Latin America Busted

The economic cycle of many emerging markets is nothing more than a resource/credit boom. The poorly managed nations of the world that we often see in Africa and Latin America are trapped in the boom-bust cycle because they do not have long-term growth plans, they simply ride the cycle. Capital from developed economies is funneled into malinvestment and the bust inevitably follows. The end result is the economy gains no ground on developed economies, losing nearly all the gains made during the boom. There is no convergence with the developed world.

...As emerging economies grew larger in the past 15 years, they became a larger portion of China's total exports. These same nations are increasingly dependent on Chinese demand for raw materials, such as copper, coal, iron ore and oil, either directly or through the higher prices caused by China's growth. Thus a self-reinforcing (pro-cyclical) trend emerges: China relies on exports to emerging economies that grow quickly because of Chinese demand for raw materials, which causes Chinese exports to increase.......and on and on.

...This makes China's economy very fragile. Even without these commodity backed loans, China's economy is at risk from a downturn in commodity prices that weakens demand in emerging economies. With these loans backed by commodities in place, commodity prices are now at risk from Chinese loans souring. If these commodities flow back into the world market, it will be the very trigger event for China's own bust.

On top of all this, much of the shadow banking credit flowed into investments in coal mines and real estate, the former of which is tied to global commodity prices and the latter to China's credit boom.

In conclusion, China has experienced a very long boom phase thanks to reckless lending taking over from 2008-2013, when global growth slowed. Instead of developing an internal market and making counter-cyclical investments, China bet everything and then leveraged up on the China/emerging market/commodity cycle.

China's Volatility Machine

ZeroHedge: "There Is Going To Be A Taper Tantrum In Latin America... It Is Inescapable"

China is the biggest trade partner to many Latin countries, but the U.S. has tried to reassert its presence in recent months. Still, China's sluggish growth is pulling Latin America down with it.

"We're expecting very, very weak growth," says Eugenio Aleman, senior economist at Wells Fargo Securities. "Brazil is in bad shape. Argentina isn't much better. Chile has slowed down to a trickle...Peru is slowing down considerably."

That's just the beginning. Venezuela is arguably the world's worst economy with sky-high inflation. Next door, Colombia has the world's worst stock market this year. Its index is down 13% so far this year. The second worst is Peru, down 12.5%. By comparison, America's S&P 500 is flat this year. (Argentina has the world's best stock market, but that's more a reflection of politics than economics).

While many are focused on Greece right now, "a deeper downturn in China remains the key external risk for Latin America," says Neil Shearing, chief emerging market economist at Capital Economics.

...Latin America is better positioned now to weather a Fed rate hike than past ones. But there could still be an exodus of cash, experts say.

"There is going to be a taper tantrum in Latin America," says Aleman. "It is inescapable."