Do it yourself

Several readers have commented on my yesterday’s post (“USD, Gold, Crypto and a mountain of $38trn debt”). Some agree that the “debt manipulation” theory was far-fetched, others argued that I was underplaying the seriousness of America’s fiscal overhang. Both reactions are valid. My intent, however, was not to trivialize the US debt issue, but to put it in its proper context — and to focus attention on the much larger transitions now underway in the global financial order.

I would like to elaborate to convey my point in the right perspective.

The Debt Problem Is Real — but Not New

The US federal debt now stands around $38 trillion, or roughly 120% of GDP. That sounds alarming, but the ratio has hovered near that level for over a decade. The composition, though, has changed dramatically.

After the dotcom bust, debt piled up in corporate and household balance sheets. After Lehman, it migrated to banks. Post-Covid, it has firmly shifted to the sovereign. In essence, the debt hasn’t disappeared — it has just changed owners.

This doesn’t mean the US is immune to a confidence crisis. But it does mean that debt is a chronic structural feature of modern fiat economies — not an engineered plot to reset the system.

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1933, 1971 — and the temptation of simplistic parallels

Many commentators love to invoke 1933 or 1971 to suggest a looming “USD reset.”

But both those episodes happened in very different institutional and political contexts — gold standard rigidity, post-war reconstruction, and early Cold War dynamics.

Today’s world operates on a networked, digitalized, and politically fractured global economy. If history rhymes, it does so in free verse, not repetition.

The better historical analogy might not be 1933 or 1971, but the slow disintegration of older orders — Roman, British, Ottoman or Mughal — when economic dominance eroded gradually, not overnight.

What the real transition looks like

The true story of this decade isn’t gold manipulation or crypto suppression. It’s the slow-motion rebalancing of global power, as the post-WW2 order strains under its own contradictions:

·         Fiscal dominance is replacing monetary orthodoxy — politics increasingly dictates central bank balance sheets.

·         Fragmentation is replacing globalization — parallel payment systems (like China’s CIPS and India’s UPI stack) are nibbling at the dollar’s monopoly.

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Asset inflation remains the political lifeline of democracies — as long as homes, stocks, and jewellery rise in nominal value, grocery inflation can be tolerated.

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Digital money: Evolution, not Revolution

The tokenization of debt and the emergence of digital treasuries is definitely worth watching. But speculating that Crypto or stablecoins could “replace” outstanding treasuries may be a little far-fetched.

These aren’t part of a grand conspiracy to devalue debt — they are the next evolutionary stage of financial plumbing, blending liquidity, programmability, and regulatory control.

Think less “Nixon shock,” more “software upgrade.”

The real risk: A world without a coherent order

While investors debate gold and Bitcoin, the bigger risk is that the rules of the global system — trade, capital flows, reserve currency privileges — are eroding without a clear replacement.

This “interregnum” between the US-led order and an undefined multipolar system may prove far more destabilizing than any Fed balance sheet maneuver.

In such a world, volatility will not come from conspiracy or manipulation — it will come from institutional entropy.

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Investment implications: focus on what’s observable

Instead of gaming hypothetical resets, investors may be better served by tracking:

·         Real yields and the pace of balance-sheet normalization

·         Fiscal-monetary coordination trends in major economies

·         Shifts in global trade invoicing patterns (USD vs CNY vs others)

·         Political tolerance for inequality and asset inflation

The Takeaway

Markets thrive on stories, and conspiracy is a powerful story. But history suggests that disorder, not design, drives most turning points.

The bigger challenge ahead is navigating a world that’s losing its monetary anchor and political consensus at the same time.

The “debt conspiracy” may fade, but the era of permanent volatility is just beginning.

In recent times, one of the most extrapolated data by the market participants in India has been the household participation in the capital markets. Several research papers/reports have highlighted the relatively low deployment of the Indian household savings into the capital market, especially listed equity shares, to argue for a high growth potential in this area. In fact, capital market related stocks like brokerages, AMCs, depositories, exchanges and transfer agents & registrars, have been outperforming the broader markets for the past few years. Impressed by the trend, NSE has even launched an index (Nifty Capital Market index) to capture the performance of this sector.

