Tuesday, March 26, 2019

Outlook and Strategy review



Some food for thought
"I want a real revolution, a real change in society: society, a great organic mass of well-regulated forces used for the bringing-about a happy life for all."
—William Morris (English Designer, 1834-1896)
Word for the day
Isolato (n)
A person who is physically or spiritually isolated from their times or society.
First thought this morning
The incumbent government has persistently sought to change the narrative of nationalism and patriotism in past five years. It wants citizens to blindly follow the path directed by it and believe whatever is narrated to them. Any resistance is met by serious allegations of sedition and anti nationalism.
As a responsible citizen, I do have full faith in my government and administration. I sincerely believe that the persons in power are people of integrity and good intentions. But that does not mean that I am willing to renounce my democratic right and obligation to ask questions and verify the bona fide of the conduct of the government and administration. Otherwise why would we need institutions like CAG, CVC and Lokpal.
I do believe that the Institution of Armed Forces is critical to sustainability of any democratic society. This Institution must be strong, capable and command complete faith of the citizen. This Institution should be beyond any suspicion at all times. It would be possible only when this Institution is fully accountable to people.
It is unfair to equate the soldiers who are just one part of the Institution of Armed Forces, with the institution itself. These brave individuals must be respected and honored for choosing an occupation that requires total commitment & dedication to the security of nation; and involves extreme risks. We the people owe a lot to the soldiers who make extreme sacrifice in line of their duty, and cannot do enough to repay the debt we owe to their families.
But valor of these soldiers cannot and should not absolve the Institution of Armed Forces from its accountability. The Institution must answer all questions that relate to the security & safety of its own personnel as well as security & safety of the nation and its people.
I refuse to accept this allegation that questioning the Institution of Armed forces is anti national or seditious. I have no sympathy with the opposition leaders who might be driven by their vested interests in questioning the government intent behind the airstrikes on Balakot. Nonetheless, I would like to know, for example:
(a)   Whether the airstrikes were an act of revenge of Pulwama attack or was it aimed at preventing any recurrence of attacks on security forces in Pulwama, Pathankot, Uri, Gurdaspur etc.
(b)   Has any enquiry been set up to investigate the security lapses leading to Pulwama attack? Shall we see action taken against people whose negligence caused loss of 44 precious lives?
(c)    It is claimed the Prime Minister himself commanded the entire operation. Did Cabinet Committee on Security empower the Prime Minister to bypass the defense minister and command the Armed Forces himself? Was the supreme commander of Armed Forces, the President of India was duly informed before the strikes?
(d)   What measures were taken to ensure the safety and security of people who would have been immediately affected if the Pakistan had decided to escalate the situation?
I also refuse to acknowledge that any political party, social or private organization has any right to term anyone anti national or seditious. It is for the law enforcement agencies and courts to decide that.
Outlook and Strategy review
The weather conditions in markets have suddenly changed. Some dark clouds have emerged from horizon to overcast what appeared like end of long winter and beginning of a glorious spring.
The first yield curve inversion in US (implying that 91days treasury bill yield is more than the 10yr treasury bond) since 2007 has raised the specter of recession again.
Last week, US Federal Reserve (Fed) in its latest monetary policy statement highlighted that "Economic activity has slowed from its solid growth rate in the fourth quarter" and "Recent indicators suggest slower growth of household spending and business fixed investment". Fed has accordingly paused the rate hikes and is not expected to make any changes in federal fund rates in the current year. Fed has also decided to end the monetary tightening program by September of 2019.
 
Early this month, The European Central Bank also revised downward its forecast for growth and inflation. It now expects headline inflation rate to slow down reaching 1.2% yoy for 2019 and the GDP growth rate to reach 1.1% yoy. Accordingly, ECB is also expected to hold its 0% rate through 2019 at least.
Bank of Japan has also expressed its intention to maintain "powerful easing monetary policy" for the time being, in view of the growth challenges.
Concerned by the growth slowdown, the People’s Bank of China said in January that it would supply lower-cost liquidity for as long as three years to banks willing to lend more to smaller companies, as policy makers roll out targeted measures aimed at shoring up the flagging economy.
The Reserve Bank of India (RBI) also cut its policy rates by 25bps in February, and changed its monetary policy stance to "neutral" from "calibrated tightening". RBI lowered its growth projections and inflation forecasts. A number of rating agencies have also lowered India's growth forecast for FY20.
In past couple of sessions markets have weakened, but certainly there is nothing to suggest that the markets are priced for a recession.
In Indian context particularly, two material events need to be priced in, i.e.,
(a)   At least three agencies have forecasted that there are 60-75% chances of El Nino reviving this summer impacting the Indian monsoon. If this does happen, it shall further impact negatively the already subdued consumer demand.
(b)   The model code of conduct remaining in effect for 2months, shall impact public spending and liquidity conditions. 4QFY19 and 1QFY20 results corporate may reflect this.
Given the growth challenges and trajectory of global monetary policy, I find it pertinent to visit my market outlook for next 9-12 months and examine whether any adjustment in investment strategy is warranted.
I feel the following two scenario plausible:
1.    US & China slowing considerably, with FAANG and Financials bubble bursting and cryptos going from bad to worse, bringing curtains on the post GFC experiment with extraordinary monetary policies. We may then go back to the classical path or experiment with a new path.
In market parlance, the existing bubble will bust as a new one begins to inflate.
2.    The post GFC extraordinary monetary policies getting accepted as a "normal"; global rates moving back to near zero and QE returning in full force.
In market parlance, more gas will be pumped in the existing bursting bubble.
Both these scenarios would mean a violent and devastating endgame before a new dawn. The timelines may though be uncertain and unexpectedly protracted.
These scenarios assume that China will no longer will the demand driver for natural resources, as it had been in past two decades or so; and also there is no visibility of a new demand driver like China. The new investment cycle is most likely to focus on development of "Human Resources" and "Technology" (Artificial Intelligence et al) rather than other "Natural Resources". So far China and US are the two major investors in this arena.
India so far is lagging far behind in both ideation and execution.
....to continue tomorrow

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