Emerging Markets Walk The Tapertalk

Those bumbling politicians would be good value if they taxed us less. The Coalition’s internet censorship policy was released ‘in error’. The irony is so brilliant it hurts.

Better still, the guy responsible for it, Malcolm Turnbull ‘read the policy for the first time when it was released’. Shadow Treasurer Joe Hockey had no idea the policy even existed on TV last night.

It’s only the law they’re dealing with folks. And remember, ignorance isn’t a defence…unless you’re a politician.

We’re going to be introducing our own filter here at the Markets and Money, not that our publisher knows about it yet. Instead of porn, it will filter politics.

So while we can, let’s mention the coalition’s planned reduction of foreign aid. Right now, our government borrows money from emerging countries and then gives it back in foreign aid. Well, that was until recently, anyway. It looks like emerging markets are dumping their reserve assets, including Aussie dollars, before we can cut their foreign aid. They’re doing it to try and defend the value of their currency. So why not make the rest of the situation a bit more sensible and stop sending borrowed money back to where it came?

Besides, foreign aid doesn’t work. Well, it works quite well for the wealthy and powerful. Australia’s whopping $500 million a year aid to PNG has a habit of going missing. Until it turns up on the demand side of North Queensland’s property market, according to Yahoo! News. The banks up there turn a blind eye to the questionable sources of money funding the PNG politicians’ buying frenzy (surprise!), and the Australian Federal Police allegedly let Rudd know all this was happening. So where did he choose for his asylum seeker deal again?

The DR‘s new political censorship kicks in here. We’re back to the good old world of finance now. And it’s picked up a new favourite topic.

It used to be ‘QE or not QE’. Then the Greek bailout, and the PIGS. ‘Risk on, risk off’ was next. Elections, debt ceilings, Syria. And now the media’s latest cause for everything is the phenomenon of Tapertalk.

No matter what happens, everything is somehow associated with the Federal Reserve’s tapering, or reducing, of QE. You can’t read a finance article without hearing it mentioned as the be all and end all. Life is much easier if you’re a journalist and you can blame anything that happens on a single topic, regardless of how related it is. Plus, that topical reference is likely to get you up the Google rankings. Hence our headline for this article.

Even emerging markets aren’t immune from the tapertalk, despite being in different hemispheres on both axes of the compass. India’s trade deficit, the Philippines’ falling stock market and a cow that farted in Brazil are all down to Bernanke’s Taper Talk if you believe the media.

But is there anything to this theory? It’s caught on in some more academic circles, so here’s the lowdown.

The theory goes that the Fed’s QE added liquidity right around the world, not just in the US. If there’s more cash and credit sloshing around, that sort of gooses economic activity. Take away the liquidity and it’s like Warren Buffet’s old parable about the tide going out – you find out who’s been skinny dipping.

The most likely skinny dippers, it turns out, are the emerging markets. That’s where the highest risk and returns are, so that’s where liquidity has the biggest effect. The emerging market skinny dippers may also be the worst to look at, with the possible exception of the actual skinny dippers on the beach at Alexandria Bay in Noosa, who we came across last weekend when we got lost in Noosa National Park.

Even before the tide has gone out and QE actually reduced, emerging markets have been caught up in Tapertalk. That’s because they’re on the fringe of the US-centric financial system, where all the excess liquidity is going to recede from first. Stocks and bonds are anticipating the taper and moving now.

The Chinese and the IMF have both sounded the alarm and the Australian Financial Review picked up on their warnings yesterday. They both played their stereotypical roles too. The IMF gave the Fed a warning to consider interests other than America’s when it tapers (good luck), and the Chinese organised ‘co-operation’ around Asia over the coming taper. Then, this morning, the following popped up, also in the AFR:

‘The BRICS group of emerging economies will contribute $US100 billion to a fighting fund to steady currency markets destabilised by an expected pullback of US monetary stimulus, China and Russia have said.’

