The Edmond Sun

Business

February 7, 2014

THE ASTUTE INVESTOR: Emerging market turmoil and taper tantrums

EDMOND — I hate to say “I told you so,” but I told you so. Actually I don’t hate it because I was right. The title of my Sept. 21, 2013, Edmond Sun column was “Beware of Emerging Market Currencies.” And here we are in 2014 with emerging market currencies and stocks going in the tank.

In that column I wrote, “As we move into the fall of 2013 and turn the calendar to 2014, I expect this trend to continue. Economic activity in the U.S. is steady, although at a very low level. There are no signs of a robust explosion to the upside. Likewise, Europe is not spiraling down, but it’s not on a soaring trajectory either. This leaves the BRIC (Brazil, Russia, India and China) economies and their compatriots to deal with growth internally, and now to deal with their own mini-credit bubbles and locally inflated asset prices.”

There is some consensus opinion lately that the cause of the U.S. stock market decline so far this year has been the problem the Fed’s tapering is creating in emerging markets. But emerging markets have been struggling for three years and they certainly had no effect on the bull market in the U.S.

As the Fed lowered interest rates to basically zero during the past several years, the hot money went looking around the world for better returns. Money poured into emerging market countries looking for higher rates. This also drove their currencies higher and created challenges as to what to do with all the money. As is often the case, not all of it was deployed wisely.

We are now seeing what happens when it goes the other way. In the past few months, with the decision that the Fed would begin tapering the amount of QE (bond buying), the hot money has been leaving emerging countries like rats leaving a sinking ship. Currencies and stocks in India, Brazil, Indonesia and many others fell like a rock. Of course, the Fed says that is not their problem, but if it spirals out of control it will become our problem.

The U.S. Federal Reserve’s decision to taper monetary expansion by another $10 billion recently has major ramifications for world markets. In comparison to the total amount being spent on a monthly basis, the taper may seem gradual, but it has created an enormous hole in market demand.  To put it in context, $10 billion of debt purchases is more than the average monthly portfolio investments into Turkey, India, Brazil, Indonesia, Thailand, Chile and Ukraine combined. The $20 billion that already has been removed from the market is roughly equivalent to the monthly flows of all those countries plus Mexico and Canada.

The same buyers who poured into these emerging market currencies are now quickly rushing out.  This leaves developing countries with few options and all of them are bad. They could raise interest rates (attracting more carry trade buyers), but that would slow or choke their economic growth.  They could buy their own currencies in bulk to prop up prices, but they’d deplete their currency reserves. Or they could do nothing (allowing the free market to figure it out), which likely would put emerging market currencies into a free fall and create high inflation. This is truly one of those “between-a-rock-and-a-hard-place” scenarios.

On Jan. 28, Turkey raised its overnight lending rate from 7.75 to 12.5 percent. Yes, that is in just one day! Will it work? We’ll see. While the hike is a bolder-than-expected move designed to jolt investor interest, they are basically using a sword to fight off a barrage of artillery as a wrenching political crisis continues to erode investor confidence.

Many emerging country economies are very export dependent, particularly commodities. With commodities in the early stages of a multi-year decline, and capital searching for more attractive or safer opportunities in the U.S. and other developed countries, emerging markets face a daunting challenge. Yes, they certainly will be the places where long-term growth opportunities abound, but in the near to intermediate term, they’re in a bind.

After the sharp decline, especially in the first month of 2014, emerging market stocks may well be due for a short-term bounce. In my opinion, that could be short lived and there is still plenty of downside left. Some analysts are talking about what a bargain they are now. I think it’s best to stand aside for now.

You could call this being hit by a BRIC. Beware. The one positive consequence for us, as I’ve been saying for a while now, is a very bullish outlook for the dollar. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through LPL Financial, member FINRA/SIPC.

 

1
Text Only
Business
  • Downtown Master Plan accepted by council

    The 2014 Downtown Master Plan Study was accepted by a 3-0 vote Tuesday evening by the Edmond City Council.
    Fort Worth-based consulting group Freese and Nichols presented their final update to the 1998 Downtown Master Plan. The city hired the group at a cost of $300,000 to make recommendations for future development of Broadway in the central business district.
    “There are clearly some short-term (parking) options that we feel should move forward,” said Cody Richardson, of Freese and Nichols consultants of Fort Worth. “Better signage at existing parking lots.”

    July 29, 2014

  • Lambrecht Construction to build office

    The commercial site plan of a physician’s office was approved recently by the Edmond Planning Commission by a vote of 4-0.
    Lambrecht Construction plans to build the office at 3917  E. Covell Road in the Fairfax Business Office, north of Covell and west of Sooner Road, said Bob Schiermeyer, city planner.

