By Peter Switzer, Switzer Super Report
There are about four weeks to go for this taper-talk anxiety, which has been unsettling markets. The Jackson Hole meeting of US central bankers did nothing to contain stock market jumpiness, but worse still, the implications of tapering QE3 is starting to rattle stock markets and currencies in emerging economies as bond yields spike in the USA.
So what? That's a reasonable question for any investor trying to work out if they should be starting to trim back his or her exposure to stocks.
The eternal optimists are telling you to totally ignore the talk around the US Fed trimming back its $85 billion bond-buying program because the forces of good that drive bull markets will KO the 'forces of evil' who want to see stocks nosedive.
(I know it's a tad dramatic but we are talking your bottom lines here, so I CANNOT play the journalist who doesn't give a toss and in fact would love a good crash story to spice up his life! Remember, I am an economist and financial adviser who writes.)
A cautionary tale
When I taught economics at UNSW, I used to tell the students, which included the Coalition's Scott Morrison and Macquarie's chief economist, Brian Redican, to name but two, about Suzanne Economics. You might recall the TV ad for the clothes business, which went: "This goes with this, goes with this, at Suzanne?"
I know it's a corny academic joke but it was useful in making economics more understandable.
So now we're seeing taper talk force bond yields up in the USA, and this goes with capital that once went to emerging economies when yields were very low leaving these countries for the USA, and this goes with stock market slumps in these nations, and this goes with sliding currencies.
Last week I pointed out that a recession in Thailand and a bear market in the Indonesian stock market ? it's down over 20% ? were on my "must watch" radar screen.
Let's just look at Brazil recently, as it is a part of the BRICS group, which includes Brazil, Russia, India, China and South Africa.
Brazil has seen its real currency fall to its worst level in four years ? off 20% in three months ? which has seen official interest rates spike 1.25% from a record low of 7.25%! (AFR 24-25 August 2013)
Over 2013, the Brazilian stock market is down around 17%, Russia 14%, China 8% and India 6%, while most other first-world economies' markets are up big time for the year.
This has been compared to the 1994 "tequila crisis" when, under Alan Greenspan, the Fed actually aggressively pushed up interest rates, to kill inflation and the action saw investors run for the exits in Latin American economies.
So what happened to the Dow in that year?
Well in 1994 the market was up 79 points and virtually traded sideways but there was no panicky sell-off and 1995 brought a whopping 35% gain! And the Aussie All Ords was up around 16%.
Now for the good news
In getting too side tracked by the potential plight of some of the BRIC countries ? China looks to be making a comeback thank God or Mao! ? it means you ignore the cumulative good news which should power stocks going forward.
China growing at 7-8%, plus the USA continuing to recover, plus Japan's surprise economic uplift under Abenomics, plus Europe's green shoots growth, plus the UK's end of recession news, plus our own low interest rates, low dollar and likely Coalition Government, equals a good case to remain long stocks.
History shows that there could be sideways movement of stocks for a while, when bond yields start spiking, but the good US economic news that is driving the taper talk, and even the lower currencies in BRIC countries, eventually should create a good story for stocks in 2014.
I remain a realistic optimist, still looking for value and always happy to be a buyer of great quality companies that pay good dividends whenever there is a dip.
The dates to watch are 17-18 September, where 44% of economists surveyed by Bloomberg say tapering will begin. This week is also a big week of economic data in the USA, but the next jobs report due the week after, could bring some pre-taper market action.
Get on your guard!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).