Wednesday, September 18, 2013

Federal Reserve Policy Affecting Emerging Markets

Jim is just back from safari in Africa, and says that bankers are more dangerous than rhinos because rhinos can only charge one person at a time, where bankers can take out entire countries and populations.

The FED relationship to the BRIC and emerging markets is like a drunk driver who runs down pedestrians and then blames the pedestrians for being in the way. Jim was in South Africa to attend an investment conference where he met the top institutional investors in the country, some of the wealthiest individuals, and government officials, and said you find out what their opinion is on what the FED is doing to the entire world.

The FED officials, reserve bank governors, say they know what is going on in the emerging markets but that they do not care. The FED says that it’s their job to take care of the United States economy and the rest of the world is on its own.

Jim believes that when you are manipulating every market in the entire world then you cannot be so careless about it. They are like a drunk driver running everyone else off the road. A lot of these markets are not that big, relative even to Europe.

When the FED calls interest rates down to zero, everyone wants to do the carry trade. They borrow dollars, then buy the local currency, invest in foreign assets, make a spread, leverage it up, and make a lot of money.

Well, as soon as the FED hints that they are going to raise interest rates, so called tapering, then everyone unwinds the carry trade. So they are now just massively dumping assets in Indonesia, Malaysia, Singapore, South Africa and elsewhere, dumping the currencies.

South Africa has seen their currency go from 8 to the dollar to almost 11 to the dollar in a matter of weeks. This is incredibly disruptive and damaging to them. The FED just says, “It’s your problem. You’ve got central banks so set your own policy.”

- Source, Elaine Taylor discussing Jim Rickards: