. But what I offer tonight is a set of concrete, practical proposals to speed up growth, strengthen the middle class, and build new ladders of opportunity into the middle class. Some require Congressional action, and I’m eager to work with all of you. But America does not stand still – and neither will I. So wherever and whenever I can take steps without legislation to expand opportunity for more American families, that’s what I’m going to do.

Ron Paul sums it up...

Well, I certainly didn't learn anything new from this sp

Full speech below:

SOTU 2014 by zerohedge

SOTU 2014

DON'T BE CONCERNED - YET!

TEXT BOOK LOG-PERIODIC CYCLE ENDS - Right on Schedule

OUR NOVEMBER 25TH POST CALLING FOR SANTA CLAUS RALLY

OUR DECEMBER 24TH POST CALLING FOR JANUARY 14TH TURN

WHAT IS NEXT

NOW WATCH FOR THE SMALL "M' TOP - As DR (Real Deflation) Begins

Click to Expand

BELOW:

FROM OUR DECEMBER CALL OF A 'AFTER JANUARY 14th TURN' - High was January 15th

Click to Expand

BE PATIENT - Wait for Death Cross

Click to Expand

MID-TERM ELECTION YEAR SUPPORTS THE ABOVE OUTSIDE SMALL "M" STRENGTH

FINANICAL REPRESSION - Obama Introduces MyRA: The "No Risk, Guaranteed Return" Retirement Savings Bond

Obama Introduces MyRA: The "No Risk, Guaranteed Return" Retirement Savings Bond 01-28-14 Zerp Hedge

Presenting: the MyRA, and since it offers "guaranteed return and no risk" we now know where all the Fed's bond trades will go to work once QE ends.

From the president:

Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can...

Or put another way - if you like your retirement account you can keep your retirement account.

And just like that, the "automatic" continuity to the Fed's Quantitative Easing is ensured.

IRA Confiscation: It's Happening 01-29-14 Simon Black via Sovereign Man blog via ZH

Here’s the deal he’s offering: you give Sam your hard-earned retirement savings. Sam will invest your funds, and pay you a rate of return.

Granted, the rate of return he’s promising doesn’t quite keep up with inflation. So you will be losing some money. But don’t dwell on that too much.

And, rather than invest your funds in productive assets, Sam is going to blow it all on new cars and flat screen TVs. So when it comes time to make interest payments, Sam won’t have any money left.

But don’t worry, he still has that good ole’ credibility. So even though his financial situation gets worse by the year, Sam will just go back out there and borrow more money from other people to pay you back.

Of course, he will be able to keep doing this forever without any consequences whatsoever.

I know what you’re thinking– “where do I sign??” I know, right? It’s the deal of the lifetime.

This is basically the offer that the President of the United States floated last night.

And like an unctuously overgeled used car salesman, he actually pitched Americans on loaning their retirement savings to the US government with a straight face, guaranteeing “a decent return with no risk of losing what you put in. . .”

This is his new “MyRA” program. And the aim is simple– dupe unwitting Americans to plow their retirement savings into the US government’s shrinking coffers.

We’ve been talking about this for years. I have personally written since 2009 that the US government would one day push US citizens into the ‘safety and security’ of US Treasuries.

Back in 2009, almost everyone else thought I was nuts for even suggesting something so sacrilegious about the US government and financial system.

But the day has arrived. And POTUS stated almost VERBATIM what I have been writing for years.

The government is flat broke. Even by their own assessment, the US government’s “net worth” is NEGATIVE 16 trillion. That’s as of the end of 2012 (the 2013 numbers aren’t out yet). But the trend is actually worsening.

In 2009, the government’s net worth was negative $11.45 trillion. By 2010, it had dropped to minus $13.47 trillion. By 2011, minus $14.78 trillion. And by 2012, minus $16.1 trillion.

