Thursday, July 20, 2017

Tamper, Temper, Taper - Tantrums?

Subprime crisis, Lehman Brothers, sub-zero interest climate, QE – we will soon be celebrating 10th anniversary of this historical financial fiasco.  In the last decade or so, market has been flushed with money; all those papers printed mainly by major central banks found their way largely into equities. To get a perspective, currently MSCI’s broadest index of Asia Pacific Shares (outside Japan) is nearly at a 9.5 years high. Don’t you personally feel richer in the last 10 years?

Years of low interest and QE, let’s assume, helped the market survive mother of all crisis (I didn’t say grandmother doesn’t exist). Central Banks pumped unimaginable sums into markets and kept all the too-big-to-fail giants breathing.  I am not questioning this approach, as I have no better alternative to suggest; cant help reminding myself though, survival of the fittest is only for the jungle and not for civilised societies.

QE made risky assets attractive, carry currencies the flavour of the season and generally the world felt like Jane Austen’s society. Then the word “taper” entered the financial dictionary thanks to the then FED Chair Ben Bernanke. Whatever else they do or don’t, Fed Chairs say potent words that move the market and are etched in financial history.  Alan Greenspan’s Irrational Exuberance (to describe red hot stock markets) is case in point too.  I am digressing here! So after Bernanke pronounced possibilities of “taper”ing in May 2015, markets went on a tailspin.  The new buzzword/phenomenon/fear caught on and drove markets crazy.  Around this time, Dollar index was at 84 and Euro at 1.29.

Financial markets in the US have since been off ventilator and out of the ICU, though the effect of strong drugs is yet to wear off. QE stopped, interest rates northbound, lo and behold markets adjusted to a new normal. Reasons to rejoice shifted from easy money to strong economy (relatively speaking).  Before the Brexit shock hit the financial markets Dollar index moved up to 96 and Euro down to 1.11. Post Brexit and the all drama associated with it AND FOMC staying on course on rate hike - Dollar index climbed comfortably to 102 while the Euro got dumped touching close to 1.04.

Now the Taper Tantrum begins again but in another region.  ECB has been at it and the Euro is on a roll.  Is the single currency also secretly rejoicing the mess that Britons have landed themselves into?  Is there more upside to this strange animal as ECB tapers QE?  What happens to the pair EUR/USD if FED is on track hiking rates and ECB continues to taper? Which of the two will play out stronger? If you are looking to find answers here, you may want to stop reading now.

Few months ago, I was watching surfers at Gold Coast.  They swim in, catch on to a wave, ride it, reach the shore, swim again and repeat.  They don’t / can’t ride every wave that they catch on but they take that in their stride.  It is the most calming sight and got me reflecting. Market operators (read markets, collectively) are like surfers. Some are seasoned and many novices (and some just philosophize).  We may discuss the waves and techniques till cows come home, but the key is in riding the current wave.  That is all there is to it. And most of us reach the shore, don’t we?

Enjoy the ride!

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