Sunder’s List: Taper, Part Deux

Roundup: S&P +0.81%, Dow +0.69%, Nasdaq +1.22%, Gold $1,244.80, London flat, Germany -0.07%, France -0.34%. At pixel: Nikkei +1.39%, Hang Seng +0.74%

Whenever the US Fed whispers the word “taper”, world markets get spooked. Here’s what you need to know for what lies ahead.

Even the best got it wrong

Goldman Sachs lost $1.3 billion when the Fed decided not to taper in September. It appears the bank was net short emerging market currencies, and “absolutely got annihilated” when the Fed unexpectedly postponed tapering. (SA)

The Fed is mostly dovish

Doves are officials who will lean on easy money, Hawks want it tight. The incoming Fed chairman, Janet Yellen, is an all out Dove. So it will take a lot of convincing to move towards tighter money.

FOMC-2014

The QE option cannot be un-invented

Now that it’s been used, and widely, it will always be with us. QE can be a very difficult habit to kick. Look at Japan. Still at it decades after its first foray. Even if the Fed manages to taper down to the bone, there will be other downturns, other recessions. When they come, whoever is in charge of the Fed will be expected to abide by the new rules and run the presses. (WSJ)

One of the costs of QE is the inability to exit QE

Tim Duy’s parsing of the FOMC minutes points to a Fed that increasingly desires to end the asset purchase program. And is becoming increasingly nervous they will need to pull the trigger on that option before the data allows. That means that tapering is not data dependent. (EV)

DM-powered lift to EMs

Finally, it boils down to “where’s the beef?”

The connection between EM economic health and EM stock performance has been amazingly tight historically. For instance, since 2000, a 1% increase in emerging Asia industrial production has been associated with a nearly 5% gain in EM stock returns.

Over the past decade, a 1% rise in developed-market (DM) industrial production has tracked with a 2.4% increase in EM industrial production.

All said, staying underweight EM stocks poses substantial opportunity costs for investors. (AllianceBernstein)

Our takeaway

Forget about tapering till the new Fed Chairman takes office (mid-Jan). That’s still 45 days away. Hopefully by then, Rajan and his brain-trust at RBI would have come up with something to counter the taper. Plus, don’t discount the election factor in our markets. Usually, capital goods and cyclical stocks do well right about now.

Good luck!

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