Indubitably, the Indian capital markets are at the threshold of a major transition. Acceleration in institutionalization of household participation has been a major trend in the past five years. Access to banking and financial markets has improved materially with the advancement of technology and digitalization in the last one decade. The young demographic is looking to enhance their wealth through participation in the growth businesses. `The participation of small and medium sized entrepreneurs in the listed market is also increasing rapidly.

Nonetheless, extrapolating the current household participation data to the levels of the US and affording valuations based on 10-15yr forward earnings based on such lofty assumptions might not be appropriate in my view.

It may be pertinent to note the following in this context —

·         Household participation in capital markets in countries like UK, Australia, South Korea is about 7 to 8% of total household assets. China and Japan are higher at 11 to 12%. At present, Indian households’ allocation to shares, debentures and mutual funds is approximately 2.5% of their total assets.

The per capita income in these countries are much higher than India – the UK ($55000), Australia ($64,500), China ($13,700,), Japan ($34000), South Korea ($34600) as compared to India ($2880). As of this morning, there is nothing to suggest that India might reach $12000 (4x the current level) mean per capita income level in the next 10-12years, that might be needed to reach 7-8% allocation to capital markets (debt and equity).

​Indian households presently allocate about 29-30% of their assets to financial assets. Of this 30%, about 7-8% (2 to 2.5% of the total) is allocated to mutual funds, shares and debentures (public equity and debt). This allocation is almost the same as it was in the decade of 1990s. Not much has changed in the past three decades, since the first round of reforms and liberalization.

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·         The financial liabilities of the Indian households have been rising faster than the financial assets in the past couple of decades. The anecdotal evidence suggests that this trend is likely to sustain for the next decade also, as household savings continue to stay lower. This implies that the risk-taking ability of the Indian household would diminish further in the short to medium term. This does not augur well for a meaningful rise in the capital market participation.

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​·         Indian listed equities and mutual funds have consistently failed to generate meaningful alpha over physical assets like gold and real estate over a longer period. For example, over the past 15 years, Nifty 50 (+311%) has sharply underperformed even gold (464% in INR terms) returns. Over 50% fund managers have even failed to match the benchmark returns.

·         In the past three decades, the employment intensity of GDP has diminished materially. For 6.5% GDP growth, employment growth is less than 0.5% CAGR. This trend has pushed people towards self-employment. At present there are about 80 million self-owned enterprises, employing over 130 million people. The owner of these enterprises usually owns 100% of the equity. In many cases, the value of self-owned enterprises’ equity is more than the networth of the household. It could be a matter of debate whether households who fully own their enterprise do actually need to invest in listed equity. But no asset allocator would advise further equity exposure to a person who has 100% (or more in many cases) of his networth invested in the equity of his own business.

To conclude, I would say, the capital market in India is on a high growth path. The next couple of decades would see material jump in the level of activity; market capitalization; household ownership of listed equity and debt; and the people employed or engaged in the capital market activities. However, extrapolating it to matching earnings growth for all the participants might not be a great idea.

It is a common adage amongst the financial market participants that “When America sneezes, the rest of the world catches a cold”. The origin of this belief is the global market turbulence in the aftermath of 1929 Wall Street crash. In the past 100 years, whenever the US economy or markets have faced any serious problem, most of the global economies and markets have witnessed elevated volatility and erosion in asset prices. The prime reason for this correlation of the US economy and markets has been the disproportionately large size of the US economy and markets; dominance of the US dollar in global trade; and over-reliance of emerging markets on the US for investment, development assistance and humanitarian aid.

In the past couple of years, serious concerns have emerged about the sustainability of the US public debt and fiscal deficit. The overall GDP growth has been aligned to the average of the post global financial crisis (GFC) period. The efforts to accelerate growth have not yielded much results.

Since January 2025, when the incumbent President (Mr. Trump) assumed charge, things have been rather volatile. Mr. Trump has presented some radical ideas to tackle the economic problems distressing the US economy. These ideas include renegotiating terms of trade with all the trade partners; drastically reducing the budget for global development assistance and humanitarian aid programs; optimizing the size of US administration; and reducing the US commitment to strategic alliance (e.g., NATO); multilateral institutions including the UN and IMF etc.

