My Dear Extended Family,
A key element of Chairperson Yellen’s intellectual position is that cutting down on stimulation prematurely would be the most serious mistake that can be made economically. She blames the long term desperation of the 1930s on the central bank’s then retreat from their form of QE prematurely in the early 1930s. That was before the incipient 1930 recovery had solid legs.
Assuming that Yellen did not follow her well known dictum and tapered seriously now, the emerging markets will implode. Should the emerging markets implode, the US major markets will also implode. The dollar would lead on the downside. She knows this.
The Plunge Protection Team cannot manipulate the entire world equity market so control would be lost. The US markets would tank, and gold would explode on the upside because of the implication on monetary aggregates. The Exchange Stabilization fund would be so busy attempting to hold US market from implosion to pay equal attention to the dollar.
Analysis: Emerging markets as vulnerable to contagion as ever
By Sujata Rao, Daniel Bases and Vidya Ranganathan
London/New York/Singapore Mon Jan 27, 2014 1:51pm EST
(Reuters) – Emerging markets may be unrecognizable from the small and fragile economies that fell like dominoes 15 years ago, but they are just as vulnerable today to the same sort of indiscriminate selling when investor panic sets in.
As even the relatively robust economies of Mexico and Poland now feel the heat from disparate flashpoints from Turkey to Argentina, there are growing doubts that emerging markets have built any immunity to such contagion.
The wildfire engulfing the developing world is starting to look very like the currency runs of the past, such as the Asian, Russian and Latin American collapses that began in 1997.
Dominic Rossi, Global CIO for equities at fund manager Fidelity, likens the current wave of plunging currencies, equities and bonds to watching an old film – one in which some of the biggest emerging markets could feature.
"We’ve seen this movie before," he said. "One emerging country after another gets left stranded on the shore as the tide goes out. The weakest ones first, Argentina and Turkey, soon to be followed by Brazil, Russia and others."
Emerging markets have been inflated in recent years by huge amounts of cheap cash created by the U.S. Federal Reserve, much if which found its way into developing economies in the hunt for better returns. With the Fed scaling back the program, that flow is reversing and the currencies of countries with the biggest economic and political problems – notably Argentina and Turkey – are diving.
Investors’ behavior may not have changed all that much from during the past crises, even though many emerging economies now have more flexible currencies and trillions of dollars in foreign exchange reserves. There are three main reasons why these markets could again suffer the capital flight that plagued them during the 1990s.