Third Waves Of Financial Turmoil In Emerging Markets

Goldman Sachs said that the financial crisis can be seen as the following three stages:

In the first stage, the collapse of the US property market triggered the credit crunch, which eventually led to the collapse of Lehman. After that, the United States introduced the "TARP" and the QE policy.

The second stage is the European sovereign debt crisis.

This stage began with the European bank's exposure to the loss of leverage in the US, and subsequently, due to the lack of a debt sharing mechanism throughout Europe, the exposure extended to the sovereign debt crisis.

The European sovereign debt crisis ended in direct currency trading. The European Central Bank promised to take measures at all costs and eventually introduced quantitative easing in Europe.

We think Goldman Sachs must have a special definition of global slump.

But we should not be too entangled in this.

We should note that the voice of the global recession that economists Buiter recently issued is softer than the premise often adopted by the IMF.

The premise of Buiter's judgment of the global recession is the global gross domestic product gap. The IMF measures the negative growth of global gross domestic product (parity based purchasing power).

Another economist, Gavyn Davies, took some entirely different approaches and made some entirely different thinking.

His conclusion is similar to Goldman Sachs, that is, the possibility of global recession is very low.

His additional instructions are as follows:

In the third stage, the emerging market crisis and the sharp fall in commodity prices overlapped.

This evolving crisis takes place in three stages.

It disrupts the typical path of stock market recovery.

In most historical periods, we can see four obvious stages in the stock market. We describe these four stages as hopelessness, hope, growth and optimism.

Around the US crisis and the global economic recession in 2009, all markets entered a classic "desperate" stage. Then the US quantitative easing led these stocks to start a strong "optimism" stage.

Yet Europe's banking and sovereign debt crisis has derailed the recovery of European stock markets.

Emerging market equities have entered an optimistic stage with the support of us easing policy and credit growth.

With the positive policy easing, Europe finally entered the "growth" stage in 2012, but at this time, the emerging market has entered the next stage of "despair".

Investor pairs

The concern is increasing, which has raised concerns about the impact of emerging markets on global growth. This has led investors to stand at a crossroads and bring different results to the market.

We are either facing the "long term growth stagnation" that has caused many investors to panic. The bond market (and credit market) implicitly imply such a long-term growth stagnation or that the economic downturn in the emerging market will be seen as the last stage of the financial crisis.

This stage, as before the United States and Europe, will force the balance sheet to make adjustments, forcing the economy to rebalance in a necessary way, laying the foundation for the gradual normalization of economic activity, profit growth and interest rates.

Of course, each band will absorb energy from the previous band, so it is very difficult to isolate the emerging market crisis led by China.

The fragmented view has ignored such information. Since 2007, the downturn in Western economies has encouraged China's stimulus policy, and the low level of interest rates in Western economies has helped boost China's leverage.

As Citigroup said in the past few weeks, "since 2009, loans in the global banking sector have increased by US $7 trillion and 600 billion, and China has contributed nearly $3 trillion and 500 billion or nearly half of that.

From 2009 to 2014, the contribution of major emerging market economies to global loan growth reached 75%.

Memorabilia can give you a broader perspective:

In the 11997 year, the Asian financial crisis hit global economic growth expectations and brought deflationary pressure to the world economy.

Countries are cutting interest rates, and emerging economies are coping with the crisis by increasing domestic savings.

2, after a very low level of inflation and interest rates, global economic growth has improved.

Stock market valuations in developed economies rose, and US credit growth accelerated.

3, with the outbreak of technology stocks (due to low capital costs and low bond yields) and the optimistic expectations of the market for economic globalization and future productivity growth, the stock market is in the bull market and has begun to form a bubble.

4, as the market's confidence in the future economic growth is strengthened, the risk premium of the stock market falls.

Investors are seeking lower risk compensation for slowing growth in the future.

5, the collapse of share prices leads to an increase in risk premiums and easing monetary policy.

6, countries with high savings levels (emerging markets and Germany) promote credit growth in the United States and southern Europe.

7, after years of economic growth and leverage, the US property bubble burst (triggering the first wave of the international financial crisis), leading to bank failures and credit crunch.

The United States began implementing QE.

8, a major impact on European banks exposed to us real estate loans and credit expansion in southern Europe.

The spread of sovereign risk spreads in southern Europe has accelerated the financing problem (triggering the second wave of financial crisis).

The market began to worry about whether the single currency of the euro could maintain sustainability. Europe began to QE.

9, because of the implementation of QE and

The risk premium of bonds goes up to zero, just as the stock market happened in the late 1990s.

10, the sharp fall in commodity prices (mainly because of rising capital expenditure and increased supply of new technologies) has put pressure on emerging markets.

Emerging market currencies are weakening (the third wave of the financial crisis started). China's economic slowdown has begun to relax its policy by devaluing the renminbi.

By the way, Goldman Sachs does not favour the stagnation of long-term growth and believes that the risk of a global recession is not high.