The impact of these measures, whenever these are effectively implemented (or abandoned), may be felt in the US economy and markets, as well as the global economy and markets. Till then expect the markets to remain tentative and sideways.

Trump Plan

Notwithstanding the theatrics of Mr. Trump, a method in his madness is conspicuous. As I see it, the primary problem of the US is its unsustainable debt. At last count the US public debt was out US$36trn (appx 123% of its GDP), entailing over US$1trn in annual interest payments.

The conventional way to reduce this debt is to use a judicious mix of —

(i)    Curtailing government expenses;

(ii)   Increasing revenue;

(iii)  Inflating the economy to reduce the value of money

(iv)  Weakening the currency; and

(v)   Lowering the debt servicing cost through lower rates.

Mr. Trump is trying to achieve through tariffs (higher revenue and inflation); lower expenses (reducing the size of government, cutting foreign aid, lower clean energy subsidies, etc.); additional revenue (higher VISA fee, new taxes etc.); weaker USD; and coaxing the Fed to cut rates.

How much success he gets in his endeavor, we will know in the next 6-12 months. For now, I see nothing to worry about whatever is emanating from the US. In the next 12 months, the situation will either be the same or significantly better. I shall stay hopeful, though.

 The issue of high and rising US public debt is a subject matter of public discussion in Indian streets. Using a common Dalal Street phrase I can say that every paanwalla, taxi driver, and barber is now discussing how unsustainable US public debt is. For example, listen to this boy .

From top economists, analysts, and global strategists to a common man on the street, all are worried about an imminent US default and its impact on the global financial system, especially the developing and underdeveloped countries.

Currently, the US public debt is close to US$35trn (Appx 125% of annual GDP) and is projected to double in the next eight years. The current US government's annual interest payments are more than US$1trn (Appx 20% of annual federal revenue; 14% of annual federal spending and 4% of GDP). The average interest rate on the entire debt is less than 3% p.a.

As of June 2023, 43% of this debt was owned by the Federal Reserve System and State and Local Governments. 32% of the debt was owned by various domestic institutions (MF, Insurance, Pension, and Depositories, etc.) The balance 26% was owned by other institutions including foreign governments. Almost the entire debt is denominated in USD.

This debt level is a matter of concern but does not prima facie appear to be at a disaster level. The worrisome part is that about one-third of US public debt is short-term (12 months or less maturity). However, considering that a large part of this debt could be owned by the government institution and the Federal Reserve System, refinancing of this debt should not pose a significant problem. In my view, US debt could be sustained with 3-4% inflation, 20% USD devaluation, 5% revenue growth (higher taxes), and rationalization/reimbursement of various war funding expenses, this debt could be sustained, reduced, and serviced. It is of course going to be hard for US savers and middle classes for a decade or so. USD losing its reserve currency status may be collateral damage.

For context, as per the interim budget for FY25, India’s central government debt was ~Rs172trn as of 31^st March 2024. This is approximately 58% of GDP. 3% of this debt is held by foreign entities. However, using the standard IMF definition India’s Debt to GDP ratio is ~82%. Since most of this debt is INR-denominated and RBI is holding a strong US$650bn forex chest, servicing is not an issue.

However, as per FY24BE, interest expense would account for 25% of total government expenditure, after material cuts in subsidies. For a developing economy, this interest expense to government revenue expenditure is considered worrisome, as it hampers investments, keeps fiscal deficit high, makes interest rate cuts difficult, leads to lower social expenditure affecting the quality of life, and hampers further market borrowing capability of the government.

The small point is that investors in Indian securities should be more concerned about seemingly unsustainable public debt in India rather than the high debt levels of developed countries.

As a small investor with zero risk appetite, I keep a cushion for lower subsidies, late payments of government dues, higher effective taxes, small probability of higher rates in my investment strategy.

