Note: This article was written on Wednesday, August 21
Tonight sees the release of the minutes from the last FOMC meeting, and the market expects the minutes to reveal a committee ready to start tapering the Fed's US85 billion per month of bond and mortgage securities buy-backs. Governors will probably argue that it makes sense as economic numbers are improving, and with US yields currently trading at two-year highs it is telling as that demand is picking up. Some form of monetary constraint might be needed. You would think that it is a certain bet the way the markets are talking. However, we continue to feel this is a bit premature. Why? Bernanke is acutely aware that as the US is the key global economy that other economies will feed off its sentiment. The Fed has shown in the past that it is willing to hold off until the last minute when the road to recovery has been firmly trodden and its criteria have been meet. Although we can suggest that the US is painfully starting to recover, other economies around the world are not. Two weeks ago we looked at Europe and this week we look at developments in emerging markets, namely India, Indonesia and Thailand. Relatively speaking, although the combined GDPs for these countries only represents close to 20% of US GDP, we believe it would not take much for global sentiment to be bashed should a crisis of some sort or another in one of these countries develop. Lets face it: Greece's sovereign debt crisis rocked the world, so given the fragility of the global economy it will not take too much and the world is still in a very fragile state at this time. The emerging markets are one such place where we need to tread carefully as we have developing stories that just do not feel right.
India at the moment has a currency on record lows, a widening deficit, slow growth and inflation is picking up. Trying to manage this set of economic woes is worrying and some argue that India is on the edge of a crisis. The Government, daily, continues to put in place monetary and fiscal measures to try and support the economy, however as the Sensex stock index drops, already down 10% this last month, investors are becoming increasingly nervous and foreign investors are fleeing the country in droves. As the crisis develops, and more look to flee, the government may find itself in a situation similar to the 1991 crises where it had to airlift bullion reserves to the IMF as pledges against loans to help to resolve its then balance of payments issue. The Indian economy, given its imports outweigh its exports, relies on foreign capital to help balance its book. However, as the rupee collapses, investors struggle to invest in a country whose currency that has already lost about 25% of its value. A policy paralysis emerges which, if it cannot be resolved domestically, will require outside assistance, as in 1991. The problems we feel is that the economic woes and policy dilemmas the RBI is facing in India, namely a weak currency, burgeoning current account deficit and slow growth coupled with inflation are spreading towards other Asian economies such as