It is the nature of the beast that we use events—like the day you were born—to define nodal points, even though the actual starting point was likely much earlier, when your mother and father met, for instance. So, too, we define the start of the trans-Atlantic financial crisis (nicely coined by Rakesh Mohan) as the day Lehman Brothers collapsed—September 15, 2008. And, here we are, trying to see if what happened over the last 10 years could help us figure out what’s to happen next. Between then and now, there were several market-shaking events—the grotesquely aggressive monetary policy called QE; the Greek crisis (highlighting fiscal vulnerabilities in Europe); the ‘taper tantrum’, signaling the end of QE; the election of Donald Trump; Brexit; all modulated by the ebb and flow of always-uncertain information from China.
Judging from the impact on markets, the most important one was the taper tantrum in late 2013 (about the middle of the 10 year period), when the Fed signaled that it was ready to end QE. At that time, the Fed funds rate was at a miniscule 0.25% and had been there since it was cut from 1% at the start of the crisis. US equities, that had put on over 60% till then, dipped for a minute (metaphorically speaking), but then quickly got back on the steady up-track, as it became clear that the Fed was not actually going to raise rates any time soon. Thus, the money-for-jam continued, with the Fed’s forthright exposition of what it was going to do on a quarter to quarter basis feeding directly into profits for the financial sector, increasing the inequality between those who earned from capital and those who worked for a living.
The venality of the political class was thrown into sharp relief as people saw the government bailing out the banks (and bankers), while tens of thousands of ordinary citizens lost their homes and worse. This created a fertile environment for Trump’s populist rhetoric. However, and full credit to the Fed’s unorthodox policies, by this time, the US economy had come back steadily and was adding jobs strongly every month. Equity markets accelerated their pace, and even after a short dip when Trump came to power, continued to put on massive gains—five years since the taper tantrum, the Dow is up >70%, outpacing its excellent performance of the previous five years.
The dollar, on the other hand, has had a different history before and post the taper tantrum. During the 2008 crisis, volatility shot higher—DXY volumes peaked above 16%, with the EUR and JPY a little below and a little above 20%, respectively. Volatile conditions continued, and the average volatility of DXY till the taper tantrum was just under 10%. In value terms, the dollar stayed in a range, with the DXY unable to break above 90. After the taper tantrum, volatility declined sharply (averaging under 7%), while the dollar took to the skies. DXY even crossed 100 for around six months (after Trump’s election) and over the past five years, it has put on nearly 17%.
The rupee was shaped by both global events and local forces. Between the 2008 crisis and the taper tantrum, it ran a reasonable positive correlation with the DXY (~50%), and it seemed clear that RBI policy was to allow it to depreciate whenever the dollar was strong, but hold its own when the dollar was weak. Thus, over the period, the rupee lost ~50% of its value, even though the dollar was only up about 3.5%; it was, on average, almost as volatile as the dollar (8.82% vs 9.21%). Our equity markets, too, were very volatile, but the rising tide of low global interest rates lifted the Sensex by a huge 69%.
Post the taper tantrum, things changed markedly for the rupee. First off, Raghuram Rajan came in as RBI Governor at the peak of the crisis and immediately issued NRI bonds and, leveraging his credibility, jawboned the rupee to stability. After that, he put in place a very rigid—and extreme, I would say—approach to containing volatility, which has remained in place even after his departure. Thus, despite the DXY rising by nearly 17% over the past five years, the rupee is more or less at the same level it was at the peak of the taper tantrum. The Sensex, yet again, outperformed the Dow, more than doubling in value (as compared to a 72% rise in the US index). To be sure, we are in a different world today. The Fed funds rate has climbed to 2% (from 0.25% in 2013) and there is increasing nervousness about inflation that Trump’s trade wars could exacerbate. The rise of “strong man” leaders is already provoking a backlash, which could create more waves of uncertainty and instability. Perhaps, this anniversary will deliver another crisis.
The author is a CEO, Mecklai Financial.