Do it yourself

Continuing from my previous post (View from the Mars)

“There are events in the womb of time, which shall be delivered in time”. (Othello, William Shakespeare)

Beginning of the current year, I commented that “the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make. Making right choices, in my view, would be the central investment challenge for the year 2025.”

Barely one month into the year and it appears that earth already witnessed many seasons. The conditions are becoming more uncertain with each passing day. The 47^th President of the United States (P47), appears in a tremendous hurry to deliver on his promise to Make America Great Again (MAGA). He is using all his negotiating skills to secure good deals for his country. How much success will he achieve with his aggressive approach, we would only know with passage of time. Nonetheless, with his initial actions he has created a fair degree of uncertainty in the minds of his political opponents, trade partners, strategic partners, competitors and markets.

While I continue to maintain that investors would be better off avoiding a macro trade and focusing on individual business stories in the next 12-24 months, the three macro trends worth including in the matrix for identifying and evaluating individual business stories are Deleveraging, Demographics and Deflation.

Deleveraging: The US Fed has contracted its balance sheet by US$2.1trn since the beginning of its monetary tightening (QT) program in April 2022. The total assets held by the US Fed are now lowest since May 2020. It would need to unwind another US$2.7trn to completely undo the Covid related monetary expansion. Besides the US Fed, most other central bankers have shown a tendency to tighten the money supply by reducing their asset holdings. The Bank of England balance sheet is following the same trajectory as the US Fed. BoJ has not expanded its balance sheet in the past couple of years and cut the size of its asset holdings in recent months. Even RBI’s balance sheet has contracted in the past few months.

If we take the plan of P47 at par value, we are staring at one of the biggest fiscal corrections in modern history. Most other major developed and developing countries are also progressing on the path of sustainable fiscal corrections.

This macro deleveraging at the global level might reflect in the corporate and household balance sheets sooner than later. But for a major natural or manmade disaster, we should be factoring in sustainable governments, lower rates and adequate household savings in our investment strategies.

Demographics: One of the most critical trends in a large part of the developed world is deteriorating demographics. Most European and LatAm countries, the US, Canada, Japan, China, South Korea, Thailand, etc. have their total fertility rates fallen below the replacement ratio (implying their population is now on a declining path). The proportion of the working age population in these countries is decreasing fast. The population in China has already peaked and the population in India is expected to peak much ahead of the previous estimates of 2050.

This demographic trend appears structural and irreversible. With deeper and wider integration of technological advancement in social and personal life, the need & space for human interaction is on the decline. Financial and professional constraints are adversely impacting the capability and willingness to commit to personal relationships. Stressed and hectic lifestyles are adversely impacting the fertility of humans. There is nothing to suggest that these trends could change in the foreseeable future.

Obviously, the demographic trends will reflect on the aggregate demand as well as the demand mix.

Deflation: The mix of deleveraging, ageing demographics and superior productivity gains through technological advancements may lead to resumption of the pre-Covid deflationary trend. The supply lines disrupted due to Covid related restrictions and geopolitical developments post 2021 have mostly been restored. Save for a totally unexpected development, the current trend appears that a workable global trade balance may be achieved within the next 12-24 months.

With almost all major global market forces (the US, China, Germany, Japan, South Korea, France and the UK account for ~40% of the global trade) focused on repairing and strengthening their domestic economies, it is more likely a mutually beneficial global trade framework will emerge after the initial aggression of the P47 brings all trade partners to the negotiating table. This framework would, among other things, will certainly dampen the inflationary expectations.

Mr. Donald Trump has chosen to take some time before speaking with his Indian counterpart Mr. Narendra Modi. Trump has chosen to call the Chinese premier Xi Jinping, even before his inauguration. Prime Minister Modi has apparently sent a written congratulatory message to Trump, instead of calling him. This small pause in the top-level communication has triggered a debate about the shape of Indo-US relations in the near future.

In my view, before drawing any conclusion from Trump’s pause, and writing obituaries of the Indo-US strategic partnership, we must study the evolution of Indo-US relationships. This relationship has evolved over the past 75 years. It is primarily based on mutual need and shared democratic values, and goes much beyond the personal equation of individual leaders.

Prologue

The foundation of Indo-US was laid during the 1949 visit of Prime Minister Nehru’s visit to the US and meeting with President Henry Truman. Nehru was welcomed by everyone he met during his multi week stay in the US. However, Not much was achieved in diplomatic and economic terms.

Ten years later, President Eisenhower visited India for five days, in 1959. He addressed the Parliament and expressed “deep satisfaction at the friendly and cordial relations existing between their two countries, and their firm belief that their common ideals and objectives and their quest for peace will ensure the maintenance and development of the strong ties of friendship between the two countries.” Again, the Indo-US relations did not move beyond exchanging pleasantries.

The first chapter

India co-founded the Non-Aligned Movement in 1961, taking a neutral stand in the cold-war between the USSR and the US. 1962 was an important year in the evolution of Indo-US relationship. This year, the U.S. Agency for International Development signed the Kanpur Indo-American Program to help in the establishment of the first IIT. The program included deployment of American faculty members to develop academic programs and research laboratories at the new university over the next decade. Later, President Kennedy supported India in the Indo-China conflict, recognizing McMahon Line and also providing air assistance and arms. Next year, in 1963 Norman Borlaug, a renowned US Agronomist, visited India and laid the foundation of the Green Revolution. India also benefited from wheat imports from the US under PL-480 “food for peace” program during the 1960s.

