"The surest way
to be deceived is to consider oneself cleverer than others."
—Francois de La
Rochefoucauld (French, 1613-1680)
Word
for the day
Bon mot (n)
A witty remark or comment; clever saying; witticism
Malice
towards none
War with Pakistan -
Seriously!
First random thought this morning
If we go by the media perceptions - US citizens are faced with a
dilemma of choosing the best from two worst presidential candidates.
If I have any idea about the psychology of an average American,
expect the voters' participation to be extremely low. Yes, avoiding tough
decisions to the extent possible is a common American trait.
Lower....sooner
Some of my readers termed my yesterday post (see here) rather alarmist. I think, it needs some
clarifications.
If the contention is that I am
hinting at a major correction (10% or more) in the benchmark indices in near
term, I must say, that is not the idea. My simple point is that there are early
signs of global flows turning erratic in next few months. This capriciousness
of flows may cause market volatility to rise materially, which I do not like.
Nonetheless, intermediate
corrections in a larger market trend are normal and desirable. As of this morning,
I do see the current trend peaking within 3-5% of the previous Nifty closing
high of 8997 and correcting 7-10% from there. Such a correction would be
healthy for the market and an opportunity to increase equity allocation for
investors. I shall be sharing my strategy for preparing for the volatility,
correction, raising equity allocation and leveraging the portfolio in
subsequent posts.
Now coming back to where we left
yesterday.
In my view, The US Fed would need
to hike rates not for any conventional reason, e.g., to tame inflation or
cooling down the overheating economy. This would be more to help pensioners and
bring down the prices of financial assets (stocks and bonds) in sync with the
economic reality.
In past five years, Fed has erred
materially in estimating the growth of US economy. The realized growth since
2011 has been almost 50% lower than the forecast. Now, the long term median
real GDP growth forecast is below 2% against over 3.5% in 2011.
The corporate earnings have been
broadly following the macro growth trend. As per some estimates, S&P500
profit peaked in September 2014 and has fallen 19% since then. However, S&P
value has continued to rise through multiple expansion. Currently S&P500 is
trading at ~25x or close to bubble territory.
Similarly, the rally in US bonds
is also beyond rational explanation. With the shrinking tax revenue, rising
fiscal deficit and burgeoning public debt, the yields on US bonds may have some
solid reason to move up.
The full employment theory of some
Fed members might only be partially correct. An overwhelming majority of new
jobs are reportedly part-time and contractual. Besides, the denominator is the
4.9% may not be reflective of the true position of workforce. A large number of
people are above 60yrs of age but still offering themselves for work. Secondly,
there are many who are out of workforce because their skill sets obsolete.
I therefore believe that while the
rate hike may be necessary to prick the bubble in the financial assets, the Fed
may not be able realize its dream of 3% federal funds rate and 4-4.5% benchmark
10yr yields.
The normalization may occur at
much lower levels and much sooner than most expect....continue
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