The Markets

“So much depends upon, a red wheelbarrow, glazed with rainwater, beside the white chickens.” 

Well, the U.S. Federal Reserve’s monetary policy is a lot more complex than the simple tools mentioned in the oft-memorised William Carlos Williams’ poem, The Red Wheelbarrow, but an awful lot is depending on it. In some of those countries that have been affected negatively by changing expectations about quantitative easing, the importance of chickens, wheelbarrows, and other basic tools to a family’s economic well-being has not been forgotten.

During the past 10 weeks, currencies in many emerging countries tumbled against the U.S. dollar on expectations the U.S.Federal Reserve will begin to taper off its bond buying program (which is known as quantitative easing). The Brazilian real sank like a weighted fishing line, dropping almost 16 percent. The Indian rupee dropped almost 12 percent. The Indonesian rupiah lost seven percent, and the Malaysian ringgit fell by a bit more than 6 percent during the period.

The Mexican peso and South African rand dropped, as well, but both have recovered some value, in part because they don’t have large deficits, according to The Indian Express. China and South Korea, which are strong exporters, saw their currencies dunk down, but both bobbed back up. 

According to The New York Times, currency weakness caused several emerging markets to lose significant value recently. India’s stock market lost one-quarter of its value during the past three months in U.S. dollar terms, but market declines in local currency terms have been much smaller. A recent New York Times article pointed out, “…From the end of 2000 through the end of 2010, the developed market index rose a scant 5 percent. The emerging markets index more than tripled during the same period. Since then, however, the developed markets have risen nearly 20 percent, while the emerging ones have fallen about the same amount.”

As we’ve mentioned before, mean reversion theory suggests prices and returns adjust towards a mean or average over time. That raises an interesting question. Have recent market shifts been adjustments toward a mean?