Friday, April 17, 2020

Preparing for Spring

I have narrated this story many times before. This is in fact one of my favorite instance from Hindu mythology.
Once the forces of good (Sura) and evil (Asura) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the savior Lord Vishnu. The Savior advised them to go and explore the great ocean (Sagar Manthan) to find new resources and vigor to make a fresh beginning.
Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered huge amount of wealth and resources that included the Amruta (nectar) that would immortalize the consumer and Vish (venom) that would destroy whoever consumes it.
Realizing that if the evil forces get the access to Amruta and other resources found during the exploration it would seriously jeopardize the interest of the forces of good, Lord Vishnu tricked the forces of evil and appropriated the entire nectar for consumption by the forces of good.
Lord Vishnu also requested the almighty Lord Shiva to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.
Post this the forces of good became more powerful. But whenever they deviated from the path of common good, they were overpowered by the evil forces and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.
Over the years I have realized that it is not just a mythological story to be heard during religious ceremonies and forgotten immediately thereafter. It is also not a usual morality emphasizing victory of good over evil. It is much beyond. This applies to all aspects of life, even economics.
The Ocean Exploration mission (Sagar Manthan) is basically a collaborative research effort to find solution to a problem that afflicts all alike, e.g., a prolonged bloody war like World War, a pandemic like plague, smallpox, HIV AIDS or COVID-19. The experts collaborate to find solutions like vaccines, hygiene products, UNO, Nuclear deterrents, globalized markets, etc to overcome the losses and prevent recurrence of such problems.
In modern economic parlance, the ocean exploration is akin to the period of recessions followed by irrational exuberance, fiscal and monetary profligacy, and household extravagance.
When all the participants get tired, frustrated and exhausted from prolonged economic weakness, collaborative efforts are needed to stimulate the economic activity. At this time all the stakeholders muster courage, and supported by the 'authority', they do things they would never do in normal times. Invariably, this effort involves excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale which are unfathomable during normal times. Usually this drives the asset prices to levels that cannot be explained or justified by conventional methods. These unexplained phenomenon are generally described as bubble in market parlance. The nectar or the good that emerges from these bubbles is shared by all. However the venom is consumed only by the financial investors who invariably end up poorer after every bubble is burst. The financial assets' prices correct upon the bursting of bubble but the productive capacities built during the bubble phase stay for long, supporting and promoting growth and development.
If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during the decade of 2000s but for a credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! The capacities built during these bubbles shall continue to support India's growth and development for long, even though the financial investors lost significant fortunes during 2001-02 and 2008-09 burst periods.
The present crisis situation is no different, even though it is much more severe, deeper and wider in its impact. This crisis needs a much stronger collaborative at all levels - scientific research and development, social development, economic revival, political restraint, etc.
Considering that there may be only a few thousand people surviving who have experienced the catastrophic world wars, great depression, and the rebuilding effort post WWII, the present crisis managers may be slightly limited by their inexperience.
The famous American Economist Kenneth Rogoff noted in one of his recent posts - "With each passing day, the 2008 global financial crisis increasingly looks like a mere dry run for today’s economic catastrophe.
The short-term collapse in global output now underway already seems likely to rival or exceed that of any recession in the last 150 years.
Even with all-out efforts by central banks and fiscal authorities to soften the blow, asset markets in advanced economies have cratered, and capital has been pouring out of emerging markets at a breathtaking pace.
A deep economic slump and financial crisis are unavoidable."
This appears to be the common view amongst economists, strategists, analysts, banker and politicians across the world.
I would tend to agree with these experts on almost all issues. As I said yesterday (see here), this crisis is unprecedented in the sense that it has seriously impacted the liquidity, solvency and viability of a large number of businesses, all at the same time. Nonetheless, I am sure that the global community will inflate a bubble to find a way out of this crisis.
The bubble so created will obviously have a direct reflection on stock prices and hence investment strategy.
...to continue next week

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