The market shows that investors have been following the wrong narratives for two years.

For the better part of two years, US markets have dominated investor interest on the belief that the Federal Reserve finally got it right with Quantitative Easing 3. T

The economy was about to hit escape velocity, economic growth would decouple from the rest of the world, and all would be well as we normalized interest rates. 

The most important thing people did for me was to expose me to new things.
                                                                                              -Temple Grandin

Of course, the world is finally coming around to the idea that none of these narratives seems to be holding true, as US large-caps finally begin to falter and other areas of the investable landscape go down less in this environment.

And what the other narrative that didn’t pan out? 

An emerging market crisis that caused those stock markets to collapse on the taper tantrum of 2013. It was argued that a rising rate environment in the US would result in emerging markets being toast. We never got the rising rate environment everyone was convinced would break those economies. 

Now clearly, their economic growth is weak, but this has been known for some time and pessimism has dominated investor flows. 

Yet, into the most recent period of stock market volatility, emerging markets seem to have held up well. 

Our alternative ATAC Inflation Rotation Fund (ATACX) has the ability to position aggressively into emerging markets out of Treasuries once this period passes, given a subtle rotation into the volatility that seems to be happening.

Take a look below at the price ratio of the iShares MSCI Emerging Markets ETF (EEM) relative to theMSCI ACWI Index Fund ETF (ACWI). 

A rising price ratio means the numerator/EEM is outperforming (up more/down less) the denominator/ACWI. Note the recent strength on the far right, and the ratio making higher lows recently into the Fall Epiphany where investors have suddenly begun to refresh the fear.

Emerging markets outperforming does not necessarily mean the secular bull market will continue. Rather, after a prolonged period of negativity around those countries’ economic activity, it is now repricing of prolonged period of optimism in developed markets that has caused them to outperform. 

I believe commodities likely need to stabilize and the US Dollar likely needs to fall for a real period of absolute price gains to take place, but the crisis talk may change from emerging markets to developed ones. 

That alone is a substantial new theme which could last years to come.

….also from Michael Gayed: The Wrong Rates Are Rising