Turning Points: Taper Strikes Emerging Markets

Categories: Alternative Investments, Derivatives, Economics, Equity Investments, Portfolio Management
A television screen on the floor of the New York Stock Exchange shows the decision of the Federal Reserve, Wednesday, Jan. 29, 2014.

The Fed continues with its second “installment” of the taper, reducing monetary easing from a total of $85 billion per month two months ago, to a “mere” $65 billion per month in February of 2014.

This is the taper heard round the world. The monetary regime change is shifting markets everywhere from the United States and European bond markets, to capital flows out of emerging markets, to increases in interest rates and capital controls in a number of countries. Relative to the enormous amounts of monetary stimulus added to the global monetary system in the past five years, this is but a drop in the bucket. Nevertheless, it represents a meaningful change in policy. Consequently, investors are running for cover.

Perhaps the greatest concern is that countries around the world that have benefited from this stimulus will be revealed to have invested that post-crisis influx of capital poorly, only now to be discovered since policy has changed. One of the most important pieces of the puzzle is the performance of real estate in various markets. Should the change in liquidity and markets cause a change in the performance of real estate, then the rest of the world will have effectively imported the US real estate crisis of 2008 — delayed only by monetary policy.

Here’s a wrap-up of key issues affecting global markets for fundamental investors.

Currencies

Commodities

China’s Direction

Credit Markets

Derivatives

Energy

Euro Crisis

Hedge Fund Money

Interest Rates and Central Banks

Japanese Debt and Inflation

Stock Market

Follow the Bubble

Time Capsule

  • The OCC credit survey from 2007 reveals that the agency grossly underestimated the decline in credit quality as defined in this survey. “Institutional investors have drawn comfort from strong earnings and cash flow and therefore, have been more willing to accept more accommodative terms and higher borrower leverage.” Regarding retail loan portfolios, the report indicates that “although asset quality performance of retail portfolios remained satisfactory, delinquency increased slightly while losses remained stable.” (Office of the Comptroller of the Currency)

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Photo credit: AP Photo/Richard Drew

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