As the U.S. Federal Reserve moves toward "lift off" I can't help but recall an experience I had flying on a Philippine Airlines 747 in 1997 enroute to Manila. It was a well-used first generation plane from the 1970's filled to capacity with passengers, cargo, and fuel. When the pilot throttled up the behemoth and began its slow acceleration you could hear and feel the jarring "thump, thump, thump" of the wheels over the seams in the runway. As the cadence of the landing gears pounding grew to a fever pitch I wondered whether she would get off the ground in time. Approaching the far end of the runway the pilot finally tipped her nose skyward. Once off the ground the old plane creaked and rattled as the pilot increased her pitch angle to climb at an acceptable rate. Within moments of this maneuver passengers gasped when the storage cupboards in both mid section galleys popped open, kitchen utensils and other paraphernalia crashed about, water and coffee sloshed onto the floor. At an altitude of a couple thousand feet the pilot dropped the pitch angle, rolled the plane to its initial heading, then leveled the wings and settled into a more relaxed climb. The stewards rose from their seats, and mopped up the mess as if nothing happened.  A thrilling and terrifying experience to say the least. Also, in retrospect, a good metaphor for what may occur to the economy as the Fed raises interest rates.

Once at cruising altitude, I had a chance to ask one of the stewards what happened, she replied that takeoff from LAX was always like that. In broken English she explained that the heavily laden 747, while able to perform the lift off angle required by the LA city noise ordinances, had a galley that wasn't designed with the steep pitch that the older 747 required to achieve it. Philippine Airlines, rather than retrofit the galleys cupboards opted for the solution of armoring the galley floor with heavy duty rubber and accepting the fact that stewards would have to mop up a wet mess every time they left LAX with a full load. A "twofer" as metaphors go, but also a good peek at third world ingenuity in first world technology.

As some of my readers may recall 1997 was the year of the Asian currency crises. It was a period in time, economically speaking at least, that had great similarities to what has been occurring to the emerging markets today. In 1997 the US dollar strengthened as the Fed increased interest rates and the price of oil dropped. The "hot" money that had fed much of the Asian economic expansion began to rush back to the US, driving down the value of Asian currencies and stock markets by an average of 40%.  When all the dust had settled some Asian companies were forced into bankruptcy, some of the governments had to accept IMF austerity reforms, and higher interest rates in order to prop up their currencies. The higher interest rates, at a time when those economies needed just the opposite, were a devastating blow. Since then Asian central banks have learned their lesson and have started carrying much higher US dollar currency reserves to help prevent the reoccurrence of this type of disaster. New types of currency swaps have been instituted that help protect companies with dollar denominated debt from sky high interest payments if their currency falls. In other words, the markets have diversified risk and the regulators have put in relief valves to help prevent crises in the future.

Flash forward to today, and we observe many of the hallmarks of that debacle. Ironically, since much of the world's trade weighted commerce is geared toward the emerging economies, rising interest rates in the US may now have a boomerang effect. As lift off occurs, the metaphoric pantry doors may fly open, and there is a mess to clean up after the initial ascent.

When you feel a bear market is at hand move up the quality ladder to assets which have a less volatile nature and pay you to wait. Barring that, you hold cash. Tolerance for risk is a huge factor, those willing to bear the pain of down markets will be rewarded long term by dollar cost averaging in near the lows and hanging on for the ride. Sometimes the ride is very long. For example, the Vanguard Emerging Market Index ETF has been in a see-saw market for nearly five years, and recently is turning decidedly bearish. While the price seems to have gone nowhere for five years a patient and observant investor will note that the index sports a rich 3.2% yield and a dividend that has grown at a 7% rate. Eventually the compounding effect of that will pay off to the tune of 10% total return. The addition of Chinese "A" shares to the index this year will help that dividend growth continue. In the fullness of time the companies in the emerging markets will be helped by the strengthening dollar and lower oil prices. These economies are rotating to more service sector orientation and away from being commodity centric. It is a slow process and not one geared towered the short termism of current market sentiment. Debt is considered a higher quality financial asset than stocks. If you are inclined to believe the bear market will continue consider emerging market debt as an alternative. The Vanguard Emerging market government bond fund (ticker: VGOVX) has a 4.6% yield which is almost 2.5% higher than Vanguard Total Bond Index (ticker: BND). Also, it only holds dollar denominated debt which significantly dampens currency risk. The VGOVX is much more volatile than the BND, but the income oriented investors might consider adding a small portion of this to their portfolio to enhance yield after the Fed meeting on the 16th.

On final note, this year has been brutal for energy stocks.  Year-end tax loss selling is reaching a crescendo, and the baby is being thrown out with the bathwater. It stands to reason that this selling will reach its apex as the Fed meeting approaches, and taper off into the end of the year. This is true for bonds and stocks. Take advantage of it if you can, there is value to be found, but be prepared for a wild ride.

Happy New Year.