Here’s the thing: according to the IRS, there is well over $5 trillion in US individual retirement accounts. For a government as bankrupt as Uncle Sam is, $5 trillion is irresistible.

They need that money. They need YOUR money. And this MyRA program is the critical first step to corralling your hard earned retirement funds.

At our event here in Chile last year, Jim Rogers nailed this right on the head when he and Ron Paul told our audience that the government would try to take your retirement funds:

I don’t know how much more clear I can be: this is happening. This is exactly what bankrupt governments do. And it’s time to give serious, serious consideration to shipping your retirement funds overseas before they take yours.

Obama, Treasury detail new MyRA savings plan 01-29-14 Pensions & Investments

President Barack Obama directed the Treasury Department on Wednesday to create the “MyRA” retirement savings bond program mentioned in his State of the Union address Tuesday night to reach low- and middle-income workers and others not saving for retirement.

“This is a starter IRA,” said a senior administration official on a background press call.

Treasury officials said on the call that they will launch a pilot program by the end of 2014 with employers opting to participate. Employers would not administer or contribute to the accounts, and there would be “little to no cost” to them, administration officials said. The federal government will pay an agent selected through a competitive process to administer the program.

The savings account would be offered as

• a Roth individual retirement account managed by a third party for the federal government.
• The federal government would guarantee the principal as it does with savings bonds.
• The interest rate would be based on the Thrift Savings Plan's G Fund, which uses rates based on a four- to 30-year average maturity.
• Households with income of up to $191,000 can open accounts with just $25 and make contributions of as little as $5 through payroll deductions.
• The MyRA accounts would also be portable among employers.
• Contributions may be withdrawn tax-free at any time, and Treasury officials said they would not police that.
• Once an account reaches $15,000 or 30 years, the money would have to be rolled over into a private-sector Roth IRA.
• Balances may also be rolled over to a Roth IRA before the limit is reached.

“We currently have a system that is not doing what it is supposed to,” said a different senior administration official, who noted that 50% of all full-time workers and 75% of part-time workers are not saving for retirement. “The proposal today is very much pitched at bringing new people in and is based on economic research that what you need is something simple, safe, secure and easy to set up through an employer,” the official said.

ECHO BOOM - Commodity Prices and YEN Impact Peripherals

ECHO BOOM - What Blows Up First; Subprime Countries

What Blows Up First? Part 3: Subprime Countries 01-27-14 John Rubino

One of the reasons the rich countries’ excessive money creation hasn’t ignited a generalized inflation is that today’s global economy is, well, global. When the Fed dumps trillions of dollars into the US banking system, that liquidity is free to flow wherever it wants. And in the past few years it has chosen to visit Brazil, China, Thailand, and the rest of the developing world.

This tidal wave of hot money bid up asset prices and led emerging market governments and businesses to borrow a lot more than they would have otherwise. Like the recipients of subprime mortgages in 2006, they were seduced by easy money and fooled into placing bets that could only work out if the credit kept flowing forever.

Then the Fed, spooked by nascent bubbles in equities and real estate, began to talk about scaling back its money printing*. The hot money started flowing back into the US and out of the developing world. And again just like subprime mortgages, the most leveraged and/or badly managed emerging markets have begun to implode, threatening to pull down everyone else. A sampling of recent headlines:

Contagion Spreads in Emerging Markets as Crises Grow

Investors Flee Developing World

Erosion of Argentine Peso Sends a Shudder Through Latin America

The Entire World is Unraveling Before Our Eyes

Chinese Debt Debacle Supports Soros’ ‘Eerie’ Portrayal

Venezuela Enacts “Law of Fair Prices”

Argentina Returns to Villa Miseria

Indian Rupee Falls to 2-Month Low; Joins Emerging Market Sell-Off

Turkey’s ‘Embarrassing’ Intervention Fails to Curb Lira Sell-Off

Prudent Bear’s Doug Noland as usual gets it exactly right in his most recent Credit Bubble Bulletin. Here are a few excerpts from a much longer article that should be read by everyone who wants to understand the causes and implications of the emerging-market implosion:

