"A wise man
thinks it more advantageous not to join the battle than to win."
—Francois de La
Rochefoucauld (French, 1613-1680)
Word
for the day
Albatross (n)
A seemingly inescapable moral or emotional burden, as of guilt or
responsibility.
Malice
towards none
Is India rushing too
hurriedly into the Paris deal, or NOW is the time to do it?
First random thought this morning
A large majority of Indians seem unable to decide whether Indo-Pak
rivalry is about religion (Hindu-Muslim) or about geo-politics. The perception
about and the response to the conflict are therefore mostly confused.
An occurrence of violence evokes extreme religious fervor. An
initiative for peace evokes even stronger response from the people living on
either side of the border!
Let's first decide what we want - (a) Friendship (peaceful
co-existence) ; (b) Enmity (perpetual war); (c) Reunion (Unification through
agreement or force)
I do not like roller coaster rides
There is enough evidence to
suggest that the market is now finding the rate hike inevitable. It is no
longer a matter of "if", but just a question of "when".
The flattening US yield curve
suggests that bond holders are now beginning to prefer longer maturities
believing that a hike by Fed hike is inevitable and higher rates will keep
inflation under check over mid to long term. (see here)
Chinese authorities have approved
trading in credit default swaps (CDS) for local debt. This shows that they
accept much higher delinquencies in the local bond market as US rates begin to
rise, causing pressure on consumer demand (hence Chinese exports).
The central bankers that have been
big buyers of US treasuries, believing these to be the safest haven, have been
on a selling spree in past few months. Chinese and Japanese central bankers
have sold US treasuries consistently for past three quarters, a record selling
spree. (see here)
The reasons for such selling could
be multiple. For example selling could have been necessary:
(a) to fund the local fiscal deficit as oil economies and Japan
struggle with growth;
(b) to fund the demand for outflow of capital (e.g., in China) as
local economy struggle;
(c) to defend local currencies as exports slow down and USD supplies
contract due to lower US trade deficit; end of QE program of US Fed and easing
US fiscal deficit;
(d) to prepare a war chest, should a currency war is unleashed.
Nonetheless, one major reason is
that US bond rally is seen coming to end with the Fed hiking rates.
It is noteworthy that while many
Central Banks have lowered their US treasury stock, none has been reported
buying gold aggressively. It is clear that central bankers do not anticipate
any material rise in inflation in near to midterm as they expect that higher
rates will stem any chance of inflation getting out of control.
The question before a tiny
investor like me, who does not have any dollar asset, but is invested in
equities of Indian companies that may have material exposure to USD assets,
liabilities, revenue and/or expenditure, is what should be the strategy under
the current circumstances.
In normal course a stronger USD,
consequent to Fed hike, should not be a problem for me. However, given that
Indian rate cycle may be diverging from the US rate cycle for a year or two,
capital flows may become a major challenge. The volatility that may result from
a sudden drying up or even reversal of flows would put markets on a roller
coaster. I am too scared of such rides....to continue
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