Some random thoughts

Ppt slides about accomplished PIOs

It is very common to receive the lists (or graphics) depicting very successful persons of Indian origin (PIOs) on our social media timelines; email inboxes and even front pages of newspapers. Some of these lists contain names of people who are not necessarily of Indian origin, but whose names resemble Indian names like Tulsi. In some cases we do not even mind turning matriarchal, if the successful person has only a mother of Indian origin, e.g., Kamala Harris.

Recently, two such persons are prominently in the news – Rishi Sunak, who lost the race to the 10 Downing Street last month, and Suella Braveman, the newly appointed Home Secretary in Liz Truss cabinet. Both British politicians happen to be born to parents of Indian origin who migrated from India many decades ago. Both were born and brought up in the UK; own a passport issued in the name of the British Monarch; have never publicly shown any allegiance to India. Suella Braveman recently lamented that Indians form the largest group of VISA violators in the UK.

Many of the top global corporations, like Google, Microsoft, Adobe, Twitter, IBM, Cognizant, Nokia, Bata, Chanel, Starbucks, Micron etc. now have CEOs who were born and graduated from India. Many of them pursued higher studies abroad and worked there for many years before reaching the top. They all are global citizens, do not necessarily carry an Indian passport and have shown no specific commitment to development and growth of India.

I fear that most of these names may be under pressure to prove their allegiance to the country, whose name appears on the front page of their passports; or the companies which write their paychecks; even if it means taking decisions that are prejudicial to the Indian economy. They may hold tremendous respect for their motherland, alma mater, religion and culture. But the economy of India and welfare of a common Indian may not appear high in their list of priorities. In fact, people who are not of Indian origin may do much more for India than PIOs.

In fact, the more PIOs reach the pole positions in global corporations and politics, more worried we should be. Because, it not only strengthens the global lobby of influential people who may not like to be openly seen as biased towards India; it also reflects poorly on the weaknesses of our entrepreneurial ecosystem that is unable to retain top talent.

Having understood this, I shall now avoid investing in mutual funds and companies whose periodic presentations show the list of accomplished PIOs as a strength of the Indian economy and markets.

Running foreign policy from press conferences

Recently, one of the most celebrated video clips on social media in India has been the one where the external affair minister (EAM) of India is answering the questions of western media about India’s policy with regard to the Russia-Ukraine war, especially India’s decision to buy crude oil from Russia despite NATO sanctions. The stern and articulate response of the EAM won him millions of accolades. Many did not hesitate in terming him the most competent minister of PM Modi’s cabinet; a symbol of rising global power of India; and a worthy successor to PM Modi (whenever he decides to retire). Even some foreign experts have termed him one of the best diplomats in the world.

Inarguably, incumbent EAM is very articulate, confident and clear in his views. He also seems to have a clear mandate from the prime minister in the matters of foreign policy. But in recent times, there have been more failures than successes in foreign policy.

NATO countries have tacitly imposed travel sanctions (inordinate delays in VISA issuance) against India for supporting Russia. Businesses and students are suffering from long delays in VISA issuance. China is cementing its position in Ladakh. The US is giving arms and money to Pakistan. We have not been able to get Pakistan black listed by FATF. There is little progress on key issues like membership of UNSC and NSG. There is little improvement in relationships with other neighbors. The UK home secretary has spoken openly against India and the trade deal has been delayed. The Canadian government is seen openly supporting anti India (Khalistan) elements. Despite claims of 30-35% cheaper oil from Russia, the price of our basket of oil is not much different from the benchmark Brent Crude. Belt Road and CPEC are progressing steadily.

I would rather prefer that no one knows about our EAM or see him on TV. Let him be an anonymous person and work behind curtains and show results. The job of making fun of western media and giving blunt responses to western diplomats is best left to the innocuous full timers like Tharoors and Swamis.

What if USD is devalued?

This summer Americans drove less than the summer of 2020 when many office goers were working from home and the economy was partially shut down. The situation is no better in Europe. Higher fuel and food cost is driving the cost of living higher in most of the world, significantly disturbing the household budgets.