Virtually the entire emerging market “complex” has been enveloped in protracted destabilizing financial and economic Bubbles. In particular, for five years now unprecedented “developed” world central bank-induced liquidity has spurred unsound economic and financial booms. The massive investment and “hot money” flows are illustrated by the multi-trillion growth of EM central bank international reserve holdings. There have of course been disparate resulting impacts on EM financial and economic systems. But I believe in all cases this tsunami of liquidity and speculation has had deleterious consequences, certainly including fomenting systemic dependencies to foreign-sourced flows. In seemingly all cases, protracted Bubbles have inflated societal expectations.

For a while, central bank willingness to use reserves to support individual currencies bolsters market confidence in a country’s currency, bonds and financial system more generally. But at some point a central bank begins losing the battle to accelerating outflows. A tough decision is made to back away from market intervention to safeguard increasingly precious reserve holdings. Immediately, the marketplace must then contend with a faltering currency, surging yields, unstable financial markets and rapidly waning liquidity generally. Things unravel quickly.

The issue of EM sovereign and corporate borrowings in dollar (and euro and yen) denominated debt has speedily become a critical “macro” issue. More than five years of unprecedented global dollar liquidity excess spurred a historic boom in dollar-denominated borrowings. The marketplace assumed ongoing dollar devaluation/EM currency appreciation. There became essentially insatiable market demand for higher-yielding EM debt, replete with all the distortions in risk perceptions, market mispricing and associated maladjustment one should expect from years of unlimited cheap finance. As was the case with U.S. subprime, it’s always the riskiest borrowers that most intensively feast at the trough of easy “money.”

So, too many high-risk borrowers – from vulnerable economies and Credit systems – accumulated debt denominated in U.S. and other foreign currencies – for too long. Now, currencies are faltering, “hot money” is exiting, Credit conditions are tightening and economic conditions are rapidly deteriorating. It’s a problematic confluence that will find scores of borrowers challenged to service untenable debt loads, especially for borrowings denominated in appreciating non-domestic currencies. This tightening of finance then becomes a pressing economic issue, further pressuring EM currencies and financial systems – the brutal downside of a protracted globalized Credit and speculative cycle.

In many cases, this was all part of a colossal “global reflation trade.” Today, many EM economies confront the exact opposite: mounting disinflationary forces for things sold into global markets. Falling prices, especially throughout the commodities complex, have pressured domestic currencies. This became a major systemic risk after huge speculative flows arrived in anticipation of buoyant currencies, attractive securities markets, and enticing business opportunities. The commodities boom was to fuel general and sustained economic booms. EM was to finally play catchup to “developed.”

Now, Bubbles are faltering right and left – and fearful “money” is heading for the (closing?) exits. And, as the global pool of speculative finance reverses course, the scale of economic maladjustment and financial system impairment begins to come into clearer focus. It’s time for the marketplace to remove the beer goggles.

No less important is the historic – and ongoing – boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

At the same time, data this week provided added confirmation (see “China Bubble Watch”) that China’s spectacular apartment Bubble continues to run out of control. When Chinese officials quickly backed away from Credit tightening measures this past summer, already overheated housing markets turned even hotter. Now officials confront a dangerous situation: Acute fragility in segments of its “shadow” financing of corporate and local government debt festers concurrently with ongoing “terminal phase” excess throughout housing finance. China’s financial and economic systems have grown dependent upon massive ongoing Credit expansion, while the quality of new Credit is suspect at best. It’s that fateful “terminal phase” exponential growth in systemic risk playing out in historic proportions. Global markets have begun to take notice.

