The Brewing Turmoil in Emerging Markets

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Oh the irony! In Bernanke’s last meeting as Chairman of the US Federal Reserve, he fails to give markets what they want. Stocks spit the dummy and fall more than 1%. What happened to the Bernanke put?

That’s right. After a two day meeting, the Fed’s press release made no mention of the growing turmoil in emerging markets. It announced that it would continue with its gradual ‘taper’ program, reducing assets purchases by another US$10 billion per month starting in February. Now, the Fed will ‘only’ buy US$65 billion in assets per month.

Usually, whenever stock markets get the wobbles the Fed is there with reassuring words, letting the punters know that they can go on punting without fear. Back in June last year, when markets first writhed in pain and anger about the prospect of a taper, Bernanke responded by saying the Fed was willing to ‘push back’ on its tightening pace.

With that Bernanke ‘put’ in place, markets went spec crazy again.

But not this time. The Fed’s statement focused completely on the US domestic economy. The Fed thinks that growth will pick up this year as fiscal policy becomes more neutral, and not acting as a drag on growth as it did throughout 2013. Here’s what the Fed said about it:

‘Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.’

The ‘current asset purchase program’ came into force in September 2012. That’s when Bernanke jacked up the pace of debt monetisation to US$85 billion per month. He did it to offset tighter US fiscal policy, but it helped to unleash a surge of speculative activity in asset markets.

Of course the Fed doesn’t acknowledge that its policies foster destabilising speculation, so it’s no wonder today’s statement makes no mention of the fragility of the emerging markets. That’s someone else’s problem.

As we said yesterday, the Fed sets monetary policy for the domestic economy, and damn the consequences elsewhere. But when you’re dealing with the world’s reserve currency there will be consequences. So when you’re monetising around US$1 trillion per year of debt based assets, you’re going to create a tide of liquidity that goes searching for short term returns.

And then when you start to change policy, that tide is going to come back the other way, with major implications. It will be funny to see what the Fed says in three to six months’ time when slowing growth in the emerging markets begins to feed back into the US economy. Again, there will be no mention of the role the Fed played in causing it all.

Don’t think that we’re talking about a few minor, peripheral economies here like Argentina or Turkey. This trend will impact all emerging markets to varying degrees. Taken together, they make up around half the global economy. Companies in the S&P500, who derive a decent chunk of their earnings from these markets, will feel the effects first.

That’s probably why US markets are selling off now. Less play money from the Fed and the prospect of slower global growth don’t make for a ‘risk-on’ environment.

But you’re probably wondering what the big deal is. After all, the Fed will still create additional liquidity each month to the tune of US$65 billion.

The nature of inflation always requires more…a faster growth rate, not a slower one. So the fact that the Fed’s asset purchases are slowing and will continue to slow this year is weighing on the ability of speculators to take risk and create even more liquidity. Liquidity begets liquidity…and the opposite also holds true.

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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14 Comments on "The Brewing Turmoil in Emerging Markets"

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Ross
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Ah, the emerging market thing … the dollar blockers vs the contenders Back in the day, and it was a long one, China was the arrogant supreme world power in market and technology terms that forgot to compete in terms of its readiness to project that power militarily. They had the type of economic power stats employed by Paul Kennedy in his Rise and Fall Of Empires on their side too. To quote Lord Palmerston’s biographer Jasper Ridley “China contained one-third of the (then … 1861) total population of the world: it had more than 350,000,000 inhabitants, at a time… Read more »
Ross
Guest
Ah, the emerging market thing … the dollar blockers vs the contenders Back in the day, and it was a long one, China was the arrogant supreme world power in market and technology terms that forgot to compete in terms of its readiness to project that power militarily. They had the type of economic power stats employed by Paul Kennedy in his Rise and Fall Of Empires on their side too. To quote Lord Palmerston’s biographer Jasper Ridley “China contained one-third of the (then … 1861) total population of the world: it had more than 350,000,000 inhabitants, at a time… Read more »
slewie the pi-rat
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this is from a few days ago; early Monday morning, as i recall: [Paste} (AP:ANKARA, Turkey) ANKARA, Turkey (AP) — The top U.S. Treasury official dealing with sanctions has told companies interested in doing business in Iran to “hold off.” Speaking in Turkey, which is looking to expand business opportunities with its neighbor, David Cohen warned that there are still significant sanctions in place against Iran. “The day may come when Iran is open for business but the day is not today,” Cohen said. Last week, the United States and the European Union partially lifted economic sanctions on Iran after… Read more »
slewie the pi-rat
Guest
this is from a few days ago; early Monday morning, as i recall: [Paste} (AP:ANKARA, Turkey) ANKARA, Turkey (AP) — The top U.S. Treasury official dealing with sanctions has told companies interested in doing business in Iran to “hold off.” Speaking in Turkey, which is looking to expand business opportunities with its neighbor, David Cohen warned that there are still significant sanctions in place against Iran. “The day may come when Iran is open for business but the day is not today,” Cohen said. Last week, the United States and the European Union partially lifted economic sanctions on Iran after… Read more »
Ross
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Here it comes…. remember the recent dilution to the a supposed absolute BIS raw leverage to liquid capital limit (where preferentials were reintroduced to certain asset classes? With the following in mind side of the issue do you think the AU executive lobbied? Evenso the AU liquidity shortfall is said to be $344B! Bail-in the super then…. http://www.bankingday.com/nl06_news_selected.php?act=2&stream=1&selkey=16064&hlc=2&hlw= The 4 pillars of what? Safe as AU and NZ land prices (and in NABs case UK too). We should be able to mathematically reverse engineer some of the mystery out of the underlying balance sheets from the above after correlating the… Read more »
Ross
Guest
Here it comes…. remember the recent dilution to the a supposed absolute BIS raw leverage to liquid capital limit (where preferentials were reintroduced to certain asset classes? With the following in mind side of the issue do you think the AU executive lobbied? Evenso the AU liquidity shortfall is said to be $344B! Bail-in the super then…. http://www.bankingday.com/nl06_news_selected.php?act=2&stream=1&selkey=16064&hlc=2&hlw= The 4 pillars of what? Safe as AU and NZ land prices (and in NABs case UK too). We should be able to mathematically reverse engineer some of the mystery out of the underlying balance sheets from the above after correlating the… Read more »
Ross
Guest
But then again, Keating and his corporatist mates and the ticket clipping hangers on already gave them nearly half the former mutual super didn’t he? And guess what? What’s yours is theirs already. http://www.bankingday.com/nl06_news_selected.php?act=2&stream=1&selkey=16063&hlc=2&hlw= And if you think about shifting it anywhere else they’ll pick up the dog and bone to their corporatist executive mates and the political parties and suddenly – no switches – no withdrawals of all that splash invested in those rapacious dividend paying 4 pillar shares wisely watched over by “independent” people on the other side of that said curtain recruited and remunerated downstream of those… Read more »
Ross
Guest
But then again, Keating and his corporatist mates and the ticket clipping hangers on already gave them nearly half the former mutual super didn’t he? And guess what? What’s yours is theirs already. http://www.bankingday.com/nl06_news_selected.php?act=2&stream=1&selkey=16063&hlc=2&hlw= And if you think about shifting it anywhere else they’ll pick up the dog and bone to their corporatist executive mates and the political parties and suddenly – no switches – no withdrawals of all that splash invested in those rapacious dividend paying 4 pillar shares wisely watched over by “independent” people on the other side of that said curtain recruited and remunerated downstream of those… Read more »
Jason
Guest
The need to bow and scrape at China’s feet like a subservient little terrier is over. Reading China’s demographic statistics prooves that. As for the United States being master and the rest of us being the boot-licking dashchunds, the ONLy reason the US dollar remains powerful is due to it being pegged to oil. The world needs US dollars to buy oil, even all-mighty China has too as well. So long as oil production grows or remains flat (as it has been since 2008) then the ‘petrodollar’ will never collapse, no matter how much money the Federal Reserve prints. But,… Read more »
Jason
Guest
The need to bow and scrape at China’s feet like a subservient little terrier is over. Reading China’s demographic statistics prooves that. As for the United States being master and the rest of us being the boot-licking dashchunds, the ONLy reason the US dollar remains powerful is due to it being pegged to oil. The world needs US dollars to buy oil, even all-mighty China has too as well. So long as oil production grows or remains flat (as it has been since 2008) then the ‘petrodollar’ will never collapse, no matter how much money the Federal Reserve prints. But,… Read more »
Justin King
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Look at the newest Paul Craig Roberts newsletter for a good explanation of this subject.

Justin King
Guest

Look at the newest Paul Craig Roberts newsletter for a good explanation of this subject.

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