Regular readers will know that MB is currently running on a base case for the global economy that sees commodities and emerging markets falling in a negative feedback loop that will end inevitably in one and probably many large debt defaults that turn the current equity market volatility into a global debt shock and recession.
We don’t pretend to know from whence this shock will precisely come but have speculated that it will take down highly-geared miners and energy producers. One such candidate for the Minsky moment ahead is Brazil which is currently the epicentre of global contagion risk. The Economist offers background:
Nearly 500,000 jobs have been cut since January. Researchers at Fundação Getulio Vargas, a business school, reckon another 2.5m will be shed before the end of 2016. Unemployment rose to 7.5% in July, from 4.9% a year earlier—the fastest annual rise on record (see chart 1). It is expected to hit roughly 10% at the end of next year, and stay there for some time. Speak to Brazilians and it is hard to find anyone without a friend or family member on the dole.
From flophouses to boardrooms, moods darkened further in the wake of the decision last week by Standard & Poor’s to demote Brazil’s debt to junk status, following Ms Rousseff’s inept efforts to cast onto an unco-operative Congress the responsibility for balancing the budget. The rating agency subsequently downgraded dozens of big Brazilian companies, including several large banks. Petrobras, the state-controlled energy firm which is also at the centre of Brazil’s biggest-ever corruption scandal, earned another dubious distinction as the world’s largest company without an investment-grade credit rating. At the start of the year Petrobras accounted for about one-tenth of total Brazilian investment; now it may need to trim its capital expenditure by even more than the 40% it announced in June.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
From flophouses to boardrooms, moods darkened further in the wake of the decision last week by Standard & Poor’s to demote Brazil’s debt to junk status, following Ms Rousseff’s inept efforts to cast onto an unco-operative Congress the responsibility for balancing the budget. The rating agency subsequently downgraded dozens of big Brazilian companies, including several large banks. Petrobras, the state-controlled energy firm which is also at the centre of Brazil’s biggest-ever corruption scandal, earned another dubious distinction as the world’s largest company without an investment-grade credit rating. At the start of the year Petrobras accounted for about one-tenth of total Brazilian investment; now it may need to trim its capital expenditure by even more than the 40% it announced in June.
