It ain’t over till the fat lady sings
When the cows come home,
the world might realize that the QE was nothing more than a scare crow assigned
to protect the wounded and feeble global economy.
The money printed itself does not create inflation. It has
to reach the hands of consumers who are willing to spend it at a time when
supply of goods and services is constrained. None of these conditions exist or
are likely to exist in foreseeable future.
Moreover, the liquidity created by Central Bankers does not
automatically become capital. Somebody needs to take risk of losing it, to give
it the color of capital. The liquidity chases 20-30bps arbitrage without taking
additional risk. It is neither spent nor invested.
The Black Swan, if any, might come flying from the
commodities’ world. By definition it will be visible only on the day it is
visible. Bothering too much about that will not help.
The series of financial crisis that started in summer
of 2007 has definitely taken an interesting twist with the latest episode
(Cyprus). The script that was becoming boring and predictable has turned
interesting again.
When the whole world thought that with the quantitative
easing (QE) now effectively open ended in US and EU, and “committed to do
whatever it takes” approach of BoJ and BoE, the Central Bankers might have run
out of options, Cyprus solution has opened up many new vistas.
US had successfully experimented with a similar solution
through IRS going after Swiss deposits of “tax evaders”. But this is much more
direct and effective.
In our view this should make three things reasonably clear:
(a)
The global financial system and investors are
significantly better positioned and prepared for a Lehman like event and
therefore chances of a 2008-09 like collapse in the global markets are
substantially lower, irrespective of what the prophets of doom may wish.
(b)
Incessant QE is proving to be a blessing despite
all its criticism. The trends in global commodity prices in past one year
clearly show that QE has not and will not result in the kind of hyper inflation
many are expecting. In fact it may end up regulating inflation whenever the
next super economic cycle begins (may be a decade or two down the line).
Inflation usually occurs when the amount of money available is
more than the goods available. QE has just created cyber money to take care of
volatility in financial markets. So far there is little to suggest that it has
any impact on the real market for goods and services.
The commodity prices are down despite lower supplies (due to
capacity shut down), largely in line with the trends in consumption demand.
Banks and corporates have accumulated huge reserves to handle any black swan
event and households are saving more. The business consolidation process is
gathering momentum to complete the bottoming process.
(c)
The USA will once again emerge a winner out of
this crisis. Historically, most large European crises have been settled through
a war. However, this will not be the case this time. You need truck loads of
young people and trunk load of gold to fight a war. The struggling Europe may
have none this time.
The emerging nations, including so called BRIC, have
demonstrated that they are yet not prepared to move above their “developing”
status. China may be the biggest short term loser of this economic down cycle.
So, we need to watch only the USA. So far its global leadership
is not seriously challenged; the world is not coming to an end.
Focusing back home, India once again becomes a domestic story
that would soon be pregnant again with hope of a better government post next
election. Any investment strategy that assumes a higher than 7% sustainable
growth is bound to fail, in our view.
We are accordingly restructuring our model portfolio – based on
the USA and Hope.
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