 

Many emerging and underdeveloped markets were struggling with higher inflation even before the pandemic. But pandemic and adverse weather conditions in the past two and half years have made the situation worse.

Whereas many emerging markets, especially in Africa and Latin America, have been struggling with higher inflation and rise in the cost of living for a couple of decades, it is a relatively new phenomenon for the post 1980s developed western economies. The present generation in these economies had gotten used to cheap and easily available money and marginal food and fuel inflation in the past two decades. For them this sudden and sharp rise in basic cost of living is nothing less than a major shock. Most of them may not be financially sufficient, economically trained, socially skilled and/or mentally prepared to deal with this problem.

On the other hand, the modern asset pricing models may also not be suitable to the situation where interest rates are rising at record pace. Many valuation models used for making investments in "startups" - having very long payback period in terms of conventional asset pricing techniques; not differentiating between revenue and capital cashflows for operating purposes; usually funded by professional private equity investors with little own skin in the game; and having high leverage debt as the ultimate source of funding – may not work at all in a scenario where USD is depreciating and cost of USD borrowing is running in excess of 6%.

The current spike and persistence of inflation has been attributed to the logistic constraints due to the pandemic; adverse weather conditions; Russia-Ukraine war and fiscal support extended by various governments to mitigate the hardships faced by the citizens. Initially most central bankers believed that the inflation is transitory and will wane as these conditions change. However, in the past six months a realization seems to be dawning upon them that the trillions of dollars in new money, printed over the course of the past 2yrs, may also have a key role to play in this episode of high inflation. Apparently, it took 215yrs for the US government debt to reach US$7trn. It has added the same amount in just the past 27months.

 

Inarguably, the problem of inflation has many more dimensions. Hiking rates and withdrawing quantitative tightening will take more than 25yrs to reach a sustainable level of debt. Manufacturing a recession by sharp hikes will only destroy demand for various commodities and weaken the inflation. However, the inflationary forces will keep coming back, much stronger than now, as and when the growth begins to revive.

A sharp USD and EUR devaluation could perhaps be one of the more viable solutions left to (i) reduce the public debt materially in a short period of time; (ii) complete restructuring of the global terms of trade; (iii) rationalization of the global commodity prices especially energy; (iv) catalyze a new investment cycle led by US and European exports.

The investors in USD denominated assets would obviously suffer tremendous losses. No wonder large investors like the Chinese government have materially reduced their holdings of US treasury and USD. India is also trying hard to diversify its trade to include other currencies like Ruble, Riyal and Yuan, to contain its exposure to USD.

The questions that beg answer are:

(a)   What shall be the safe haven in case of a sudden USD decline. Whether it would be the traditional asset like Gold; a new age asset like digital currencies or traditional safe havens like CHF, CNY, SGD etc.?

(b)   Is there any actionable for a small investor, if this speculation does come true?

4th Industrial Revolution – Is the circle of civilization completing?

 “Fourth Industrial Revolution” is one of the most popular buzzwords these days. One gets to hear this almost every day in one context or the other. Business leaders, administrators, policy makers and money managers etc. have been using it in their presentations and interactions. In some cases it is used as a cliché, without intending any specific trend or opportunity. However, in most cases it is used to imply that new technologies and applications being used in the areas like manufacturing, mobility, communication, healthcare, education etc. are bringing remarkable change in the ways we are used to function. Metaverse, Clean Fuels, 5G, Drones, Artificial Intelligence, Convergence of Technologies, Blockchain, etc. are some of the pieces that are putting this revolution together.

For the youngest generation, the changes this revolution is bringing to their lifestyle might not appear stark. They were born in a world where technological changes have been fast, dramatic and disruptive. For the older generation, however, the experience is overwhelming.