1965 saw a material deterioration in the US-Indo relationship as Washington sided with Islamabad in the second major Indo-Pak conflict. The situation worsened further in 1970’s when President Nixon sided with Islamabad during the 1971 Indo-Pak war. This was the time when India signed a 20 year “Treaty of Friendship and Cooperation” with the USSR. The relationship deteriorated further in 1974 when India became the first non UNSC permanent member to conduct a nuclear test.

A reproachment effort started in 1978, after Mrs. Gandhi was defeated in the 1977 general elections. President Carter visited India and Prime Minister Desai reciprocated with a 6-day visit to Washington. However, with the US enacting the Nuclear Nonproliferation Act in 1978, the process was derailed.

Prime Minister Gandhi made another attempt to revive Indo-US relations during her visit to Washington in 1982. She and President Regan largely agreed to increase cooperation and resolve a dispute over nuclear power. Vice president Bush (Sr.) led a high level visit to New Delhi to explore areas of cooperation. However, 1984 Bhopal Gas tragedy again derailed the process.

Post the end of the cold war (1989), for a few years, India and the US had a good working relationship. Prime Minister Rao unleashed substantial economic reforms and expanded economic ties with the US. However, things turned for the worse in the summer of 1998, when prime Minister Vajpayee surprised the US intelligence agencies with a nuclear test and announced India as a full-fledged nuclear power. President Clinton recalled his ambassador to India and imposed severe economic sanctions on India.

A year later in 1999, President Clinton called Pakistan Prime Minister Sharif and nudged him to end the Kargil conflict immediately. In the year 2000, Clinton became the first US President to Visit India since 1978. The visit marked the first step toward forming a durable Indo-US strategic relationship. Clinton agreed to not make signing of CTBT a precondition for Indo-US economic cooperation. The Indo-U.S. Science and Technology Forum was established during this trip, which also marked the beginning of the end of the Cold-War strategic US-Pak alliance. President Bush lifted all US sanctions on India in 2001.

Second chapter

In 2005 a new chapter in the Indo-US relations started. Both countries signed the New Framework for the U.S.-India Defense Relationship, which set priorities for defense cooperation in maritime security, humanitarian assistance/disaster relief, and counterterrorism. They also inked the Civil Nuclear Cooperation Initiative, a framework that lifts a three-decade U.S. moratorium on nuclear energy trade with India. Under the agreement, India agrees to separate its civil and military nuclear facilities and place all its civil resources under International Atomic Energy Agency (IAEA) safeguards. In exchange, the United States agrees to work toward full civil nuclear cooperation with India. (The US Congress and Indian Parliament ratified this deal in 2008.) In October 2005, both countries jointly conducted the largest naval exercise to date, followed by major air and land exercises.

In 2006, President Bush visited India and finalized, with Prime Minister Singh, Singh finalized the framework of the civil nuclear deal and boosted security and economic ties. The nuclear deal made India the only country outside of the Nonproliferation Treaty that has nuclear capabilities and is allowed to participate in nuclear commerce.

In 2007, an 18year old ban on import of Indian mangoes to the US was lifted, marking the beginning of an effort to double the Indo-US trade within three years. Bilateral trade in goods and services totaled around $45 billion in 2006 and rose to more than $70 billion in 2010.

In 2008, Chandrayaan-1 became the first Indian spacecraft to land on the moon. It carried two scientific instruments designed by NASA scientists, marking a significant progress in Indo-US space cooperation (an agreement that existed since 1963).

Third chapter

In 2010, India and the US convened the first U.S.-India Strategic Dialogue. Secretary Clinton lauds India as “an indispensable partner” and President Obama claimed the relationship “will be a defining partnership in the twenty-first century.” President Obama visited India in November. He addressed the Parliament and backed the country’s long-held bid for a permanent seat on the United Nations Security Council. He announced $14.9 billion in trade deals.

In 2012, Secretary of Defense Leon Panetta visited India to bolster military ties. Next year (2013), Prime Minister Singh visited Washington to meet President Obama for the third time in four years to discuss important issues such as security, trade, immigration reform, and the civilian nuclear deal.

In 2014, President Obama invited Prime Minister Modi to the White House. President Obama made his second visit to India in 2015 as Chief Guest at Republic Day celebrations. Ten-year U.S.-India Defense Framework Agreement was renewed for another ten years.

In 2016, the US elevated India to a “major defense partner”, a status no other country holds. This enabled India to enjoy some of the benefits of being a U.S. treaty ally, such as access to defense technology.

In 2017, Prime Minister Modi visited the US to meet President Trump, who raised sharp disagreements with India over trade, climate change, and H-1B visas. Regardless, their joint statement emphasizes strengthening their defense partnership, cooperating on counterterrorism efforts, and boosting economic ties.

