Banking, credit crises flash danger signal

2016 to be a minefield for markets.

Global markets end November 2015 at an inflection point. An era of go-go leverage, central bank easy money and colossal debt creation will end when the Federal Reserve raises interest rates in mid-December. Excessive, even idiotic lending is nothing new in international banking.
From Texas shale to African offshore oil, from Australian mining to GCC property, bank credit crunch cycles are now impossible to ignore. Overvalued asset markets will fall. I see credit spreads widen and credit default swap rates spike in the world's debt markets. Even Saudi Arabia, owner of one-fourth of the world's proven oil reserves, just got a sovereign credit downgrade. This is scary stuff. The ghosts of 2008 continue to haunt me, as they will for life.
Higher US dollar interest rates are the kiss of death for emerging markets, down 10 per cent in 2015. The Bloomberg Commodities Index has plunged to a 17-year low and China has accumulated history's biggest credit bubble, a $25 trillion financial Frankenstein, 250 per cent of GDP, via its shadow bank and local government Ponzi schemes. There is $18 trillion in unhedged emerging market debt that will become leprosy as King Dollar continues to rise and commodities continue to plunge as the Fed tightens while Chinese GDP growth falls to four per cent. Last summer, I warned about the world's first "Made in China" recession. The risk SOS in my nervous system flashes yet another danger signal; ain't no sunshine when she's gone, (I mean Mama Yellen). I see dozens of Brazilian, African, Russian, Turkish, Chinese and Indian corporates that borrowed in US dollars face ruin next year. This world will face another Lehman moment as emerging markets banks cannot roll over their debt. An international banking crisis that on the scale of Latin American sovereign lending in the 1980s, Asian/Russian/Mexican currency meltdowns in the 1990's, subprime/CDO excreta in 2008 could be the dominant theme of 2016.
Contagion is an ugly word used for the spread of diseases and epidemics. Yet as a trader and investor, I have often seen contagion spill over countries, asset classes, currencies time and time again. I knew Bernanke was lying when he assured the world with a straight face that "subprime will be contained" in 2007 as I saw the crowds outside Northern Rock in the first British bank run since Victorian times, saw BNP Paribas freeze redemption on its mortgage hedge funds, watch my friends on the corporate bond dealing desks of Wall Street widen their bid/ask spreads in horror. I knew the credit tsunami would circle the global like a vengeful demon. Yet China is much bigger, much more lethal than Lehman ever was. Will China be "contained" by the central banks? With what? Rate cuts? There is only one endgame for epic accumulations of debt in the history of world finance: devaluation and default. The cost of borrowing does not just soar in time of financial distress, bank credit disappears when investors need it the most.
The S&P 500 index at 18 times earnings, the FTSE 100 at 16 times earnings, the Nikkei Dow and India's Sensex at 17 times earnings all look overpriced to me as I expect higher credit costs to inhibit share buybacks, high-yield debt issuance, mergers and dividend growth/payouts. Why else have Blackstone a $300 billion private equity/property/credit/hedge fund colossus, shares fallen 35 per cent this summer? Is the Turkish-Russian spat the Sarajevo of our generation?
Geopolitics is, as usual, a black swan fat tail. The Paris atrocities means an escalation of Allied bombing raids over Syria/Iraq and therefore terrorist retaliation via mass slaughter attacks. This means Chancellor Merkel's open border, migrant policy could be challenged in the Bundestag. Are Europe and global markets ready for Chancellor Wolfgang Schauble or a shock National Front win in the next French elections?
My highest conviction macro calls reflect my views on the global credit cycle and central bank policy responses. So I believe the US dollar will surge to ?0.95, ¥128 yen and C$1.38 as central bank monetary divergences work their alchemy. I see Hong Kong/Gulf property fall 30-40 per cent more as the dollar pegs amplify deflation shocks caused by a China hard landing and a tighter Fed. Emerging markets? Even Goldman Sachs has ditched its Bric fund after ruinous losses. As the world storage capacity in Rotterdam/Amsterdam/Antwerp runs out, a free-fall in Brent, possibly down to below $20 is imminent. The global markets will be lethal minefield in 2016.