Do it yourself

The conventional market wisdom suggests that the bonds usually lead the change in market cycles. Traditionally traders have closely followed the yield curve shape, benchmark (10 year) yields and high yield credit spreads to speculate the near term moves in equity, currency and commodity markets. Two simple reasons for this traditional practice are – (i)     Bond markets are usually more correlated with the economy. (ii)    Size of bond markets is materially larger than the equity, currency and commodity markets. It has the largest number of leveraged positions at any given point in time; and most of the large and influential market participants are more active in bond markets as compared to the other markets. I am however inclined to disregard this piece of conventional wisdom. In my view, it would make sense only if the markets are operating in a free and fair manner. In cases where the central bankers and governments (through Sovereign Wealth Funds and o...

  The Federal Open Market Committee (FOMC) of the Federal Reserve of the US announced another 25bps hike, taking its key fed fund rate toa target range of 5.00 to 5.25%. This unanimous decision of the FOMC is the 10 th  straight hike in the past twelve months. With this hike, the effective fed fund rate is now highest since the global financial crisis. Besides the hike, the Fed also maintains the plan to shrink the balance sheet each month by $60 billion for Treasuries and $35 billion for mortgage-backed securities. …claims banking system “strong and resilient” Noting the concerns in the financial markets, especially those arising from the failure of Signature Bank, Silicon Valley Bank and First Republic Bank, the FOMC emphasized that "The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly ...

As I mentioned yesterday ( see here ), the current conditions are very different from the conditions in the 1980s when the US Federal Reserve under the chairmanship of Paul Volcker, managed to kill inflation with a deeper recession, but without pushing the world into an economic depression. But this does not imply that we have nothing to learn from history. A key learning from the past 150 years of economic history is that every major economic cycle has been a function of a different set of factors like war; decolonization; politics triumphing over economics; major demographic shifts; major technological evolution (industrial or technical revolution); etc. The policy responses to various economic cycles have depended upon the mix of factor that were responsible for the cycle. Industrial revolution, destruction due to world wars and then reconstruction effort; emergence of Communism (command economies) and cold war; decolonization of European colonies; population boom (baby boomers)...

The Federal Open Market Committee (FOMC) of the US Federal Reserve decided to hike the benchmark bank rate by 75bps to 1.5% - 1.75% on Wednesday. The Committee also reiterated that the Fed will continue to shrink its balance sheet by US$47.5bn till August 2022 and from September the unwinding will be stepped up by US$95bn/month. The FOMC noted that there is no sign of broader slowdown in the economy, while lowering its GDP growth forecast for 2022 to 1.7% from 2.8% earlier. The FOMC statement reiterated the strong commitment to achieve the 2% inflation target. The Fed Officials projected raising it to 3.4% by year-end, implying another 175 basis points of tightening this year. The projection shows a rate cut in 2024. In the post meeting press meet, Chairman Powell commented that “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting.” The Chairman added that ““It does appear that the US econom...

Continuing from yesterday (See Preparing for chaos ) I believe that severity of any geopolitical event, financial crisis, economic event, natural calamity, industrial disaster, technological evolution, pandemic, etc. must be assessed in terms of its impact on the human lives. Any event that severely impacts the asset prices but its impact on human lives is limited to a small segment of people does not qualify to be a called a global crisis in my view. I put the financial crisis of 2008-09 in this category. The impact of that crisis was largely limited to financial markets and investors. It had almost no implications for the human life per se. It actually impacted more populated developing economies positively as the unprecedented amount of liquidity manufactured in developed markets found its way to emerging market assets enhancing the wealth effect in there. Similarly, the events like 9/11 attacks in New York city, 26/11 attacks in Mumbai city, Nuclear accidents in Chernobyl ...

The undeniable fact is that FY21 could see most pervasive contraction in global economy in post war era. The economic impact of novel coronavirus led lockdown is deep and wide, engulfing most economies, most sectors and most people. The impact may not be evenly spread as services sector have suffered more due to restrictions on mobility; and consequently the developed economies with larger share of services in their economy have also suffered more. The economies based on commodity exports have also suffered extensive damage due to lower demand and logistic challenges. The economies based on agriculture may be the least impacted as demand and supply chain for food have been least impacted due to pandemic. If we consider the impact of pandemic from socio-economic distress view point, the poorest countries perhaps would end up suffering the most. Poor health infrastructure, cut in global development aid, sharp cut in remittances, fall in exports, etc have hit the poorest the most. T...

