By Dave Kranzler

Rising energy prices and collapsing emerging currencies are two developments that are not receiving much attention in the mainstream propaganda narrative. But either development which could end up “pulling the rug” out from underneath the markets.

I pieced together the graphic below from an article on Zerohedge about the developing currency and debt crisis in emerging markets and, specifically, Latin America. This topic is not receiving much attention from the mainstream financial media. I guess facts that undermine the “strong economy” narrative go unreported. If it’s not reported, it doesn’t exist, right?

The top chart shows the abrupt plunge in an index of emerging market currencies. But most of that decline is attributable to the plunging currencies in Latin America. Currently the Brazilian real is in free-fall, followed closely by the Mexican peso.

The bottom chart shows an index of emerging market debt prices. The index has plunged over 6 points, or nearly 7% since mid-April. In terms of bond prices, that’s a mini-crash. And that’s an index. Individual bond issues are getting massacred.

I was trading junk bonds in 1994 when the emerging market debt crisis hit hard in late January. Prior to that, emerging market debt issuance had just been through a mini-bubble. The money pumped into the system by Greenspan to “save the markets” from the collapse of Drexel Burnham and the related S&L collapse, plus to save the markets from the blow-back from the collapse of Russia, precipitated a mini-boom in high yield and emerging market debt.

The crisis started with a loss of confidence in the Mexican banking system and quickly spread like the flu throughout Latin America. The effects soon spilled-over into the U.S. markets. Between January and the end of March 1994, the Dow plunged 10.6%. The credit markets were a mess, especially the junk bond market. A friend of mine on the EM desk at BT was worried about losing his job.

It’s impossible to know the extent to which central banks are working to prevent the current EM crisis from spreading, but at some point there will be a spillover effect in our markets.

As everyone knows, Deutsche Bank has resumed the collapse that started in 2008 before the Fed, ECB and Bundesbank combined to keep DB from collapsing. Why was DB saved? Because DB’s balance sheet likely represents the largest systemic risk to the global financial system. It has been burning furniture for years and now the bank is unloading more than 10% of its workforce as well as dismantling its North American and Investment Banking operation. 25% of the equity sales and trading personnel are being eliminated.

No one outside of DB has any possibility of understanding DB’s OTC derivatives book. It’s highly probably that DB insiders do not understand the scale of counter-party risk exposure. When DB acquired Bankers Trust, Anshu Jain took the emerging market derivatives business and injected it with steroids. Why? Because the fees were enormous.