The pandemic has added another dimension to the extant global development paradigm. A larger number of people are now looking for evidence to assess if we human being were less “happy” before we started to study and research the functioning of universe, cosmic events, natural phenomena like gravity & relativity, adopted the modern science and technology to carry out our day to day functions, trade and commerce, etc. In fact, if we do honestly assume "happiness" as the "ultimate goal" of all our social and economic activities; then most parts of modern science and technology may appear redundant to us.

An esoteric explanation of the fourth industrial revolution could be that we as a scientifically evolved society are trying to complete the circle by connecting the present to the point where it all started. Some indicators of this endeavor could be seen from the following trends:

·         We are increasingly accepting the Sun and Water as the primary source of energy and nutrition. Terms like chemical free, carbon free, etc. command the highest premium. Smoke rising from chimneys that symbolized earlier industrial revolution is considered regressive now.

·         We are increasingly preferring to stay in our respective caves, leaving the job of hunting and bringing food to few warriors (ecommerce, food delivery, work from home, video conferencing etc.)

·         The commitment to family and society is diminishing. “Individual” rather than the “community”, is becoming the focus of most activities, including sales & marketing, politics, religion, etc.

·         “Tribes” are becoming smaller and inward focused.

·         Procreation is not a priority for a significant proportion of the global population. In the next five decades we might see the global population stagnating or even declining.

·         The laws of the jungle have gained acceptance in most jurisdictions. The interest of the strong is accepted as justice even in the most developed societies. Lions and Elephants act at will while the rabbits and deer wait in horror to be devoured.

A trading opportunity in gold

 In the past one month, the bond yields in most of the developed world have risen sharply, devastating the bond portfolios, especially the leveraged portfolios. Even most emerging markets have seen their bonds declining in value. Consequently, the global currency markets have also seen high volatility. The USD index has reached the highest level in two decades, as JPY, EUR and GBP have declined to lowest levels in decades. Even PoBC is cutting the reference range for CNY sharply and USDINR is at historic lows.

The sharp rate hikes in most parts of the world, and tighter money markets have so far not been able to rein the runaway inflation. It is expected that the central banker may continue hiking aggressively for another quarter at least. Accordingly, the forecast of a severe recession in 2023 in most parts of the western world on both sides of the Atlantic is fast becoming a consensus.

Poor demand outlook due to recessionary conditions is causing severe correction in the commodities markets. Industrial metals and crude oil have corrected sharply. The shipping container rates have also collapsed. Even if we normalize the commodity prices and container rates for the Covid related abnormalities, we are heading towards prices lower than the average of 2018-19.

In all this global turmoil, the most puzzling piece is precious metals. Both gold and silver have not behaved in the expected manner. Traditionally, during periods of high inflation, geopolitical uncertainties, war, money-debasement (due to quantitative easing or hyperinflation) etc. gold and silver had provided a safe haven, protecting the wealth of investors. In the latest episode of crises, precious metals have actually belied their safe haven status.

Despite, inflation ruling at four decade high level; Russia-Ukraine war; tension in the China Sea; and massive money debasement (US Fed alone printing US$7trn in the past 30months), international gold prices have actually fallen over 10% since January 2021 in nominal USD terms. In real terms, the losses are even more. Though, in GBP and EUR terms gold prices are higher, but certainly not commensurate with the circumstances and historical trends.

The trend in gold prices becomes even more intriguing, when we factor in the requirements under Basel III regulations that may require much higher holdings of physical gold by the global central banks. In fact a number of central banks like Bundesbank, PoBC, Central Bank of Russian Federation, RBI, etc. have increased their holdings of physical gold in the past 4years.

A few months ago, I had expressed my apprehension that yellow metal might be losing its luster (see here). The recent trend further strengthens my fear that in the new global order that is emerging post the pandemic, Gold may not be a key component. Declining consumption demand (the share of gold & silver ornaments has fallen below 1% in Indian household savings, from 1.7% just 5yrs ago, see here); competition from digital currencies; higher security risk and higher cost of security; and rising cost of production etc. are some factors that seem to be working against the gold.

