The weather in India these days is as diverse as the country itself. There are severe floods (usually not seen in pre monsoon period) in North East; cyclonic storms in East and South East, torrential rains in South; drought in North and scorching heat in North and West. Power supplies are challenges; wheat has ripened early; sugar cane is drier; seasonal vegetable crops have been damaged.
On the top, Indian Railways has cancelled many trains to expedite the coal supplies to the languishing power plants. This is hindering the movement of farm labour, as the sowing season begins. This is making things even tougher for the majority poor and lower middle classes, who are already struggling with stagflationary conditions.
Somewhat similar is the situation on the global scene also. Abnormal weather conditions are persisting in the Americas and Europe. Shutdown in some key China provinces and protracted Russia-Ukraine war are keeping the global supply chain's recovery from pandemic disruption on hold. Aggressive monetary tightening by central bankers is leading to sharp correction in asset prices (equity, cryptoes, gold, realty).
The wealth effect of higher asset prices that supported consumer spending for the past one decade is eroding, stalling the economic growth from the US to China. The corporations that used cheaper money to fund expensive buybacks; fancy acquisitions and investments in utopian projects are feeling the burn in their hands. The wealth erosion is thrice as fast as wealth creation has been in the past decade.
The macroeconomic conditions are thus clear – inflation is elevated; money is tightening; consumption is moderating; and growth is slowing. Besides, global trade is facing challenges from the rise in tendencies of de-globalization, ultra-nationalism and imperial communism. One could therefore strongly argue a case for structural bear market in assets like equities and commodities; and rise in safe havens like gold, USD and developed economy bonds. In the words of Bill Dudley, the former president of the Federal Reserve Bank of New York and Former Vice Chairman of FOMC, “one way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower”. The message to Mr. Market could not be clearer and louder. Mr. Market however does not appear to be in an obliging mood by exactly following this script.
There are visible signs of growth slowdown post 75bps hike by US Fed; but it has so far not impacted the inflation. This makes the further hikes a little tricky – “Will it hurt inflation more or hurt the growth more?” The rising cost of borrowing has no visible impact on the government borrowing so far. The fiscal conditions continue to remain profligate.
As of now, no one is suspecting the central bankers’ to be cruel enough to cause a hard landing of the economy. A soft landing is the most expected outcome, but then this assumes that the central bankers are in control of things and can plan a controlled slowdown of the economy. Unfortunately, the evidence is overwhelmingly stacked against this assumption, as most central banks have completely failed in first reversing deflation (pre pandemic) and then controlling inflation (post pandemic). The role of central bankers in stimulating sustainable and faster growth, as was the stated objective of QE, is also questionable.
Similar is the situation elsewhere – in Europe, UK, India, Brazil, Japan, Pakistan, South Africa, and Australia - everywhere.
Most of the governments are still burdened by the guilt of suppressing poor savers through negative real rates; fueling inequalities; undermining the investments in global supply chain and not respecting the importance of free markets. Doling helicopter money on the poor and oppressed is their way of tackling this guilt; or maybe political compulsion also.
Since the damage to the global economy was done by the monetary and fiscal policies together, the course of correction must also involve both of these to be effective. Without an effective support from the fiscal side,
The global markets at this point in time are more like a Rubik Cube in the hands of a novice. Bringing one piece to the desired place is displacing two other pieces from their desired place.
Equities, cryptoes and bonds have corrected, but so have gold and silver. Emerging markets are suffering and so are the developed markets. Energy prices have shown no intent of weakening in the near term. Metals are lower than their recent highs but in no way showing a sign of collapsing, as should have been the case if the central bankers were seen winning the war with inflation. Maybe it is too early to judge the efficacy of the central bankers’ strategy to tighten the money markets; and we would see the impact in due course.
Obviously, it is a tough market for traders and investors, as correlation are breaking and diversification is not working.
More on this tomorrow.
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