Fed Can’t Avoid Emerging-Markets Blame

Fed Can’t Avoid Emerging-Markets Blame

SPENCER JAKAB

Jan. 28, 2014 5:13 p.m. ET

Ben Bernanke just can’t catch a break.

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Three years ago he was forced to defend the Federal Reserve from accusations its bond buying somehow had triggered the Arab Spring, which was just getting under way at the time. Now, with the era of aggressive monetary policy waning, a slump in emerging markets is seen as a dangerous side effect of stimulus being withdrawn.

If the Fed considers those countries’ plight at all Wednesday in its last meeting with Mr. Bernanke at the helm, expect its attitude to be along the lines of his response in February 2011: “It really is up to emerging markets to find the appropriate tools to balance their own growth.”

In the same vein, don’t expect a delay in the expected $10 billion cut to monthly bond purchases because of recent gyrations.

Even so, the question will remain should emerging markets tumble: Is the Fed in any way culpable?

Indirectly, yes. In spring 2011, it is likely rising grain prices played a role in social unrest. But at worst, the round of Fed bond buying then in place exacerbated the impact of poor harvests world-wide. And, of course, it wasn’t responsible for decades of political repression.

As for the latest instability, the Fed was a benign enabler of countries such as India, Turkey, Indonesia, Ukraine, Argentina and South Africa that relied too much on external capital. Yield-seeking investors gave policy makers in those countries just enough rope to hang themselves. Corruption, ill-advised economic policies and political discord are all homegrown phenomena, though.

While the Fed is unlikely to alter policy this week, it might later if things get serious enough to threaten the global economy. It set that precedent after Russia’s default in 1998 began a chain of events that decimated hedge fund Long Term Capital Management. It is safe to say a crisis in some large economies—for example, in China’s shadow-banking system—could pack a far greater punch today than 16 years ago.

So, in a repeat of 1998 or worse, the Fed will have to help clean up the mess. This time, though, it will deserve some blame, too. While assessing the benefits of its unorthodox policies, it weighed them against risks mostly within U.S. borders. Now, some foreign risks it disowned could come home to roost.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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