Dog Wags Tail!
Absent from most of the news analysis of Fed Chairman Ben Bernanke’s new lame-duck status and his apparent decision to stop pumping up the stock and bond markets before his January 2014 departure was that three-word headline.
But you can bet your bottom dollar that you’ll be seeing a version of that theme in the weeks to come.
That’s because despite the devastation on Wall Street this past week, the carnage in emerging markets around the globe has been far worse.
How bad is it? While the S&P 500 is up about 12 percent on the year, the emerging-market benchmark index, the MSCI, has lost 14 percent year to date, and those losses have been accelerating since the Bank of Bernanke first hinted back on May 22that it might take the proverbial punch bowl away.
As a result, the Chinese market is down more than 10 percent this month alone. Japan, a mature and sickly market, has lost 18 percent of its value in the past 30 days. Rioting in the streets of Turkey and Brazil only adds to the unease.
The pain around the globe gives lie to the conventional wisdom that the emerging markets — led by China — have grown big enough to “decouple” from the US economy and our monetary machinations.
In fact, over the past few months global markets have followed a predictable pattern that has presaged many of the financial crises of the past 30 years, from the Mexican currency crisis of 1994 to the Asian contagion of 1997 and the Russian default crisis of 1998.
As Morgan Stanley asks in a recent report, “What If the Tide Goes Out?” Events of this past week suggest it is starting to do just that.
Why should Americans care? In addition to the fact that many US investors have been branching out into emerging-market stocks in recent years — often through exchange-traded funds and index funds, a financial crisis in China, Brazil, India or even Turkey could easily spill over into our markets as it did several times in the late 1990s.
Yes, in a week in which President Obama unceremoniously pointed his loyal money man Bernanke toward the door, the financial storm clouds grew ever thicker.
Bernanke may be getting out just in time.