Currency dislocations from around the world are starting to be noticed here in the US as investors rush to get out of stuff that’s levered or related to EM. My friend Peter Boockvar, a steadfast contrarian versus the Wall Street consensus for 2014 (he sees a 20% down year for the US stock market) explains the problem with the Fed’s exiting from QE…
“Monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well.” Mr. Bernanke said this in a speech in October 2012 just as QE3/4 was getting under way. Back in 2010, he defended the Fed’s bond purchases to a skeptical overseas audience that was worried about the spillover effect of QE and flood of fast money into their countries by saying “our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the US.” Thus saying, your problem is your problem and we’re focused only on the US.
We’re of course now seeing what happens when the Fed decides to ease the monetary ease. When the Fed is the steward of the world’s reserve currency, we’re all in this together and QE can’t be contained and diverted to what certain econometric models say they should. The Turkish lira, South African rand, Indian rupee, Indonesian rupiah, Ukrainian hryvnia, Russian ruble and Brazilian real, to name a few, are all down sharply again vs the US$ after the Argentinean peso plunged yesterday and gold is rallying to a two month high. Bottom line, QE creates an at the money put and without it, the strike price goes out of the money, potentially far out.
Managing Director, Chief Market Analyst of The Lindsey Group LLC