Nonetheless, I am inclined to believe that we may get a very good trading opportunity in gold sometime in the next twelve months. I shall look to allocate some tactical money towards gold, if it falls another 8-10%.

“Selfie” diminishing 18-20th century ideologies

Households in most parts of the world are struggling to manage their finances. The cost of living is becoming unaffordable for most poor and lower middle class households. The basic necessities like housing, food, energy and healthcare have seen material inflation in most jurisdictions.

Even middle class households are finding it hard to maintain their current lifestyles as the wealth effect created by bloated asset prices is waning fast; savings are depleting due to massively negative real interest rates; and real wages have declined over the past 3yrs.

Historically, such conditions have provided a fertile ground for a workers’ (communist) movement. Countries face widespread civil unrest (anarchy) and anger against the wealthy (burgeon) and capitalist democracies are usurped by the authoritative (dictatorial) leaders. Peoples’ right to basic standard of life takes precedence over liberty and nationalism.

The latest election results in Sweden and Italy are surprising in this context. Both the countries have elected leaders holding extreme Right ideologies. In fact Giorgia Miloni is being compared to the fascist Benito Mussolini, who made the Pact of Steel with Adolf Hitler (Germany) and later Tripartite Pact, including Japan in the Axis Powers to establish the rule of “racial supremacist” in the world.

Until only a few months ago, it appeared that left leaning parties are taking control over major economies. However, that assumption has been belied completely in the recent events in UK, Sweden and Italy. It is also expected that right wing Republicans may take control of US Congress in the ensuing mid-term elections.

So how do we explain this phenomenon of ultranationalist leadership emerging in various parts of the world when one half of the global population is struggling to make two ends meet? In my view, it is important to decipher this puzzle for making a good investment strategy.

One view I got is that uprising of workers occurs only after burgeon excesses reach an extreme. We may therefore be one step away from the revolution.

I am however not inclined to accept this view. I believe that the quantitative easing (QE) that created thousands of millionaires and unicorns, while pushing almost a billion people back into poverty is nothing but a burgeon excess on the extreme. The pandemic and erratic weather patterns that have caused severe food and health crises globally are also an indication that Mother Nature is no longer willing to tolerate the excesses perpetrated by way of unsustainable exploitation of resources under the garb of industrialization, civilization, growth and development.

My view is that the lines between Left (communism), Center (Socialism) and Right (Ultra nationalism) political ideologies have got obliterated in the past two decades. Politics is now driven more by personalities than ideologies. The persons at the helm do not mind using the ideas of the French Revolution, Marx, Lenin, Hitler, and Keynes, et. al. to attain and/or stay in power. We have seen leaders like Trump, Putin, Xi Jinping, Narendra Modi, Imran Khan, etc. to be ultranationalist, socialist, and communist at the same time.

Thus, in this era of ‘Selfie”, personalities rather than ideologies & values are driving the politics. Obviously, the policy making is highly unpredictable. For example, in the case of India, in the same cabinet meeting we could have extremely populist (socialist); ultranationalist and burgeon (capitalist) decisions being taken. President Xi Jinping could liberalize the economy, dissipate Jack Ma, sign a watershed petro-yuan deal with Saudi and annihilate Uyghurs Muslims, threaten Taiwan, invade India and talk about global cooperation (Belt and Road initiative) in the same breath. Biden can leave Afghans on God’s mercy and pledge support to Ukraine and Taiwan. Trump can seek help from Russians to win elections, and Sunni Saudi Sheikh can talk peace and friendship with Jewish Israel and Shia Iran.

Trends in Indian Household Savings

The latest edition of the Handbook on Indian Statistics released by the Reserve Bank of India (RBI) depicts some interesting trends in domestic savings. Gross Domestic Savings (GDS), which was recovering steadily post demonetization, has again declined post Covid. However, the decline since FY17 is entirely due to lower savings in the corporate sector. The household savings have actually risen sharply, especially during Covid.

