Oil is plunging again, this time in the wake of OPEC’s inability to limit its members’ production. The US dollar, meanwhile, is up on the divergence between Fed tightening and ECB/BoJ/BoC easing.

This widening gap is a perfect storm for the many, many entities that have borrowed dollars to speculate in foreign currencies or drill for oil. Some examples:

Emerging Market Debt Sales Are Down 98 Percent

(Bloomberg) – The commodity-price slump and the slowdown in China’s economy are crippling developing nations’ ability to borrow abroad, even as international debt sales from advanced nations remain at a five-year high.

Issuance by emerging-market borrowers slumped to a net $1.5 billion in the third quarter, a drop of 98 percent from the second quarter, according to the Bank for International Settlements. That was the biggest downtrend since the 2008 financial crisis and reduced global sales of securities by almost 80 percent, the BIS said in a report.

Emerging-market assets tumbled in the third quarter, led by the biggest plunge in commodity prices since 2008 and China’s surprise devaluation of the yuan. The average yield on developing-nation corporate bonds posted the biggest increase in four years, stocks lost a combined $4.2 trillion and a gauge of currencies slid 8.3 percent against the dollar. Sanctions on Russian entities and political turmoil in Brazil and Turkey also affected sales by companies in those countries.

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Fears rise that junk bond investors are over their skis

(CNBC) – After years of safely reaching for yield through risky assets like stocks and speculative-grade bonds, Wall Street is heading into 2016 rethinking the strategy.

That trend of low defaults has begun to turn the other way, with the trailing 12-month rate rising to 2.8 percent in November, the highest level in three years, according to ratings agency S&P, which expects defaults to climb to 3.3 percent by Sept. 30, 2016.

Moreover, fellow ratings agency Moody’s reported its liquidity stress index in November hit its highest rate since February 2010. Still more troubling is that some of the damage has begun to spill outside the oil, gas and mining sectors, where most of the defaults had been contained.

Fully one-third of oil and gas and mining and metals companies in Moody’s coverage universe are on review for downgrade or have negative outlooks.

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Brazil’s Unprecedented Torrent of Downgrades Is Set to Get Worse

(Bloomberg) – Amid Brazil’s economic and political tumult, the nation’s businesses have seen a record number of downgrades this year — and the total is about to get worse.

Fitch Ratings estimates it may slash the ratings of as many as 10 companies for every one it upgrades in 2016. Fitch said that grim scenario is most likely if it chops Brazil’s grade, an ever-growing possibility as the country’s woes deepen.

A top lawmaker initiated impeachment proceedings against President Dilma Rousseff last week, a move that may further undermine the nation’s finances and exacerbate the worst recession in a quarter century. That spells trouble for companies already finding it hard to obtain financing in the wake of an unprecedented corruption scandal at Brazil’s state oil company.

“You will see companies burning cash,” Fitch’s Carvalho said. “The cross-border market is closed for Brazilian companies, and the local market is selective.”

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Saudi Arabia’s big welfare spending faces the oil abyss

(CNBC) – If Saudi Arabia maintains oil production at current levels amid the oil price crash, then it’s going to have to cut its budget — or it will likely be bankrupt by the end of the decade. The big issue is Saudi Arabia’s big spending ways, especially increased government spending on social welfare programs.

According to the IMF, government expenditures in Saudi Arabia are expected to reach 50.4 percent of GDP in 2015, up from 40.8 percent in 2014. That increase can be attributed to two things: falling oil prices (it’s bringing in less revenue) and an inflated budget (it’s spending more money).

It’s no secret that a large portion of Saudi Arabia’s roughly 30 million people rely on the government for economic support. In February, the newly crowned King Salman doled out a reported $32 billion to the Saudi people in bonuses and subsidies to celebrate his ascension to the throne.

“We are a welfare society, so the population depends a lot on government subsidies, directly and indirectly,” Abdullah Al-Alami, a Saudi writer and economist, recently told The New York Times. “But one day we are going to run out of oil, and I don’t believe it is wise to be pampered and subsidized.”

To summarize, the world is entering a classic credit crunch, in which lending dries up for marginal borrowers first before tightening for core entities like multinational corporations and developed world governments. And it’s just beginning.

Most of today’s crises evolved with oil considerably higher and the dollar somewhat lower, so current conditions are actually a lot worse than those that, for instance, caused emerging market debt issuance to evaporate and shoved Brazil into existential crisis.

And since oil overproduction will likely to continue while the differences in central bank policies are etched in stone for the next few months at least, it’s possible that the performance gap between oil and the dollar will widen going forward. This will turbo-charge today’s crises and add a few more, as oil producing US states hit financial walls and big chunks of the developing world follow Brazil down the drain.

Brett Rentmeester Outlines:

APPROACHES TO SOLVING YIELD CHASING

& HIGH VALUATION RISKS

 

FRA Co-Founder Gordon T. Long interviews Brett Rentmeester on Austrian economics and the importance of having an entrepreneurial mindset in investment.  Brent Rentmeester is the president of Windrock Wealth Management and has been in the wealth asset management for over 18years. Mr Rentmeester believes the uniqueness of Windrock is its focus on the macroeconomic picture, Austrian economics and what it all means for investment implications as well as an entrepreneurial mindset on how to find investment opportunities.

The Austrian school to him is the “acknowledgement of the influence that central banks have on the business cycle and interest rate and therefore the opportunities left for investment”.

He mentions that the traditional stock, bond portfolio is under a lot of challenge going forward because there is no real and safe income anywhere today. As a result people are becoming speculators and risk takers even when they don’t want to.

Brett believes having an entrepreneur mindset when investing, is the key to addressing the dilemma of income and the future of investment. Secure private lending is lending money to borrowers that is backed by real tangible assets or an income stream. According to him, what makes this a unique category is that it addresses the pockets of lending that is being neglected by the big banks as a result of  the financial banking distress that took place in 2008.

On examples of secure private lending, Brett highlights 3 different categories with his examples. He explains that in auctioned rental properties, the government organizations Fannie Mae and Freddie Mac by law are restricted from buying mortgages on such properties until after 2 years, this results in a niche market for private lenders. “In energy markets more states are moving towards a deregulated market”. What this means is that a consumer can buy energy from a variety of energy companies. Now this system is facilitated by third party brokers who go door to door offering this energy from various energy companies. Now because the brokers want the commissions up front and the energy companies can’t provide it, we see people coming in to pay the brokers a discounted fee upfront and then agree to collect the 3year contract provided by the energy companies.

Trade financing

“Global trade happens between different parties but often times it’s financed by big banks, trade receivables. So one party needs to buy goods and a supplier supplies them but someone’s got to finance that transaction and it’s often the third party bank”.

Due to new regulations, banks are required to reserve more capital in such situations, as a result an opportunity is created for private money to finance the transaction between the customer and supplier.

“Rather than taking on more risk you don’t have to today, you just have to be more creative”

– Gordon. T. Long.

Brett echoes this sentiment saying:

“So much of the industry and investors think in a very narrow box of stocks, bonds and maybe hedge funds but there’s a lot of things outside of that, that if you open your mind to the opportunities, are quite interesting to research”.

Abstract written by Chukwuma Uwaga – [email protected]