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Market Observer John Mauldin - The End of Innocence

February 11, 2014 | About:

Take a long, hard look, Janet.

The landscape over which you cast your eyes when you accepted the poisoned chalice prestigious role of Fed Chair changed last week — just two days before you were confirmed in a rather lovely ceremony.

On January 30, in an interview in Mumbai, Raghuram Rajan (one-time Chief Economist at the IMF and current Governor of the Reserve Bank of India) rather UNceremoniously dropped something of a bombshell that went largely unreported (perish the thought, in this era of dogged journalism) but that most definitely queers your pitch in a major way:

(Bloomberg): India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira.

Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world's top developed and emerging markets gather in Sydney. The Fed's Jan. 29 statement made no mention of developing economies. "International monetary cooperation has broken down," Rajan, 50, said yesterday in an interview in Mumbai with Bloomberg TV India, noting how emerging markets helped pull the global economy out of crisis starting in late 2008. "Industrial countries have to play a part in restoring that, and they can't at this point wash their hands off and say we'll do what we need to and you do the adjustment."

Now this is going to be a problem, Janet.

Potentially, a BIG one.

The standout feature of central bank policy over the last five years has been the spirit of cooperation amongst the men ("And women!" — Sorry, Janet, "and women") in charge of the world's central banks.

Whilst this spirit of cooperation has been somewhat unwilling in a few cases (yes, Glenn, I'm talking about you), it has been vital to establish a unified message that would give investors the sense that these guys ("And girls!" — Sorry, Janet, "and girls") were talking (a) to each other and (b) to us from a common perspective, that perspective being low rates and free money forever.

Then came The Taper.

The mantra being chanted by FOMC officials around The Taper has been this:

"Tapering isn't tightening."

Well maybe it hasn't been — yet — in the USA, but thanks to the unintended consequences of Fed actions, it sure as hell has been elsewhere:

(IOL): South Africans should expect more shocks to their finances as the Reserve Bank is poised to raise interest rates further to stem inflation.

This prediction was made yesterday by Citi Research, which said the bank's monetary policy committee (MPC) would raise interest rates twice more by July despite the view held by many economists that this would happen only in the second half of this year.

Citi said that the MPC was likely to raise interest rates by at least 150 basis points to dampen domestic demand and inflation but said the economy was likely to suffer as a result.

This statement follows last week's 50 basis point rate hike, the first in almost five years.

For those of you keeping score at home, the chart below shows what South African interest rates have looked like for the past five years when everybody was, to quote the cast of High School Musical, "all in this together." (Finally, all the years of having that damned thing playing on a TV in the background on a continuous loop have paid off! Thanks, Brontë. Thanks, Molly.)

Everyone is special in their own way
We make each other strong (we make each other strong)
We're not the same
We're different in a good way
Together's where we belong

We're all in this together
Once we know
That we are
We're all stars
And we see that
We're all in this together
And it shows
When we stand
Hand in hand

Sorry — got distracted. Where were we? Oh yes, the chart:


Source: Bloomberg

Nothing to worry about, I hear you cry ... except, HERE'S what it looks like going back to 1998:


Source: Bloomberg

Yes... that average line is correct. Rates in South Africa have averaged 9.51% over the last 15 years (a number which includes record low rates for the last three years).

But it isn't just South Africa feeling the pinch of the Fed's tightening tapering. Ohhhhh no.

Across the world, emerging markets are suffering from the Fed's unilateral declaration that it's every man ("And woman!" — Sorry, Janet, "and woman") for him- or herself.

In Brazil, as The Economist points out this week, the timing couldn't have been worse:

(Economist): Later this month [Dilma Rousseff] will launch her campaign to win a second term in a presidential election due on October 5th. Normally at this stage of the political cycle, as in the run-up to elections in 2006 and 2010, the government would be ramping up spending. But when Ms Rousseff spoke to the World Economic Forum in Davos last month, with the São Paulo stockmarket and the real dipping along with other emerging economies, she felt impelled to stress her commitment to being strait-laced.

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