Contrary to popular perception, the Indian households are allocating much less to the capital market products (shares and bonds) post Covid. Even contributions to the provident funds have declined materially, indicating lower employment in the organized sector. Bank deposits have seen an increase. The contribution of Indian households to Investments (Gross Capital Formation) is stable at the elevated levels seen post demonetization, implying a rising trend towards self-employment.

Key trends

·         Gross Domestic Savings (GDS) in India that had recovered from Rs48.2trn in FY17 to Rs 60trn in FY19, declined to Rs55.9trn in FY21.

·         Household’s share in GDS increased from 58% in FY17 to 79% in FY21. During Covid it increased from 65% in FY20 to 79% in FY21. At the same time the share of the private corporate sector in GDS declined from 34% in FY17 to 30.6% in FY21.

·         The share of financial assets in household’s total savings has seen an increase from 41% in FY17 to 52.5% in FY21. In the same period the share of physical assets declined from 57.2% to 46.7%; and the share of gold and silver ornaments fell from 1.7% to 0.9%.

·         Contrary to popular perception the share of allocation to capital markets (shares and debentures) fell from a high of 9% in FY17 to 3% in FY21.

·         Household share in investment has increased from 32% in FY17 to 38% in FY21.

Indications

Post demonetization and GST, the private sector profitability (hence savings) have been impacted.

Households are increasingly becoming cautious. They are controlling their consumption and adding to savings.

Employment conditions may have worsened. More households are engaging in self-employment.

Deployment of savings in physical assets like personal vehicles, housing etc. is being avoided to maintain liquidity.

Risk appetite has been impacted adversely; and households are preferring safer bank deposits over riskier capital market assets.

 

ZET – A transformative investment opportunity

 One of the earliest expressway projects in India was the golden triangle expressway connecting the tourist circuit of Delhi-Agra-Jaipur. The project was completed years before the National Highway Development Project (NHDP) was announced in late 1990s. It is only appropriate that the government has planned India’s first National Highway for Electric Vehicles in this golden triangle. Last week, a trial run of NHEV was conducted on a 248km highway between Delhi and Jaipur.

Agra-Delhi-Jaipur will be the first 500km EV corridor programmed and to be operated by Advance Services on Social and Administrative Reforms (ASSAR). ASSAR would be operating 12 such corridors marked by the Union Power Ministry. On all these corridors, vehicles, chargers, civil & electrical infrastructure, fleet & station utilities and all other components would be engaged together on Annuity Hybrid E-Mobility (AHEM) model with single capex spend from PSUs and Banks.

Agra-Delhi-Jaipur NHEV marks the beginning of an exciting journey towards the goal of full Zero Emission Transportation (ZET) over the next 3 decades.

Recently, India’s premier policy research institution, NITI Aayog, and RMI, an independent nonprofit that transforms global energy systems through market-driven solutions, published a detailed report outlining a roadmap for achieving complete ZET in the freight road transport sector by the year 2050. The report titled “Transforming Trucking in India – Pathways to Zero-Emission Truck Deployment” highlights the roadmap for making India a crucial player in the inevitable transition to zero-emission freight vehicles.  

The key points highlighted in the report include the following:

1.    ZETs can lead to sustained logistics cost savings. Transportation costs are a major driver (62%) of overall logistics costs in India, accounting for 14% of India’s GDP.5 Since diesel fuel costs account for the overwhelming majority of transportation costs, ZET adoption can dramatically lower associated fuel costs by up to 46% over the vehicle's lifetime, with broad implications for the Indian economy.

2.    A robust domestic ZET market can transform India into a global green hub for battery manufacturing. ZETs would be a significant source of demand for domestically produced batteries (up to 4,000 gigawatt-hours [GWh] cumulative through 2050), supporting and underpinning the National Energy Storage Mission and providing the impetus for the nation to become a low-cost and low-carbon manufacturing hub.

3.    If produced at scale, the total cost of ownership (TCO) for ZETs in the MDT segment can be less than diesel trucks, and TCO parity can be reached in the HDT segment by 2027. Currently, ZETs have a higher upfront cost compared to diesel trucks, but ZETs also have significantly lower per-kilometre operating costs.

