Annals of Overblown Stories: Tapering Will Kill Emerging Markets
I’d like to contrast the ‘big’ investment stories (as defined by press coverage) with the important stories as measured by principled reasoning.
Tapering is the biggie: Markets ebbed and flowed reflexively in response to the expectations that Quantitative Easing would be tapered. Not just actual announcement of tapering, but hints of future announcements, slight variations in word choice parsed and re-parsed, led to wide swings in global markets. Eventually, ‘parsing’ became in many investors’ minds a synonym for ‘tightening’. Commentary in the press almost universally promoted the idea that when tapering would finally appear it would lead to widespread declines in global equity markets, especially in the emerging markets. It was widely expected that developed markets would be immune from these sell-offs. These ideas were promoted so heavily and confidently that they were generally accepted without question.
But they were wrong. Tapering was begun, but it did not amount to monetary tightening. The Fed’s balance sheet continued to balloon; at this writing it stands at over 3.9 trillion dollars, is still growing, and has grown consistently throughout the tapering process. While tapering has decreased the rate of growth of medium and long term bonds, the principle area in which the Fed injects new money directly into the system is the very short-term FedFunds. And the Fed has been cutting rates there over the past year from approximately .15 a year ago to .08 in recent months. Money supply continues to grow at a fairly rigorous pace.
Commentary was also wrong about equity markets. They did not crash in response to tapering, because tapering is not tightening. Emerging markets did not collapse, they have performed fairly well year to date during the tapering process, and have handily outperformed Japan, which was widely believed to have been immune to the alleged tapering effect, though not the U.S.. The ‘big story’ basically turned out to be wrong.