    July 29, 2014

  • jc_ITS map.jpg More cameras monitoring Edmond motorists

    The Edmond City Council this week approved a services agreement with Electronic Technology, Inc. For the  installation of Intelligent Transportation Systems’ video wall system at a cost of $314,620. The vote was 3-0.
    ITS is a fiber optic, wireless or hybrid communication system of monitoring road events and equipment in the field, data archiving and predicting traffic volume, said Kent Kacir, an engineer with Kimley-Horn and Associates Inc.

    July 29, 2014 1 Photo

  • sales tax holiday.jpg Oklahoma sales tax takes a holiday

    Beginning at 12:01 a.m. on Friday, Aug. 1 and ending at midnight Aug. 3, Oklahomans will be able to participate in a sales tax holiday giving shoppers the opportunity to purchase certain clothing and shoes free of sales tax.
    Yes, retailers may not charge tax, including state and local sales taxes on items that are tax-exempt during the sales tax holiday weekend. The sales of clothing and shoes priced at less than $100 are exempted from sales taxes.

    July 28, 2014 1 Photo

  • Karan & Rwanda.jpg Peace through Business empowering women entrepreneurs

    Peace Through Business is part of the Institute for Economic Empowerment of Women (IEEW) based in Oklahoma City. It is a program that connects small business entrepreneurs in Afghanistan and Rwanda with business owners in Oklahoma. One such entrepreneur found out about the program from a friend, applied, and was accepted to take part in this year’s session.
    Upon earning a master’s degree in Civil Engineering from the Universite de Sciences et Technique de Lille in Belgium, Lyliose Nduhungirehe began her career working for a construction company in Brussels, but she quickly switched paths to Information Technology.

    July 28, 2014 1 Photo

  • Anderson Properties continues to grow

    Berkshire Hathaway HomeServices Anderson Properties recently announced the acquisition of Tulsa-based Prudential Alliance Realty, an eight-office, 150-agent brokerage operating in Tulsa and Oklahoma City and Edmond.
    The transaction gives Anderson Properties, a full-service real estate agency a total of 38 offices and more than 600 agents.

    July 28, 2014

  • Logan County pays off jail tax early, seeks new one

    Logan County is paying off a sales tax ahead of schedule and needs a new one to be able to afford funding jail operation and maintenance, officials said.
    Citizens vote on the county sales tax which is split for redistribution by state law. The tax is collected by the Oklahoma Tax Commission and redistributed back to the county as specified by voters.
    In 2005, citizens passed a 10-year sales tax, scheduled to end next month, to fund the building, operation and maintenance of the county jail, which operates on a $1.3 million budget. Jail capacity is 188 without anyone in a holding cell or a temporary bunk. Thursday it was holding 130 inmates, said Logan County Chief Deputy Richard Stephens.

    July 26, 2014

  • Edmond School District’s change orders anticipated

    When building new schools and classrooms there may be additional costs, but when renovating older buildings those costs can more than double, according to a Edmond School District official.
    “When remodeling, you have unknown and hidden costs and you need to include in your budgeted funds for the built-in items you can not see,” said Bret Towne, Edmond’s associate superintendent of general administration.

    July 25, 2014

  • Planning Commission approves rezoning

    The Edmond Planning Commission this week voted 4-0 in favor of rezoning from a single family district.  Peter and Kimberly Roberts made the request to allow a planned unit development on the southeast corner of Jackson and Lincoln Avenue, said Bob Schiermeyer, city planner.
    “They would like to have D-2 family (neighborhood commercial) zoning for duplexes, 14,000 square feet,” Schiermeyer said. “They can put four units on the property.”

    July 25, 2014

  • A Q&A on ‘Obamacare’ Court Rulings

    On Tuesday, two federal appeals courts issued conflicting rulings on the legality of tax subsidies being provided to people who bought “Obamacare” health insurance policies in Oklahoma and 35 other states.
    Here’s a look at the rulings’ potential impact in Oklahoma.

    Q: I’m confused. What did the courts rule today?
    A: A three-judge panel of the U.S. Court of Appeals circuit in Washington, D.C., decided that the government can’t provide tax subsidies for Affordable Care Act plans purchased in 36 states where the federal government is operating the health insurance exchange. Oklahoma is one of the 36 states. A few hours later, the U.S. Court of Appeals circuit in Richmond, Va., issued a conflicting ruling that upheld the legality of the health-care law’s tax subsidies.

    July 22, 2014

Stocks