The 2023^rd year of the Christ is ending on a rather buoyant note for the Indian financial markets. The equity markets are at all-time high levels. Bond markets are now looking up, after challenging 18 months. Cryptocurrencies have yielded good returns. Gold has also been positive. Macroeconomic conditions have become supportive of the markets – prices are under control, currency stable, twin deficits under control, no overhang of government borrowing crowding out private capex, manufacturing growth is accelerating as capacity utilizations improve and PLI payments begin to flow in, and overall growth is the best amongst the global peer. The foreign flows have improved, while the overall domestic flows have remained strong. Corporate earnings remained buoyant led by easing raw material prices, improved domestic demand environment, deleveraged balance sheets, and materially improved asset quality for the lenders.

Stock markets – Capex theme finally catches up

The Benchmark Nifty50 has gained ~18.5% YTD2023. But the heightened action was witnessed in the broader markets where Nifty smallcap100 gained ~53% and Nifty Midcap100 gained ~45%, sharply outperforming the benchmark. The overall market capitalization of NSE increased ~26.6% to Rs355 trillion (US$4.28trn).

The investment theme - capital goods, infrastructure, construction, and manufacturing were the top themes in 2023. Defense, clean energy, Real Estate, power, roads, railways, etc. - did exceedingly well. The materials (metals, cement, etc.); large private banks, services, and consumer finance were relative underperformers.

·         Realty, Defense & Railways PSEs, PSU lenders, Power, and Clean Energy were the top themes for 2023.

·         International equity funds and Gold ETFs were the worst-performing fund categories; smallcap funds were the remarkable outperformers.

·         Most large cap funds managed to beat the benchmark Nifty50 by a decent margin.

·         The valuation gap between broader markets and Nifty widened to 2018 levels when a sharp correction was witnessed in broader markets.

·         Long-term (5yr rolling CAGR) Nifty returns are in double-digit for the unprecedented fourth year.

Earnings growth – all set for a sustained up move

Nifty EPS is all set to record a fourth consecutive year of double-digit growth in FY24. The earnings in the five years FY20-FY24e have grown at 14.4% CAGR. The outlook for FY25 and FY26 is also promising with consensus estimates suggesting over 15% CAGR over FY25-FY26.

Flows positive – Quality of domestic flows remain good

The overall institutional flows in the secondary markets remained positive consistently. Over all, FPIs pumped in over Rs 1.12 trillion (YTD 2023) in Indian equities; while domestic institutions were buyer to the tune of Rs1.74trn. The best part was the quality of flows. The entire Rs1.7trn of domestic new flows was through SIP route and hence sustainable and stable.

Debt and currency – bonds stable amidst global turmoil; INR marginally lower

Indian debt and currency markets were perhaps the most stable among the global emerging market and developed market peers. While the sovereign ratings of countries like the US and China witnessed adverse rating action, India’s sovereign rating remained stable with a case for upgrade. The benchmark yields ended lower for the year despite tighter liquidity and higher policy rates. During the year INR was down ~5% against USD and ~9% against EUR.

As the yields were mostly stable and the yield curve flattened, duration did not affect the bond returns. Most debt funds (including Liquid) on average yielded 6-6.5% return.

Commodities – deflation sets in

The year 2023 has not been good for commodities. With the global central bankers determined to reign inflation with aggressive, monetary tightening, demand slowing, and post-Covid logistic challenges easing materially, most commodities yielded negative returns in 2023. Natural gas, agri commodities (wheat & corn) crude oil, and base metals were notable losers.

·         Precious metals managed to stay in positive territory but did not yield any return despite having all the reasons to do that.

·         Energy prices have corrected back to the pre-covid period. Natural Gas and Crude Oil (despite higher production cuts by OPEC+) ended sharply lower. Natural gas prices are now lowest in three years. The latest inventory, consumption, and production forecasts for 2024 and 2025 are indicating further easing in energy prices over the next couple of years.

·        Agri commodities corrected despite inclement weather conditions across geographies and continued hostilities in Ukraine and sanctions on Russia.

