Some food for thought
"It's a new game now, you know, you have to bring some
fresh stuff."
—Scotty McCreery (American Musician, Born 1993)
Word for the day
Ineluctable (adj)
Incapable of being evaded; inescapable:
First random thought this morning
I have written it before. But this morning I find it germane to
reiterate this story. As per the Hindu lunar calendar the ancestors' fortnight (पितृपक्ष),
ended couple of days back. As per the ancient Hindu traditions, all Hindus are
obligated to serve Brahmins (Scholars) and feed crows during this fortnight
that usually comes in the month of September every year. It is widely believed
that serving Brahmins and feeding crows in this fortnight pleases souls of the
ancestors and thus redeems the person performing this ritual from the debt of
ancestors.
Besides, a grand feast has to be organized by all Hindu males
within 3weeks of the death of their parents, wives and children in which
Brahmins, Dogs and Crows are fed.
I know from my interactions with numerous villagers and urban
poor, this feast (श्राद्ध) could be one of the top 10 reasons behind
perpetual indebtedness of rural Indian household, bonded labor and distress.
The moral of the story is that the feast will be held regardless
of you. In case you want to enjoy the feast, you need to survive till good
times (अच्छे दिन)
arrive; lest Brahmins and crow shall enjoy the feast.
Relating this analogy to the politics and economics—
- It must be understood that to benefit from whatever good a government does, the political parties running that government will benefit from that good only if they survive to see the result of their good deeds. Otherwise, the party that will form the successive government will enjoy the benefit.
I am sure PM Modi is fully aware of this and he would make sure
that he survives long enough to enjoy the feast of all reforms he is trying to
implement.
- In past two decades corporate India has invested huge amount of money in creating capacities. Many of these capacities, especially in infrastructure and real estate sector, have been created without bothering about the prevailing demand conditions. Consequently, a significant amount of these capacities became economically unviable. Promoters who created these capacities, bank managers who funded these capacities, and investors who provided equity to these promoters and lenders - are all in distress.
There is no argument against the need for these capacities. The
demand will also come in next few years. But the question is who will enjoy the
feast. The bank managers would have retired, sacked or shunted out for his poor
performance. The promoters would have diluted his equity substantially at
distress price or forced out by IBC. The equity investors would have booked the
loss.
The Brahmins and Crows - the new bank manager in whose tenure
these capacities will become viable adding to bank's profitability, investors
who will buy equity at distress prices and acquirers who would then be managing
the show - will feast on the misery of others.
The conclusion is simple - You must survive to enjoy the fruits
of you labor!
Happy to be fearful and paranoid
There is an old saying
— "D'nile is not just a river in Egypt."
Denial is actually a
strong force in our life. It makes our life easier by constricting our vision
to the capabilities of our mind. Our eyes can see only as far and wide as our
mind can process.
The
problem however occurs when we make "denial" our habit or worse a
tool to disregard the obvious.
In
the current market context, in my view, ascribing the current turmoil in
the market place to mostly localized factors, e.g., temporary liquidity crisis
in certain NBFCs, political uncertainty, USD carry trade unwinding leading to
FPI selling, CAD touching 2% of GDP and consequent INR weakness, etc., may just
be another instance of denial overwhelming the reason.
I feel the investors, especially my peers, who are very small
and vulnerable, must be fearful, paranoid and aware.
I feel comfortable by just not denying or brushing aside the
following ten signs, which in my view are indicating that the current market
turmoil is consequence of some plates drifting underneath global markets. It is
entirely possible that the drift gets completed without causing any major
tremor on the surface; for which I am actually praying every day. Nonetheless,
as yet the probability of "no tremor" is nowhere close to zero.
(1) As Goldman Sachs
has highlighted in one of its recent report, "...interest-rate-sensitive
areas of the US economy have already stumbled. Auto sales have been weak this
year. Signs are also increasing that US housing is sluggish as 30yr fixed
mortgage rate has risen to nearly 5%.
(2) The default fears
in Italy, along with Greece and Portugal, caused a freeze in global markets in
2008. Italy is again becoming a threat to global markets, as Quitaly replaces
Grexit in market jargon. (See here
and here)
(3) The fear of Greece
exiting the common market kept markets awake through many nights. Much bigger
partner UK is all set to exit the common area and many other are threatening
some others seriously than before. No one seems to have any clue how bad Brexit
could be world economy.
(4) The US Fed is
unwinding QE at a pace of US$50bn/month. The economy is running at almost full
employment. Inflation is now above Fed target of 2%. The growth from here is
forecast to be flat to lower in next couple of years. A US recession towards
end of 2019 is a real possibility.
(5) China had been
the engine of global growth during most part of past 15years. The growth in
China is now slowing at much faster pace than previously anticipated. In 2008
China was forecast to be growing in double digits and India was not lagging
behind with ~9%. No longer is the case. Even though Chinese economy may not
stage a hard landing, but still there is nothing to suggest that the growth
rate decline would be arrested in neat term.
(6) Crude oil prices
are threatening to rise to a level where these seriously start hurting global
growth. GCC countries are positioned much worse than 2008. Sanctions are
beginning on Iran Oil next month.
(7) Unlike 2008, the
world leaders are not cooperating with other. The response to GFC was a united
and forceful one. No longer is the case. The obduracy of powerful leaders and
disregard for the wider common interests may actually be the cause of the next
crisis. Trade war has taken place of global cooperation.
(8) Emerging market
currencies have been dumped, causing widespread stress in global economy. IMF
has in fact just downgraded its earlier global growth estimates.
(9) US stock
valuations are already flirting with bubble territory.
(10) The USD supply in
the global market is shrinking at faster speed than previously anticipated.
When I juxtapose these signs to the high probability of earnings
downgrade, high probability of rise in cases of fresh slippages as rate rise,
significant rise in market volatility, and a violent and acrimonious election
season ahead, I find it even more prudent to be fearful and paranoid in my
investment strategy.
If in the end all comes out well and I find myself left out of a
wonderful money making opportunity, I would not feel bad. Because, if We the
1.3bn people of India have to eat two square meals, wear a pair of clean cloths
and get an all weather shelter, the opportunities to make money will remain
abundant for at least 20years.
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