US financials and emerging markets will collapse most tomorrow
Posted on 07 August 2011 with 3 comments from readers
US financial stocks and emerging markets are going to show the biggest falls tomorrow as the impact of the US debt downgrade hits global financial markets.
The move by S&P to lower US debt below triple-A for the first time in history came after the bell on Friday so equity and bond markets have not yet had a chance to vent their fury about this loss of value in the world’s most widely held asset class.
US financials
ArabianMoney reckons US financials will get the biggest beating. Quite simply the US banks are the biggest holders of US treasuries and will feel the heat most. Ditto China as the largest foreign holder of US treasuries and because it and other emerging markets are almost always more volatile to the downside.
By contrast there should be a flight to safe havens like the AAA-rated bonds of other sovereigns and gold. We are not sure whether silver will be treated as a precious metal or industrial commodity tomorrow, and it could first behave like the latter and take a turn for the worse as it did on Friday.
Clearly readers of our newsletter who bought our short ETF program will have a very good day (subscribe here). Is it too late to go short? That is always an issue as markets collapse. Stock brokers can becoming strangely hard to contact and IT systems crash. It may be hard to put a short position on.
US dollar
We will also be watching closely what happens to the US dollar. There are contradictory forces at work with the pull down from the credit rating and the push up from an equity market rout, for as stocks are sold dollars are bought.
If readers are not out of the markets after last week then it is probably not too late to sell everything, and we will be surprised if looking back in a month or two that is not also the right course of action with hindsight.
Hanging on while the world drops away can leave you dangling from the upended Titanic as it takes its last dramatic plunge.
3 Comments posted by readers:
The minor downgrade of US debt by one ratings agency has psychological significance only. It’s the chaos unfolding in the Eurobond market as politicians and the ECB offer too little, too late which is the real story.
I agree with the remarks of John Clark; the real problem at this stage are the bonds of the Euro PIIGS nations, esp. Spain and Italy, each of which are many times bigger than Greece.
US Financial Firms Under Pressure:
However, I agree with the Ed. here, in that the US financial stocks are gonna take a big hit; in fact, they’ll probably be under significant pressure all week long. But my reasoning here is different than the Ed’s: these financial firms have been selling CDSs to European nations by the boatload over the past two years.
We gotta keep in mind the fact that CDSs are just derivatives and are the equivalent of an “insurance policy”; the PIIGS (as well as France and Germany) have been buying these CDSs like Swiss chocolate (no pun intended!). But these “CDS insurance policies” are nothing more than a “promise” to pay. So even though these derivatives have some small margin associated with them, it’s really a very small amount (maybe less than 10%?). Very big counter-party risk here!
In a nutshell, these big NY banks can not guarantee the debt of Portugal, Ireland, Greece, Spain, Italy, Belgium, etc., although they are acting as if they can!
That’s why I have large short positions against the US financials!
Indeed a timely article on an important, impending matter.
However, it is VERY important to note that not all emerging markets will fail as promptly as the rest. While it is true that most emerging markets rely heavily on their export earnings, there is one shining star, the only western democracy of the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey & South Africa) which is bound to surprise the world in the months and years to come; Colombia.
Only Colombia is the second oldest constitutional democracy in the world after the USA, only Colombia has demonstrated very strong political stability, but more importantly, only Colombia has an extraordinary record in managing its business sector, banking system and balance (and timeliness) of foreign payments. Probably the only country in Latin America in which there has never been a nationalization of a foreign company, Colombia has also been the only major country in the region to have never had ramping inflation. If only Brazil , Mexico, Argentina and China could have learned from Colombia.
The wonderful singularity about Colombia is the fact that the nation is truly a survivalist country, which despite its booming economy and exports, does NOT rely on exports to survive. Colombia has it all, and in great quantities; oil, gold, coal, gas, water and year round agriculture (no winters) in a land that boasts the most bio-diverse (per sq. meter) fertile soil in the world. Add to this, the people of Colombia; amongst the most educated and sophisticated westerners to be found.
These are just some of the many reasons why Colombia is perhaps the best country in the world in which to invest, specially LONG-term. This week, Ex-Im Bank Chairman Fred P. Hochberg named Colombia one of the top 10 places in which to invest, while real estate guru Sam Zell puts Colombia already at the very top.
Unknown to most abroad, Colombian president Santos is already spearheading regional measures to protect the region from the massive amount of speculative investment taking place (especially in Colombia), and once again, Colombia will shine.
Indeed, not all emerging markets are the same.