  Cryptos – Gaining wider acceptance

Cryptocurrencies have been the best performing asset for the year. Value of Bitcoin, the largest and most popular cryptocurrency, has gained ~250% during 2023. Cryptocurrencies continued to gain wider acceptance from governments, regulators, financial institutions, market participants, and investors. Several smaller African and Latin American countries, like the Central African Republic, Uganda, Zimbabwe, El Salvadore, Paraguay, Venezuela, etc. have adopted cryptocurrencies in their monetary system, some even declaring bitcoin as legal tender.

Economic Growth – India best in the class

The overall economic growth is moderate as two of the primary engines of global growth the US and China stuttered. Germany and Sweden flirted with recession for most of the year, while the UK, France, and other European countries barely grew. In Latin America, Brazil managed to grow its economy by 3%, Argentina, and Chile were in recession, and other economies barely grew. The leading commodity-producing economies in Middle East Asia, Africa, and the Pacific (Australia) were either stagnant or contracted.

India - Best in the class

1HFY24 GDP growth (7.7% yoy) has surprised on the upside, beating the RBI estimates (6.8%) by a fairly wide margin. Most agencies and analysts have upgraded their growth forecasts for the entire financial year FY24 by 20-50bps. RBI had earlier estimated FY24 GDP growth to be 6.5%; but the current trajectory is indicating that India’s GDP may record 7% growth in the current year. The growth momentum also indicates that the present rates may not be restrictive for growth. 

In my past couple of strategy reviews, I had noted that given the present circumstances, the market outlook is pretty simple and straightforward – Moderate return expectations and focus on capital preservation. In fact, in the past three months the investment environment has become much more uncertain and complex. The geopolitical uncertainties, fiscal policy fatigue and monetary policy dilemma make short term forecasts very complex. These factors further support the idea of keeping the investment strategy simple and continue giving preference to capital preservation over higher returns.

I continue to believe that the economic and market cycles are now becoming much more shallow as compared to the 80s and 90s. The recessions nowadays last for a couple of quarters, not many years. Inflation peaks at 7-8%. Despite all the brouhaha over unprecedented QE and uncontrolled inflation, US rates are expected to peak at 3%. In fact the bond market in the US may already be pricing in a reversal of monetary policy and beginning of a rate cut cycle in 2023. In India also bond yields are expected to peak around 7.5% despite higher fiscal deficit and high inflation.

The market corrections (except the knee jerk reaction to pandemic led lock down) are also shallow and short lived. Unlike in the 1990s and early 2000s, we no longer see 20% plus correction in benchmark indices more frequently now.

The point is that defining market outlook and defining an investment strategy on the basis of that must factor in the new trend of shallow cycles. Relying on historical data of deep cycles may lead to unsatisfactory results.

Market outlook

The market movement in the first half of 2022 has been mostly on the expected lines. Despite the ongoing conflict between Russia and Ukraine, and elevated energy prices, I do not see any reason to change my market outlook for the rest of 2022. I expect-

(a)   NIfty 50 may move in a large range of 15200-18600 during 2022. It would be reasonable to expect 10% + 2% return for the year for diversified portfolios.

(b)   The outlook is positive for IT Services, Financial Services, select capital goods, healthcare and consumer staples, and negative for commodities, chemicals, energy and discretionary consumption. For most other sectors the outlook is neutral.

(c)    Benchmark bond yields may average 7.25% + 30bps for the year. Longer duration may do better in 2H2022.

(d)   USDINR may average close to INR77/USD in 2H2022. Higher yields may attract flows to support INR.

(e)    Residential real estate prices may show a divergent trend in various geographies, but may generally remain stable. Commercial real estate may remain best category

Investment strategy

I shall continue to maintain my standard allocation in 2022 and avoid active trading in my equity portfolio. I am further downgrading my target return for the overall financial asset portfolio for 2022 to 7%.

Equity investment strategy

I would continue to focus on a mix of large and midcap stocks. The criteria for large cap stocks would be growth in earnings; while for midcaps it will be a mix of solvency & profitability ratios and operating leverage.

Debt strategy

I will continue to focus on accrual strategy for my debt portfolio. In case the yields spike beyond 7.75% due to policy rate hikes by RBI, I would lock-in my mid-term funds (3 to 5yrs) in long duration bonds/funds.