“People think in stories, not in facts, not in numbers, not in statistics. We are a storytelling animal.” – Yuval Noah Harari, Masters in Business
“All lies and jests, still a man hears what he wants to hear and disregards the rest.” – Paul Simon, The Boxer
In December 2015, the Federal Reserve was preparing to hike interest rates for the first time since 2006. The media had a story angle involving Emerging Markets and they were sticking to it…
“US Rate Rise Could Hurt Emerging Markets” – WSJ, Dec 2015
“These countries [all Emerging Markets] are most at risk from U.S. rate hike.” – CNN Money, Dec 2015
“Fed rate hike to put pressure on emerging market corporates in 2016” – Reuters, Dec 2015
“EM faces ‘taper tantrum’ as US prepares to hike” – CNBC, Dec 2015
“Why a rate hike by the Fed could have a devastating impact on some people [Emerging Markets] around the world” – Washington Post, Dec 2015
“Why rising interest rates are bad news for emerging markets.” – The Conversation, Dec 2015
At the time, I was called by one of these fine outlets and asked the following question: “Emerging Markets are going to get crushed by the Fed Rate hike. This is an absolute disaster, right? Can I get a quote on that?”
I paused for a moment to think about the question. The longer I’m in this business, the lower my tolerance for bullshit. My bullshit radar here was at 100%.
This was my response…
I don’t give quotes but perhaps I can provide some historical perspective to your story.
1) Let’s start with 1998. The Fed cut interest rates 3 times that year, from 5.5% down to 4.75%. Emerging Market stocks had (at the time) their worst year on record: -26%.
2) In 1999, the Fed hiked interest rates 3 times, from 4.75% to 5.5%. Emerging Market stocks had one of their best years in history: +66%.
3) From January 2001 through November 2002, the Fed cuts rates from 6.0% down to 1.25%. Emerging Market stocks fell 7% during this period.
4) From June 2004 through June 2006, the Fed hiked rates from 1.00% to 5.25%. They did not cut rates until September 2007. From the June 2004 rate hike until the rate cut in 2007, Emerging Market stocks advanced 179% versus a return of 42% for the S&P 500.
5) From September 2007 through December 2008, the Fed cut rates from 5.25% down to 0%. During this time Emerging Markets stocks fell 41% versus a decline of 36% for the S&P 500.
Needless to say, this historical perspective was not what the reporter was looking for. There was no quote of mine included in the article as it did not fit into the bearish Emerging Market narrative they were shooting for. As Paul Simon said, people hear what they want to hear and disregard the rest.
Fast forward to today and the Fed has hiked interest rates 3 times since December 2015. Has the Emerging Market crisis materialized? Not exactly.
1) Emerging Market stocks have advanced 25% since the first rate hike versus a gain of 18.6% for the S&P 500.
2) Emerging Market High Yield Bonds have advanced 22% versus a gain of 17% for U.S. High Yield Bonds.
3) Emerging Market currencies (CEW) have advanced 10% while the Dollar Index (UUP) is slightly lower.
And so thus far Emerging Markets seem to be holding up quite well in the face of Fed hikes, as they did previously in 1999 and 2004-06.
To be clear, that doesn’t mean they will continue to do well or have to do well. There is no simple rule as to what Emerging Markets will do in response to Fed policy. If there was this game of investing would be easy but as we know it is anything but. Emerging Markets could go down from here or they could continue to go up. One must understand that its direction is determined by of a multitude of factors, only one of which is U.S. interest rate policy.
The more important takeaway here is to be wary of narratives of convenience that are devoid of any evidence. Let the media and the many pundits tell their stories. It is their job to do so; it is their job to entertain and explain. It is your job as an investor to detect their bullshit and learn to ignore it. As we are “storytelling animals,” this is by no means easy. But ignore it you must if you want to have any success in this most difficult of businesses. For there is certainly no edge in believing in fairy tales while there just might be one in ignoring them.
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This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University. He has also done a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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