4.    With supportive policies ZETs can achieve an 85% sales penetration by 2050. With cost competitiveness, and technology maturity, nearly 9 in 10 trucks sold in 2050 can be ZETs

5.    ZETs can help shift India off oil import dependency, supporting the vision of a self-reliant India. Today, road freight accounts for more than 25% of oil import expenditures—and is expected to grow over 4x by 2050. ZET adoption can eliminate a cumulative total of 838 billion litres of diesel consumption by 2050, which would reduce oil expenditures by ₹116 lakh crore through 2050.

6.    Widespread ZET adoption could reduce cumulative trucking particulate matter (PM) and nitrous oxide (NOx) pollution by ~40% by 2050, substantially improving air quality in India. Today, trucks represent just 3% of the total vehicle fleet (including both passenger and freight) yet are responsible for 53% of PM emissions.6 A purposeful transition to ZETs can lead to considerable improvements in air quality and benefit citizens’ public health.

7.    Widespread ZET adoption could reduce annual trucking carbon emissions 46% by 2050, lowering the nation’s greenhouse gas (GHG) emissions. The trucking sector is responsible for one-third of transport-related CO2 emissions in India. A determined transition to ZETs can lead to 2.8–3.8 gigatonnes of cumulative CO2 savings through 2050, which is equal to or greater than India’s entire economy-wide annual GHG emissions today.

8.    The early state of the overall ZET market in India requires a coordinated ecosystem approach spanning the public and private sectors. Such an approach can help overcome challenges such as the upfront capital needed to make the ZET transition through a combination of finance, technology, infrastructure, and policy strategies.

Indubitably, this remarkable transformation to ZET will present a once in a century type investment opportunity for both businesses as well as investors.

Fed stays on course with another 75bps hike

 “Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve, but they’re not as painful as failing to restore price stability and having to come back and do it down the road again.” – Jerome Powell, Chairman of the US Federal Reserve

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) decided to hike the policy rate by another 75bps taking the federal fund rate to 3.0%-3.25% range; the highest level since 2008.

In the post meeting press statement, the Fed chairman Jerome Powell reiterated Fed’s commitment to bring down the inflation to its target level of 2%. The Fed officials indicated that the Fed would keep hiking rates further till the terminal rate of 4.6% is reached next year. This implies another possible 75bps hike in November, followed by a couple of smaller hikes in the two subsequent meetings. Quelling the market expectations of a cut next year, the fed officials hinted that no cut is seen in 2023.

Six of the nineteen FOMC members even see the terminal rates at 4.75%-5%, implying a 175bps further hike till 2023 end, before the Fed begins to scale down in 2024, bringing the rates back to below 3% only in 2025.

It is pertinent to note that there is no precedence of Fed hiking so aggressively since 1990 when the overnight funds rate was adopted as its primary policy tool. In 1994, Fed had hiked 2.25%, resorting to cuts the very next year. US Inflation had probably peaked at 9.1% ( CPI, yoy) in June, before easing to 8.3% in August.

Indicating a recession-like condition in 2023, in their quarterly estimate of rate and economic outlook, FOMC stated that unemployment rate may rise sharply to 4.4% in 2023 from the present 3.7%. FOMC scaled down its estimates for economic growth in 2023 to 1.2% and 1.7% in 2024, reflecting a bigger impact from tighter monetary policy.

From this month, the Fed has also accelerated its quantitative tightening program with US$95bn/month reduction in its US$8.9trn balance sheet.

The Fed decision did not bring any surprise for the market, as the consensus was for a 75bps hike, with a minority expecting even a 100bps hike.

·         The US benchmark indices ended the day with sharp cuts after a highly volatile session.

·         USD Index (DXY) strengthened to over 111, its highest level since April 2002.

·         Industrial metals and crude ended with over 1% cut, while Silver (2.2%) and Gold (0.6%) were higher. Bitcoin lost over 2%.