In 2018, during a “two-plus-two” dialogue in New Delhi an the Communications Compatibility and Security Agreement (COMCASA) was signed allowing India access to advanced communication technology used in U.S. defense equipment and allows real-time information sharing between the two countries’ militaries.

Fourth chapter

In 2018, the Indo-US relations took a turn towards the south. President Trump terminated India’s preferential trade status, part of a 50yr old program that allows products from developing countries to enter the U.S. market duty free. Trump claimed India has not provided “equitable and reasonable access” to its own market. In retaliation, India slapped tariffs on twenty-eight U.S. products.

In 2020, President Trump made his first official visit to India. India agreed to purchase US$3bn worth of military equipment. However, the two countries could not resolve pending trade issues. Opinions remained divided over agricultural products, tariffs, and other areas.

In 2020 the first in-person meeting of Quad was held, and President Biden hosted Prime Minister Modi for the first time.

In 2023, the Initiative on Critical and Emerging Technologies (iCET), an agreement that aims to expand bilateral technology and defense cooperation is announced. As part of the deal, U.S. officials seek to reduce India's purchase of Russian arms.

Fifth Chapter

I guess, President Trump might look to begin a fresh chapter in the Indo-US relations. Early indicators are pointing that he may look to base the mutual relationship on equality. So far, the US has played the role of a dominant partner helping India to grow faster. President Trump may now seek to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues.

The Indo-US relationship henceforth may become purely transactional, shedding the pretense of strategic partnership. The Trump 2.0 administration would negotiate hard on tariff concessions; preference in defense and energy procurement; resolution of contentious issues like agriculture tariffs. The US negotiators might use the façade of freedom of speech & religion, persecution of minorities etc. as key negotiating tools.

It will obviously be a tough & volatile transition; especially when the domestic economy is passing through a challenging downcycle. During the previous transitory phases (1970s and Late 1990s), India managed well. Hope this time will not be different. Till then keeping fingers crossed, seat belt tightened, and store filled with emergency supplies.

In the past couple of months, since the completion of the US presidential elections, most of the global analysis (financial, geopolitical, economic, international relations, etc.) has been revolving around the likely policy stance of the Trump 2.0 administration. Various scenarios have been built based on extrapolating his election speeches and other utterances made during Trump’s election campaign.

The 45^th President of the United States of America (POTUS), Mr. Donald John Trump (Trump) has assumed office with an onerous promise to “Make America Great Again” (MAGA). In the past two months, POTUS and some of his team members have expressed their intention to implement radical policy changes in a variety of spheres.

A close study of the entire election campaign of Trump, his actions during his previous presidential tenure (2016-2020), his selection of team members for his latest presidential term, and his various utterances since the election results in November 2024, would reveal that as of this morning MAGA is mostly an aspirational slogan lacking a credible conceptual framework. For example—

·         Trump has spoken about strict border controls, tougher immigration rules, and restrictions on the skilled worker visa (H1B) program. Presently, many US corporations which would play a pivotal role in MAGA, have first generation immigrants as their top executives. There is an acute shortage of skilled tech workers in the US. MAGA would require a large number of new infrastructure construction projects requiring cheap labour. There is a sharp decline in the total fertility rate of the white native Americans; hence the demographic balance and stability of the US largely depends on the immigrants. Ironically, there is an abundance of immigrants in the governance team nominated by Trump. In fact, Trump is relying on South Africa born Elon Musk and Vivek Ramaswamy (born to Indian immigrants, and reportedly already considering withdrawing) to marginalize the infamous American Deep State.

·         Trump has been talking about adopting the pre-WW1 doctrine of isolationism (policy to not interfere in the geopolitical affairs of other countries) and making the US a dominant global force in the same breath. He has announced his expansionist agenda with élan. He apparently wants to buy Greenland, acquire Canada, control the Panama Canal and claim the entire Gulf of Mexico. With this intent, he may not only be sanctifying Russian claim on Ukraine and other countries claimed by the president Putin as historical Russian territories; Chinese claim on Taiwan, Northern and North Eastern Indian territories; Israeli claim on Palestine and territories of other neighboring countries; but also pushing the world back into pre-WW1 era of persistent conflicts, and colonialism.

·         Presently, the US derives most of  its power from (i) USD (being a global reserve currency); (ii) technological prowess (largely attained through luring talent from all parts of the world with a promise of great, fair and equal opportunity); (iii) profligate American consumers, largely fed on fiscal support and debt made possible by a huge trade deficit funded by the US trade partners by accepting USD (unsecured US Fed promissory notes) in lieu of their tangible goods and services; and (iv) the promise of the US to protect democracy and human rights, affording the US government a dominant role in the most multilateral agencies, and support of NATO forces in asserting its strategic supremacy. The proposed agenda of Trump directly hits at the core of all the pillars of support of the US.

I am obviously not very enthusiastic or unduly worried about Trump 2.0. I am expecting some disruptions in the next few months, before the tempers cool down, horses are tethered, and business becomes as usual. These disruptions will definitely reflect in the Indian stock prices also. It is for experts to slog and discern this impact. I have the privilege to approach the issue in a rather simple and nonchalant manner. …to continue tomorrow