This chart…

…is driving everything in the financial markets right now.

The Curious Case of Zambia

If you can’t see where I’m going with this, just give it a minute.

I’m fully aware that many people might be unable to find Zambia on a map, so here is Zambia on a map:

A few years ago, Zambia accessed the capital markets and did a dollar bond deal at an incredible 5.625%. People said at the time that the emerging/frontier trade was getting goofy. I disagreed. I thought Zambia was a better credit than, say, Italy.

It hasn’t worked out that way…

As you can see, the yield on that bond has gone from 6% to 11%, just in the last year.

Whoops.

Zambia found itself in a position where it had to issue more debt, at much higher interest rates. It had a huge budget deficit, because the government gets a huge amount of revenues from royalties on…copper mining.

Whoops.

And the reason copper is tanking is because China is in recession, and because of the chart I showed you at the beginning of this essay.

So why is the dollar going up?

Because even though the Fed hasn’t raised rates yet, relative to everyone else, the United States is actually sort of tightening its monetary policy.

When the Fed declined to raise interest rates because of “international concerns,” this is what they were talking about. Zambia, and everyone else like them.

For once, it is actually not Zambia’s fault. They were trucking along, growing at about 6.5% a year, and then a piano fell on their head. They were confident enough in their growth that they thought they would be able to issue dollar bonds.

You know what the problem with dollar bonds is: If your currency goes down, you are screwed.

Zambia was once a frontier-markets darling. No more.

But nothing has changed within Zambia. Same people. Same natural resources. Same government. Same thesis. They just got caught up in the macro s—storm.