Is an emerging market meltdown coming?

Dubai - King Dollar in early stages of another major bull run as Italy emerges as Europe's next systemic risk

Five years after the 2013 "taper tantrum", the world is on the brink of yet another emerging market meltdown whose twin epicentres are now Istanbul's Bosphorus and the Argentine pampas. There is now a tangible risk of contagion in the asset class, a ghastly replay of 1998 and, yes, 2008. I got MBA (Master of Bubblelogy and Amnesia!) in Wharton but got my true education trading the global markets during Mexico 1994, Thailand/Indonesia in 1997, Russia in 1998, Turkey and Argentina in 2001 and the GCC since the Emaar IPO. This time the wolf is here. Why?
One, King Dollar is in the early stages of another major bull run as Italy emerges as Europe's next systemic risk. Two, the spread between 2- and 10-year US Treasury bond notes has flattened to 48 basis points even while a June FOMC rate hike is certain. An inverted yield curve is a disaster for emerging markets since it means recession risk in the West is imminent. Three, the sheer scale of Fed monetary tightening since December 2015 has a multiplier effect in emerging markets. Four, oil importing emerging markets face a triple-whammy due to $78 Brent. Note the plunge in the Indian rupee to 68 as oil is 70 per cent of New Delhi's current account. Five, emerging markets are dangerously leveraged due to the post-Lehman decade of negative real interest rates, which generated a $14 trillion tsunami of dollar debt borrowing. As Libor rises, these overleveraged chickens will come home to roost as credit Frankensteins.
Six, internal debt, banking crises and corporate debt blow-ups are now inevitable in emerging markets. This will create fiscal black holes, as in Brazil and India. Seven, with Pompeo as America's top diplomat, Gina as its top spymaster (actually spy mistress!) and John Bolton as NSC chief hancho, the case for another geopolitical collision in certain parts of the Middle East. The resurrected ghosts of July 2006 will send shock waves across the Middle East and the provinces of black gold.
Eight, Russia is in recession again, thanks to sanctions. I expect a López Obrador (loony left!) victory in Mexico and a populist backlash in Brazil. This means emerging market growth rates fall and public finance deficits widen. Nine, the US trade deficit to China can only shrink if Chinese exports to the US decline, a disaster for the Pacific Rim's Asian tigers. Ten, distress in Egypt/North Africa and sub-Saharan Africa has been amplified by botched devaluations, terrorist threats from Madhugiri state in Nigeria to the Nile Delta, pandemic risk (Ebola/Congo) and austerity programs against IMF diktat. Financing to sub-Saharan Africa is as fragile as a desert mirage in 2018.
Eleven, apart from Saudi Arabia, GCC markets face growth pressures. Not even a 45 per cent rise in oil prices has led to a bull market, but Saudi equities are up 15 per cent in 2018. Why?
Twelve, as a Pakistani and an obsessive student of East India Company's imperial shadow on my country and family's past, I am horrified by the sheer scale of the developing world's borrowing and financial dependence on China. Any threat to the Chinese growth model will spell disaster for the dark alleys of the Third World, rebranded charitably but inaccurately as "growth markets" by Abraaj Capital. If government to government loans from China are included, emerging market debt liabilities rise by 20 per cent. This is all floating rate debt that can never be repaid.
I expect another 1980s-style intercontinental default wave in the emerging markets. Entire countries and banking systems will go bankrupt or, as my Chicago futures trading cronies used to put it, belly up. I predict the mother of all debt restructuring. Thirteen, Argentina tells me the linkage between internal debt held by gringos and post-Macri, post-Paris Club sovereign borrowing is a recipe for financial disaster. Yet I can name a dozen countries in the same boat as Argy Bargy. Fourteen, imagine a world that needs $500 billion in IMF bailouts? Will Trump's America First xenophobes ever agree to a dozen IMF bailouts? Do horses fly. Net-net, get real, get out! Remember George Santayana. Those who refuse to learn the lessons of history are doomed to repeat them. Sad but true!
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.