Turning Points: Taper Strikes Emerging Markets

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

• Turkey currency intervention fails to stem sell-off of the Lira. (Market Oracle)
• “Selloff Accelerates in Emerging Markets” (Financial Times)
• Introducing the “fragile five”: Brazil, Turkey, Indonesia, India, and South Africa. (China Daily)

Commodities

• “Copper to Suffer from China Demand Problems” (Bloomberg, video)
• China iron ore imports grow 10% in 2013, confounding analysts (Financial Times)
• Larger harvest could slump American farmland prices in 2014. (International Business Times)

China’s Direction

• As China’s economy slows, the pain hits home. (New York Times)
• Is China’s economy headed for a crash? (The Week)
• “Beijing Tests Tools to Tackle Bad Debt” (Wall Street Journal)

Credit Markets

• “2014 Outlook: Sugar High” (Financial Times)
• Credit markets are bullish. (Bloomberg)
• “China’s Liquidity Injection Did Not Calm All Its Credit Markets” (Zero Hedge)
• OCC report shows US credit standards are loosening for all loans types (except home equity lines). (Office of the Comptroller of the Currency, PDF)

Derivatives

• CDS volumes cut in half. (Bloomberg)
• Global derivative volumes down by almost 8% vs yr ago for December 2013. (NYSE Euronext)

Energy

• US oil demand outstrips China. (Financial Times)
• “A Supply-Side Face-Off in Oil” (Financial Times)
• Congress supercharges funding for fusion. (US News)

Euro Crisis

• “What Euro Crisis Watchers Should Look for in 2014” (Financial Times)
• “Merkel Warns of ‘Deceptive Calm’ as Euro Crisis Risk Remains” (Bloomberg)

Hedge Fund Money

• “EBay Bullish Bets Surge on Carl Icahn’s Activism” (Bloomberg)
• “Why David Einhorn’s Greenlight Capital Opened a Position in BP” (Yahoo! Finance)
• Griffin increases stake in Take-Two Interactive. (Gamestop)

Interest Rates and Central Banks

• “Emerging Market Update: 2014 Looking Rough” (Enterprising Investor)
• “What Will Central Banking Look Like in 2014?” (Wall Street Journal)

Japanese Debt and Inflation

• Japan logs record current account deficit for December 2013 on higher energy import costs. (Reuters)
• “Japan Households Less Upbeat on Economy Despite Abenomics” (The Star Online)

Stock Market

• Shares steadier as EM sell-off eases. (Reuters)
• “Stocks Battered as Emerging Market Sell off Spreads” (Forbes)

Follow the Bubble

• Investment in European commercial real estate rose 21% in 2013. (Bloomberg)
• Shiller says Brazil real estate is in a bubble (after rising 225% in past 5 years in Sao Paolo). (Bloomberg)
• “When It Comes To Real Estate Bubbles, China’s Got Nothing On Brazil” (Forbes)

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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