Taper Hits Emerging, Not the Dollar

Long-term growth continues in select emerging-market economies...

 

ED PONSI is founder and managing director of NFA-registered commodity trading advisor Barchetta Capital Management LLC, servicing investment portfolios for trusts, estates, and select high worth individuals.

 

Here he speaks to Mike Norman for Hard Assets Investor...

 

Hard Assets Investor: We've seen major selling in emerging markets and emerging market currencies. What is your view now of this big rout that's going on?

 

Ed Ponsi: This is definitely taking all the headlines right now. Everyone's very excited about what's happening in emerging markets. Now it's funny, they get all bought and sold together as a basket by a lot of investors. So you'll see some good emerging currencies get hit with the bad ones. But the trouble spots seem to be Turkey, South Africa, Argentina right now.

 

This could just be a blip. It could just be a short-term issue. Because if there really is a problem, it's more of a problem of perception. A lot of money's coming out of emerging markets, though. That's a tough reality that we're going to have to deal with. So this could go on a little while longer. But I don't think it's going to be a tremendously big story this year. Investors are throwing out the babies with the bath water here.

 

First of all, I love Mexico. You've had a lot of economic reform in Mexico the past few years. Not too many people are actually aware of this. But the markets have been reformed. And the Peso has actually performed pretty well. It's actually hanging in there pretty good when you consider most of the emerging currencies are getting hit hard.

 

I also like India. They had a big change in the central bank in India back at the beginning of September, and a big change in policy and the new head of the central bank, Mr.Rajan has them on the right track. So if you see an emerging markets rout, I would go to Mexico, I would go to India, I would stay away from Turkey.

 

HAI: Now what about the spillover effect? Because it seems to have gripped investors here, in equities, in metals, gold and silver...

 

Ed Ponsi: Most likely because the Dollar has strengthened a little bit since this crisis – if you want to call it that – began. And the Dollar has gained a little bit, and that's probably due to emerging-market fears. You've got money coming out of emerging. It's going to go to safe havens. And the tell there is the Yen is also strengthened, is also doing well.

 

So there's a little bit of fear. Sometimes a little bit of fear is not a bad thing, especially when the stock market has performed the way it has. I think it's probably healthy that we knock it down a peg, so we can get some good entry points that get long.

 

We've had a fantastic bull market. You need healthy corrections. I'm a chartist. And if you look at the charts, the times where you really have trouble, and you really have bad blowups in the equity markets, is when things go parabolic.

 

When markets go straight up, that's when they can get ugly on the way down. But when they back and fill, they create little support and resistance levels. And that acts as a cushion on the way down. That's really what we want to see happen.

 

There's definitely a little bit of fear now. It's a good thing, it's healthy. I think the way the market pulled back late last week definitely caught people's attention, because it was a little bit scary. We had one day where the Dow was down 300 points. And it happens on a Friday. Then everyone has all weekend to think about it. So that gets their attention.

 

But if you back up and look at the chart over a long time, this is just another dip in a long series. You can't have green every day. It's not healthy. And it's just another in a long series of dips, I think. I think the bull market is still intact.

 

HAI: A lot of people, three or four years ago, were saying all the central bank monetary operations were going to cause inflation or even hyperinflation. A lot of those same people now are talking about deflation. Time to buy the commodities again?

 

Ed Ponsi: It's so funny. Tapering of QE3 isn't really going to have a big effect on the Dollar, one way or another. Because if you look at the chart, go back to the beginning, there's no evidence that quantitative easing caused the Dollar to weaken. So why would unwinding that policy cause it to strengthen? Everyone is parroting the same thing over and over again: The Fed's going to taper; therefore, the Dollar's going to get stronger. But look at the chart. It tells me that the US Dollar index is pretty much where it was when this whole thing started. And if the Dollar is getting stronger right now, it's probably more due to those emerging market factors, and a little bit of fear there, than having anything to do with quantitative easing and tapering.

 

HAI: What's your outlook for gold prices?

 

Ed Ponsi: I'm not a big fan of gold. If you look at the charts, it's definitely in a long-term down trend. In January, we had a good month for gold. It's come up quite a bit. I would say there's probably still more upside on gold in the short term. In the longer run, I think gold will do alright. But I think there are so many other places you could have your money.

 

I think equities will outperform. And I think, if you find good valuations, like the stocks – and especially stocks that have gotten hit on earnings recently, like Apple – I really think people are underestimating future products. Everyone's looking at the products on the market right now and saying, "You only sold this many iPhones and this many iPads." But no one's thinking at all about what comes next. And then you've got to look at that big pile of cash, too.