There are critical market issues with no clear answers. For one, how much speculative “hot money” has and continues to flood into China to play their elevated yields in a currency that is (at the least) expected to remain pegged to the U.S. dollar? If there is a significant “hot money” issue, any reversal of speculative flows would surely speed up this unfolding Credit crisis. And, of course, any significant tightening of Chinese Credit would reverberate around the globe, especially for already vulnerable EM economies and financial systems.

No less important is the historic – and ongoing – boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.

The crucial point here is that this crisis is not a case of one or two little countries screwing up. It’s everywhere, from Latin America to Asia to Eastern Europe. Each country’s problems are unique, but virtually all can be traced back to the destabilizing effects of hot money created by rich countries attempting to export their debt problems to the rest of the world. ZIRP, QE and all the rest succeeded for a while in creating the illusion of recovery in the US, Europe and Japan, but now it’s blow-back time. The mess we’ve made in the subprime countries will, like rising defaults on liar loans and interest-only mortgages in 2007, start moving from periphery to core. As Noland notes:

Yet another crisis market issue became more pressing this week. The Japanese yen gained 2.0% versus the dollar. Yen gains were even more noteworthy against other currencies. The yen rose 4.2% against the Brazilian real, 3.9% versus the Chilean peso, 3.5% against the Mexican peso, 3.9% versus the South African rand, 3.8% against the South Korean won, 3.0% versus the Canadian dollar and 3.0% versus the Australian dollar.

I have surmised that the so-called “yen carry trade” (borrow/short in yen and use proceeds to lever in higher-yielding instruments) could be the largest speculative trade in history. Market trading dynamics this week certainly did not dissuade. When the yen rises, negative market dynamics rather quickly gather momentum. From my perspective, all the major speculative trades come under pressure when the yen strengthens; from EM, to the European “periphery,” to U.S. equities and corporate debt.

It’s worth noting that the beloved European “periphery” trade reversed course this week. The spread between German and both Spain and Italy 10-year sovereign yields widened 19 bps this week. Even the France to Germany spread widened 6 bps this week to an almost 9-month high (72bps). Stocks were slammed for 5.7% and 3.1% in Spain and Italy, wiping out most what had been strong January gains.

Even U.S. equities succumbed to global pressures. Notably, the cyclicals and financials were hit hard. Both have been Wall Street darlings on the bullish premise of a strengthening U.S. (and global) recovery and waning Credit and financial risk. Yet both groups this week seemed to recognize the reality that what is unfolding in China and EM actually matter – and they’re not pro-global growth. With recent extreme bullish sentiment, U.S. equities would appear particularly vulnerable to a global “risk off” market dynamic.

To summarize:
Developed world banks have lent hundreds of billions of dollars to emerging market businesses and governments. If these debts go bad, those already-impaired banks will be looking at massive, perhaps fatal losses. Meanwhile, trillions of dollars of derivatives have been written by banks and hedge funds on emerging market debt and currencies, with money center banks serving as counterparties on both sides of these contracts. They net out their long and short exposures to hide the true risk, but let just one major counterparty fail and the scam will be exposed, as it was in 2008 when AIG’s implosion nearly bankrupted Goldman Sachs and JP Morgan Chase.

Last but not least, individuals and pension funds in the developed world have invested hundreds of billions of dollars in emerging market stock and bond funds, which are now looking like huge year-ahead losers. The global balance sheet, in short, is about to get a lot more fragile.

So, just as pretty much everyone in the sound money community predicted, tapering will end sooner rather than later when a panicked Fed announces some kind of bigger and better shock-and-awe debt monetization plan. The European Central Bank, which actually shrank its balance sheet in 2013, will reverse course and start monetizing debt on a vast scale. As for Japan, who knows what they can get away with, since their government debt is, as a percentage of GDP, already twice that of the US.

The real question is not whether more debt monetization is coming, but whether it will come soon enough to preserve the asset price bubbles that are right this minute being punctured by the emerging market implosion. If not, it really is 2008 all over again.

* “Money printing” in this case refers to currency creation in all its forms, electronic and physical.