·         Bond markets quickly priced in the growing risk of a recession as the Treasury yield curve further inverted. The 2-year treasury yield over 10-year Treasury yield inverted to beyond 50-basis points.

Indian markets are also expected to open with a cut of about 1%.

Weaker Chinese economy is a problem for all

In a world where almost every central banker is struggling to contain inflation and tightening monetary policy, the People’s Bank of China (PoBC) seems to be facing a different set of problems and hence adopting a divergent policy approach. PoBC has actually cut the key loan prime rate (LPR) twice in 2022.

It is pertinent to note that the Chinese economic growth has been on the decline ever since the global financial crisis. The pandemic has slowed the growth even further. The latest growth data suggests that the Chinese economy is growing less than 5% this year, its lowest growth rate in at least three decades. Some part of the growth decline could be attributed to the zero tolerance policy towards Covid and stringent lockdown; but it is important to keep the declining trend since 2010 in mind.

 

Considering that China has been one of the key growth drivers of the global economy; declining Chinese economy is a matter of concern for all.

Besides, China has been one of the primary (i) financiers of the deficit budgets run profligately by many western economies; (ii) investor for the development projects undertaken by the Middle-East and Central Asian and African emerging economies; (iii) exporter of deflation through low rates, taxes and wages to the world; and (iv) absorber of the carbon emission for many developed and developing countries which chose to offshore their polluting manufacturing to the Chinese shores. Obviously, a weaker Chinese economy is a major concern for a large part of the world.

In the Evergrande episode (read here) we saw how much the global markets are sensitive to a financial crisis in China. In principle, the western democracies may not like the authoritative political regime of China, but the global investors’ confidence in the Chinese markets is mostly driven by this very regime; as it lends confidence to the investors that any crisis will be contained almost instantaneously. As President Xi Jinping gets ready to be elected for a record third term later this year, it would be important to see how he keeps alive the faith of global investors, who have not made money in Chinese markets for almost a decade now.

Mr. Fed - say what you want, unambiguously

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) is scheduled to announce its latest assessment of the economy and its policy stance tomorrow. A large number of market participants are waiting to hear the Fed chairman, with bated breath. I expect a large number of traders in India to stay awake till midnight to hear Mr. Powell, even though they cannot initiate any trade until 9:15AM on Thursday, when the Indian markets open for trading. Therefore, literally speaking, losing sleep to hear the Fed statement is of little consequence.

The market consensus is for a 75bps hike in the policy bank rate and an unambiguous hawkish stance unlike the previous statement in July, when the Fed sounded little ambivalent about the future hikes. Some experts are expecting even a steeper 100bps hike and raise in the terminal bank rate target to 4.5% (from previously estimated 3.75-4%) by April 2023. This implies a total of 200bps expected hike between September 2022 and April 2023; the steepest hike in the past two decades.

Since March 2022, when the Fed started to hike rates to bring down the inflation, an interesting contest has been seen between markets and the Fed.

1.    The benchmark S&P500 has moved higher after hearing the Fed on 3 of the 4 occasions. Obviously, the messaging of the Fed to the market was lacking in clarity and intent.

 

2.    One of the reasons for defiance of stock prices despite sharp rate hikes is that the Fed has not been able to materially influence the long term yields so far. The US yield curve has inverted sharply in the past six months, indicating that the markets are assuming a sharper recession and a quick reversal in the rate hike cycle (as early as 2H2023).

3.    The commodity prices have not yet corrected in line with the stance of central bankers and forecasts of severe recession. Bloomberg Commodity Index is still higher than the level it was at the beginning of the rate hikes in March 2022; and so has been the inflation. Consequently, the US rates have become sharply negative severely hurting the savers.

 

Obviously, more than the action, the Fed perhaps needs to tighten its messaging to the markets. For example, a clear message that the inflation is not seen coming below the Fed’s upper tolerance band at least till the end of 2023 and it would not be prudent to expect a rate cut before 2Q2024, could make the market reactions more congruent to the Fed’s policy stance.