The economic data for 2QFY20 will be released today evening by the Central Statistics Office (CSO). There is a near consensus that this data may not be good. The estimates of various agencies and institutions are ranging between 4% to 4.8% growth in real GDP over 2QFY19 (vs. 5% in 1QFY20). 2QFY20 is expected to be the sixth straight quarter of decline in growth rate, the longest span of decline since 2011-2012. Since this data belongs to the quarter ended September 2019 and the financial performance of the businesses for that quarter is already in the public domain, it is reasonable to assume that the financial markets have assimilated the poor growth numbers quite well. However, the growth estimates for corporate revenue and profit for 2HFY20 may not be factoring a negative surprise. Going by the forecasts of most analysts and economists, the growth estimates of 2HFY20 are not very encouraging; though the consensus is expecting the second half of the year to be better...

Since 2014, Prime Minister Narendra Modi has been consistently exhorting the foreign investors to invest in India to take advantage of 3Ds - Democracy, Demography and Demand; a unique strength not possessed by any other major economy of the world. After 5years of NDA rule under his leadership, many are now challenging this claim. A large section of domestic and foreign media, and many senior political observers & commentators have raised questions over the present health of the democracy in India. We may heavily discount their stance as deeply prejudicial and driven by ulterior motives, but rejecting it outright may not be totally logical. The Union Labor Minister himself recently raised question over the quality of human resources in the country, especially the northern states where about two third of the youth population lives. Most business leaders, both from manufacturing and service industries, have frequently expressed grave concerns about the employab...

As per the Hindu lunar calendar the ancestors' fortnight ( पितृपक्ष ) , will start from tomorrow. As per the ancient Hindu traditions, all Hindus are obligated to serve Brahmins (Scholars) and feed crows during this fortnight. It is widely believed that serving Brahmins and feeding crows in this fortnight pleases souls of the ancestors and thus redeems the person performing this ritual from the debt of ancestors. Hindu religious traditions also mandate that a grand feast must be organized by all Hindus within 3weeks of the death of their parents, spouse or children. In this grand feast Brahmins, Dogs, Crows and the poor are served with delicious food. Brahmins and poor are also given cloths, cash and other gifts. I am not competent enough to comment about the traditions of other religions and cultures, but I am sure similar traditions are practiced by the followers of other religions also. The anecdotal evidence that I have collected from my interactions with...

The dismal GDP growth data for 1QFY20 released last Friday has fueled a multitude of debates in the country. Most of these debates could be classified in three categories, viz., 1.     Political Debate: Whether the incumbent NDA government led by PM Modi has failed in handling the economy properly? The debate encompasses a variety of issues, e.g., (i) whether demonetization and GST have impacted the growth momentum so severely that it may take many years to recuperate from the side effects; (ii) whether the government is focusing on too much on political issues ignoring the evident socio-economic concerns; (iii) whether the Narendra Modi administration has adequate talent to manage a economy in serious crisis; and (iv) whether UPA government led by Dr Manmohan Singh managed the economy well or is it due to the vacuum created by that government that the current government is trying hard to fill? The former Prime Minister Dr Manmohan Singh has acti...

Policy Paralysis vs Policy Haste In 2014, NDA led by BJP's prime ministerial candidate Shri Narendra Modi won a huge majority in the Lok Sabha. "Policy Paralysis" of the extant UPA government led by Dr. Manmohan Singh was one of the primary planks on which NDA election campaign was built. A large majority of people, especially businessmen and capital market participants, had then celebrated the victory of NDA with great fervor. Assuming that the India's economic model based on Nehruvian Socialism (a distorted version of classical Keynesian model) will pave the way for the so called "Gujarat Model". Though not many people had clarity about what the much talked about Gujarat Model of growth is all about, and whether that template of socio-economic development could also be applied to the rest of India. Most people had expected that the new regime will at least provide a proactive, clean, responsive, accountable and business/investment friendly adm...