HARI SREENIVASAN: It was only five weeks ago that most analysts were predicting that 2014 would be another good year for Wall Street investors following last years huge runup, but in January the Dow turned in its worst performance in more than a year and a half. And as February trading gets underway, there are concerns that turmoil overseas and the continued rollback of the Federal Reserve’s stimulus program will continue to roil U.S. markets. For more about this we’re joined from Richmond, Virginia via Skype by Roben Farzad of Bloomberg BusinessWeek. So let’s start with kind of those two big sections: the domestic and the foreign. Domestic, we’re having this transition of power — the Fed chairman changing over. Why does this matter?
ROBEN FARZAD: Because the Fed has been the player in the markets for the past five years. An extraordinary amount of stimulus, almost 4 trillion dollars of quantitative easing in addition to interest rates being at nill. So the world is trying to get its head around this idea. Ben Bernanke he’s now a free man, he can beach in Cozumel, and Janet Yellen is taking office Monday a.m. And everybody is on tenterhooks; Thailand, Argentina, Venezuela. It’s not just the United States that’s been the beneficiary of the Fed’s largesse, it’s really been the developing economies as well.
HARI SREENIVASAN: And Janet Yellen has a very difficult task, which is to sort of ween the world off of this stimulus.
ROBEN FARZAD: Yeah, I use the metaphor of wrestling the bone from the dogs mouth. No one can remember the last time money cost something. The U.S. has been at zero interest rates for so long and you could get mortgages for next to nothing, you could get junk bonds, you could buy emerging market stocks and debt. And everything has worked and now you’re talking about sort of the morning after. We’re in stage one of withdrawing the stimulus, bringing down QE. Ultimately the Fed’s going to have to hike interest rates and what will the morning after look like?
HARI SREENIVASAN: So paint that connection for us. Why is what’s happening here at the Fed connected to what’s happening in Argentina and its currency?
ROBEN FARZAD: Everything is tied to the interest rate that’s effective here in the United States, the 10-year borrowing rate. And the Fed controls short term interest rates, and if money is cheap international investors are bound to go elsewhere, exotic places, in order to grab yield. And when those opportunities are maxed out they’ll go to even more exotic places — sub-Saharan Africa, the Philippines, Vietnam. And everybody has gotten so used to the fact that you could borrow U.S. dollars for close to nothing and put them in other currencies. And this has been problematic for other economies that can’t deal with that influx of hot money. Because if you get used to it and suddenly that hot money rolls back when it realizes it’s going to the United States where interest rates might go up, then it’s really whiplashing for developing markets like India, like Brazil. You see the Ukraine having political violence right now. Turkey is trying to get its head around what the United States is going to look like from a monetary perspective. So it’s rather blindsiding for all of emerging markets.
HARI SREENIVASAN: So help us understand. Why does what happens in all these emerging markets connect back to what’s happening in the US stock market? In the sense that, is it because all these things are happening at the same time? Is that unprecedented?
ROBEN FARZAD: It’s like the old New York telephone jingle ‘we’re all connected.’ It’s kind of a Tom Friedman mantra — “the world is flat.” If there’s a reverberation in a place like Venezuela or Argentina which really right now are teetering. There’s political violence, there’s rioting, there’s looting in Venezuela. Argentina has a traumatic debt default a decade ago. How does that then recourse to China, which is one of the biggest financial sponsors of United States spending. And if China is taken online, or growth is weaker there, how does that affect all the other smaller Asian nations that orbit China? so the United States is no island. This is no crisis like we had in the late ‘90s where emerging markets were blowing up left and right and the United States was the strong one. We’ve never been so interconnected and codependent as we are now.
HARI SREENIVASAN: Alright Roben Farzad, Bloomberg BusinessWeek. Thanks so much.
ROBEN FARZAD: My pleasure, thank you.