Thought for the day
“Reality is wrong. Dreams are for real.”
-
Tupac Shakur (American, 1971-1996)
Word for the day
Schmaltz (n)
Informal, exaggerated sentimentalism, as in music or soap
operas.
(Source: Dictionary.com)
Teaser for the day
Pride of triumphant is fine, but it should not cross the
line of hauteur.
Morning
dream
In order to diminish deflationary pressures and weaken the
common currency Euro and thereby stimulate economic growth, ECB announced some
measures a few days ago. The most discussed of these was reducing the interest
on ECB deposit facility to below zero percent.
Though at face value 1/10th of a percent is not
much below zero percent and should not be a matter of additional concern for
savers who are now used to earning negative return on their savings, the
signals are worth taking note of.
It is conspicuous that like Fed, ECB is also past the trauma
of financial crisis that repeatedly threatened the global financial system
since 2008. The regulators now want participants to take risk. They want banks
to lend more, businesses and household to borrow & spend more and save
less.
The sharp decline in long term yields, despite US Fed
tightening the policy stance, across Europe, USA and Japan is contrary to
popular expectations. It could be a matter of concern for markets.
Conventionally, compression in yields is a negative growth
signal. However, there is little evidence to suggest that economy is the USA,
Japanese or European economies are likely to fare poorly in next couple of
years at the least.
The lower yields therefore could be logically defined by
shift in demand-supply curve of government bonds. With many governments
simultaneously endeavoring to put their fiscal conditions in order, the supply
of bonds is falling at a time when crisis struck households’ propensity to save
is rising at fastest pace in recent decades. Consequently, the demand is
outstripping the supply at much faster clip.
ECB might therefore be right in signaling its support for
risk taking, lest the economy slips again into recession, this time led by
higher savings and risk averseness, unlike 2008-10 a period which saw
unsustainably high leverage and excessive risk taking materially damaging the
financial markets.
There are many who believe that it is not long when Fed may
also follow ECB below the ground Zero on deposit rates, despite continuing with
moderation in bond buying program. This may be necessary to keep US exporters
competitive against sharp decline in Euro.
Back home, we have heard some voices pleading the regulators
and government to stimulate risk appetite of investors through a series of
measure, including tax concessions, lower interest rates etc.
It would be interesting to see how RBI reacts to likely
deluge of FII flows due to higher risk appetite fueled by fall in global yields
and weaker USD and EUR.
In my view, a dramatic cut in rates to keep INR around
60/USD level would be in order. It is with this premonition I suggest a
duration play on long bonds, after spending almost 4years exclusively in accrual
products.
Gold may also warrant a re-look if my suspicion comes true.
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