It’s been something I’ve been thinking about and I’ve also mentioned it in the comments, that with this run out from EM’s, why has there such a need to flee? If money flowed in looking for better returns and overall there are still good returns to be made, why the sudden dash out?

One thing that’s been highlighted is that there are potentially some very big structural problems, but they exist anyway in EM’s and so shouldn’t be a surprise. I suspect that the money has helped mask those problems for the last few years.

One side of the trade is of course the simple carry and we shouldn’t underestimate the power that interest rate differentials still have when people look to place their money. The biggest problem though is our old friend inflation. While it’s falling off the charts in the major economies, it’s still a big problem in developing economies. And what does inflation do? It erodes your returns. Reuters has brought this very point up and given some clarity to what we are seeing.

The “real” yields have fallen as countries have been too soft on monetary policy and have not tackled inflation as strongly as they should have. That has led to real bond yields falling with some even entering negative territory. Now that the money is flowing the other way the CB’s are having to step up and fill the breach by taking these big steps in interest rate rises and FX to steady the ship . Citi estimate that 5% real yields may now needed to to finance current account deficits. This could mean that we’re at the tip of the iceberg with what EM central banks may have to do to bring their economies into line.

So inflation has done a lot of the damage and it’s got to the point where folks are simply doing the maths on where the best value now is. If your Turkish investments with 10% yields and 7.4% inflation are looking likely to sink into the negative, and not even the carry will help then a low inflation environment of 2-4% returns in developed, potentially recovering economies becomes a much better prospect than it did 3 or 4 years ago.

Some people ask why inflation targets are important for central banks and indeed economies. Here you have your answer. While inflation is soft in the US, UK and Europe there is still an element of stability especially coming off the GFC.

All of a sudden the crack pot countries of the PIIGS don’t look like too bad of an investment.

Flying pigs, get ‘em while they’re cheap

And as for the taper effect, it’s been the trigger, not the underlying cause of all this.