Being proactive is a good idea, considering what might be coming. But $100 billion in total pales in comparison to the Fed’s $85 billion a month intervention. All that money has created a very big problem. Just as the world had a tech bubble in 2000 and a housing bubble in 2007, we now have a bond bubble. And tapertalk could pop it.


In 2007, housing began its crash on the outskirts of the US housing market – sub-prime debt. In 1931 it was the collapse of an obscure Austrian bank Kreditanstalt. Today, it’s the fringes of the bond market – emerging market government bonds – that are in trouble.

We’re not a fan of this kind of evidence because there’s too much of it lying about justifying ridiculous theories, but for what it’s worth, here’s a chart illustrating our point.


As the tapertalk intensified in May (bottom half of the chart), bond yields began surging (top half of the chart). As bond yields rise, prices fall, so someone is taking a big hit on their investments. And any government running a deficit is seeing the cost of their borrowing rise fast.

Investors in the high risk fringes of the financial system, emerging markets, aren’t sticking around to find out what’s going to happen if the liquidity flow ceases. They’re escaping now.

The irony is that the Federal Reserve’s money printing was supposed to help America. Instead, it sent emerging markets on a boom…which is now about to turn bust.

Emerging markets should do much better in the long run without any QE. But for now, it’s fear, not logic, that’s determining capital movements. Poor old Peter Schiff, interviewed again by CNBC, is going to be wrong again, despite being right about a crisis in the works. He points out that he keeps his client’s capital outside the US dollar because of all the QE reducing its value. But in a crisis, which he’s predicting, money surges back into the safe haven of the US, not out of it, even when the US is the source of the problem.

Then again, that might be changing. Rumours are that wealthy Chinese and Japanese are fleeing to Singapore, not New York, with their assets. Diamonds are a popular way to move wealth around without any government knowing about it, reports Bloomberg.

If we do have a bond bubble and it’s pop is confirmed by events over the next few months, we won’t be a buyer of stocks here in Australia until the S&P500 reaches the bottom of the distribution in the first chart – about 60% below its current level at least. So what might suggest a popping bond bubble? Only the sudden jumps in interest rates like those you can see in the second chart above.

One last thought to leave you with this week. It’s not one you’ll like after our political introduction above. But it’s important.

Central banks have been the main market players since the GFC broke out. They’ve flooded everything with money, including banks and governments. Without central banks, both would’ve failed, which implies no government bailouts either.

But we think this is going to change. Politics is going to begin dominating central banking…and everything else. There’s just too much at stake for lawmakers to defer responsibility and power grabbing opportunities to central bankers. The fact that central banker Bernanke ‘saved the world’ is truly galling to an elected official who makes the rules.

Governments will begin to dominate financial market moves instead of CBs in the future. Our evidence is China and the IMF’s comments above, Abenomics in Japan, of which central bank policies are a servant, and the remarkable claims by Barack Obama in St Petersburg recently. Russia claims that Obama reassured the G20 that American stimulus would be withdrawn gradually. It shouldn’t be his place to say so – tapering isn’t a political story. Or is it?

Of course, it usually takes a crisis to get the pollies moving. In Japan, they’ve had 20 years of malaise, so Abenomics is seen as a saviour. If the bond bubble bursts, authoritarian control is the only way a government can operate, because its financial foundations are under attack. That’s not good news if you don’t like politicians.


Nick Hubble+
for Markets and Money

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From the Archives…

Is a 50% Market Decline Possible?
30-08-2013 – Greg Canavan

Why The 30/20 Tax Rule May Rise Again
29-08-2013 – Vern Gowdie

The Investment Industry: Confusion, Conflicts and Cash
28-08-2013 – Vern Gowdie

The Federal Reserve’s Crucial Next Step
27-08-2013 – Greg Canavan

Superannuation Overtakes Bank Deposits
26-08-2013 – Greg Canavan

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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