US to outperform EMs; see more volatility: Roubini

The positive in the US Federal Reserve tapering its bond buying program- the qunatitiave easing 3 (QE3) is that it may not tighten the economy until 2015 believes Arnab Das of Roubini Global Economics.

In an interview to CNBC-TV18, Das says, "The Fed is not going to change the direction as opposed to the pace of monetary policy, the trajectory of monetary policy until financial portfolios can withstand the hit from so doing because the recovery is being engineered in substantial measure through an increase in asset values and wealth effects that trickle down to income."
Additionally, Das also expects the US markets to be far more volatile now. Below is the edited transcript of Das' interview to CNBC-TV18

Q: What would your reading be that the Fed sounded a little more dovish and therefore when would you put your time-table of tapering to start?
A: I think the first thing to say is all this focus on modest versus moderate is probably well-placed and understandable, but there is not an enormous amount of difference between the two. The main issue seems to be that although the Q2 growth number was somewhat better than what many people had expected, the Q1 growth number was revised down. Hence, that gives rise to a kind of consensus opinion that the economy is improving overtime despite the fiscal drag that is kicking in this year.
I think there is something in that, but I wouldn’t want to make too much of it because the level of gross domestic product (GDP) is essentially in-line with the consensus. There has just been some shifting around of the time path of the growth rate. In addition to that, the inflation remains very well-behaved, maybe too well-behaved and this is ofcourse part of the reason for the Fed’s dovishness.
The dovishness here at the end of July stands in a bit of contrast to the prospect of tapering in the alleged kind of miscommunication that the Fed had undertaken in the last few months about tapering, which would send the market into the fear of tightening. So,  when one sifts through all these things and thinks what is really going on, basically the growth forecast, the growth trajectory, the consensus view it is more or less converging to roughly where we are which is there is a continued recovery which is positive, it is good enough, it is not great, it is not enough to tighten, it may still be enough to start tapering and door for tapering is still very much open in the Q4.
So trying to time these things perfectly ofcourse is quite difficult, but it is quite likely that there will be a tapering probably late this year and so when that comes the good news is that there won't be tightening for a very long time.
The actual tightening would probably not take place until 2015. I think the thing to emphasise here is that the Fed is not going to change the direction as oppose to the pace of monetary policy, the trajectory of monetary policy until financial portfolios can withstand the hit from so doing because ofcourse the recovery is being engineered in substantial measure through an increase in asset values and wealth effects that trickle down to income.
If those wealth effects are not assured for long enough then income is going to suffer, output is going to suffer, consumption is going to suffer and it is going to be a setback for recovery and I think that’s is really what is going on here, sifting through the noise of what the Fed is saying and what the data are indicating. Q: In the morning we were talking to the CLSA economist and he said that what the Fed is actually doing is making that distinction between tapering and tightening and in that sense it is still on course maybe for a September tapering. Do you see that there is still a possibility that they may start tapering as early as September and maybe not wait till the last quarter of this year?
A: Yes, September-October is probably the right timeframe. Yes, but it could be the end of this quarter or early-to-mid next quarter, that is going to be entirely data-dependant.
On this fine distinction between tapering and tightening I think there is quite a lot in that. Tapering ofcourse is a slowdown in the pace of easing. There will be several steps in this exit strategy. So, the first is to judge when and how much and how to “taper” which is slowdown the pace of asset purchases. Next will come probably a stop in asset purchases and then there will be a tightening.
That tightening could come through asset sales or through run-offs of the assets so that the Fed’s balance sheet shrinks, so that the quantity of money goes down and/or it could take place through an increase in the price of money, through a hike in the Federal funds rate. Which and when and what combination of these come through? I think that is going to be determined by the data over the course of the next not just weeks and months, but the next year, next several quarters. So, we have a long series of steps and many different kinds of steps in this eventual exit.
I think stepping back from that the other thing that has to be said is that we are not talking here about an exit however, gradual it maybe, from easing whereas every other major central bank is still in easing mode. Q: How would smart money managers like you all play the asset market at this juncture? Would you still continue to buy United States (US) assets simply because any tapering is an indication that the Fed itself is acknowledging a recovery and therefore it is buy US markets? Will there be flow of funds away from emerging markets (EMs) to US markets? What would be your top three asset classes? And what would be your sells more importantly?
A: A lot of this has already happened and we have been of the view that the US was better placed than many other of the major markets and the EMs. I think that continues to be the case and will continue to be the case. However, I would say that unlike the period of no tapering talk and increasing accumulation of data about US recovery, this period is going to be a much more volatile period.
The period before say May 22 or it is kind of the first five months of 2013, was a very good time when the size of the money stock was increasing, the economy was recovering and the US economy was doing significantly better, relative to expectations, whereas China and other EM countries including India and most of the others and even Europe were doing fairly bad and Japan ofcourse was the wild card with Abenomics.
During that period, it was as very good time because the increase in money was continuing to suppress volatility and the data was suggesting recovery. Now we are moving into a regime where the Fed instead of suppressing volatility by continuing both the action and the discussion of quantitative easing (QE) has shifted to a mode whether by design or by accident, I think atleast it is partly by design, where it is no longer actively aggressively suppressing volatility.
All of those things you suggest US outperformance versus the rest of the world that is going to continue. But I think we have to recognise, it is going to continue with a lot of volatility. So, in terms of asset classes, I would say the shift will be from everything going up basically to risky assets going up and “risk-free” assets underperforming within the US and risky assets - and maybe even “risk-free” assets in the rest of the world underperforming the US.