Earnings growth trajectory flattening

The latest earnings season (2QFY23) ended, leaving the markets with “glass half full or glass empty” feelings. The aggregate results were mostly in line with the already moderated expectations; though granular details indicate a wide divergence within sectors. Overall, the management commentary sounded optimistic about easing raw material, logistic and wage cost pressures; though the companies did not sound particularly sanguine about the demand environment, especially the rural demand and export demand.

The earnings for 2QFY23 were also mostly driven by financials; while IT, FMCG and Pharma also put up a good show. Oil & Gas, capital goods, consumer durables, telecom, automobiles and cement were notable underperformers. Post the results, FY23 Nifty EPS estimates have seen marginal changes, while FY24e earnings estimates have been moderated further. The long term (5yr CAGR) earnings trajectory is now flattening after a sharp growth witnessed during FY19-FY22. This flattening of long term earnings trajectory may jeopardize any chance of a PE re-rating of Indian markets, in my view.

Is Plaza 2.0 on the anvil?

 Thirty seven years ago, on 22^nd September of 1985, the representatives from the now defunct G-5 met at Plaza Hotel, New York to discuss one of the most remarkable currency manipulation plans. On that afternoon, the US, France, Germany, UK, and Japan signed the Plaza Accord to weaken the US dollar to help the US reduce its burgeoning trade deficit.

As part of the accord, the US agreed to cut its fiscal deficit materially; while Germany and Japan consented to boost their domestic demand by cutting taxes. All parties agreed to actively “manage” their currency markets to “correct” their current account imbalances.

In backdrop to the Plaza Accord, the US Dollar had appreciated about 48% during 1980-1985, primarily induced by the sharp hikes in the policy rates by the US Federal Reserve, led by the Paul Volcker; pressurizing the US manufacturing by making (i) imports from Japan and Germany more competitive and (ii) exports to other countries less competitive. This was the time when US manufacturing giants like IBM and Caterpillar were facing severe stress and lobbying the US Congress for relief.

The US Dollar (USD) depreciated over 25% against Japanese Yen (JPY) and German Mark (DEM) in the two years following the Plaza Accord. The plan worked with limited success but not without material collateral damage. The US-Japan trade sustained as Japanese automobile and Electronic products continued to overwhelm the US consumers. US-Germany trade imbalance corrected materially. A stronger JPY however resulted in severe deflationary conditions in the Japanese economy, resulting in the famous “lost decade”.

Paul Volcker retirement from US Federal Reserve and appointment of Alan Greenspan was heralded by Black Monday, 19^th October 1987. The stock markets crashed the world over and the limitation of the Plaza Accord stood exposed. The era of “Greenspan Put” that started in 1987 has continued till recently, with few short interspersed breaks; though the nomenclatures are now more generic like “Fed Put”, “ECB Put”, “BoJ Put” etc.

The current situation in the US is no different from the early 1980s. Inflation is persistently high. Rates are rising. The USD is strengthening. The trade deficit is now with China, instead of Germany and Japan then. The growth has slowed down materially. But the stock market implied volatility is impudently low. The only plausible explanation for this in my view is that the markets have strong belief in the central bankers’ put. The markets appeared assured by the reckless support extended by the central bankers post Lehman Collapse and in the wake of Covid pandemic. The belief that a “black Monday will not be repeated” is too strong at this point in time.

In this context, the latest presentation of Fidelity International on “2023 Investment Outlook” makes an interesting reading. Outlining one of the three key themes for 2023, the presentation, inter alia, highlights the following:

·         Interest rate differentials have driven the dollar ever higher, creating headwinds for countries dependent on trade, with large external debt burdens, and/or maintaining a currency peg. Vulnerability is highest among emerging markets.

·         We see chances for a Plaza 2.0 type global accord on controlling the dollar as low in the absence of a full-blown currency crisis. In the meantime, central banks including the BOJ and HKMA must ramp up efforts to defend currencies.

Politico-economic ideologies slithering in obscurity

 In my view, we have entered a phase in world history where the politico-economic ideologies, e.g., free market, socialism, communism etc., have lost their theoretical context. In a significantly large number of countries the ruling parties and their leaders are not particular about adhering to their core ideologies. The voter base of the parties also appears to be divided on the basis of current issues rather than the core ideologies.

The sharp rise in socio-economic inequalities across the ‘democratic world’ has made the bulging bottom of the socio-economic pyramid even more attractive from ‘popular vote’ perspectives; and the thinnest ever top of the pyramid the most attractive from election funding and corruption purposes.

We are, therefore, witnessing (i) a larger role of governments in the economies; (ii) deeper influence of large corporates in the matters of economics and geopolitics; and (iii) preference for stronger (egotist; fascist; ultranationalist; hardliner whatever you prefer to call them) leaders who could be hailed as superhero – taxing the rich (mostly middle classes) and providing for the poor. It would be interesting to see what shape this opportunist politico-economic ideology finally acquires to become a legitimate widely acceptable political practice.

The Wikipedia page describing “Political Parties in the United States”, incidentally provides a good historical context to the latest transition in the global politico-economic order. It, inter alia, reads as follows:

“The first President of the United States, George Washington, was not a member of any political party at the time of his election or throughout his tenure as president. Furthermore, he hoped that political parties would not be formed, fearing conflict and stagnation, as outlined in his Farewell Address. The Founders “did not believe in parties as such, scorned those that they were conscious of as historical models, had a keen terror of party spirit and its evil consequences," but Richard Hofstadter wrote, "almost as soon as their national government was in operation, found it necessary to establish parties.”

In the past 150+ years the two dominant parties have changed their ideologies and base of support considerably but kept their names. The Democratic party, that in the aftermath of the Civil War was an agrarian pro-states-rights, anti-civil rights, pro-easy money, anti-tariff, anti-bank, coalition of Jim Crow "Solid South", Western small farmers, along with budding labor unions and Catholic immigrants; has evolved into what is as of 2020, a strongly pro-civil rights party, disproportionately composed of women, LGBT, union members, and urban, educated, younger, non-white voters. Over the same period the Republican Party has gone from being the dominant American "Grand Old Party" of business large and small, skilled craftsmen, clerks, professionals and freed African Americans, based especially in the industrial northeast; to a right-wing/conservative party loyal to Donald Trump, disproportionately composed of family businesses, less educated, older, rural, southern, religious, and white working class voters. Along with this realignment, political and ideological polarization has increased, norms have deteriorated, leading to greater tension and "deadlock" in attempts to pass ideologically controversial bills. (emphasis supplied)”

In the context of Indian politics, we see that all socialist parties have become feudal; BJP that started as a party of middle class upper caste businessmen and Hindu nationalists is winning elections on “social welfare program” agenda; the left of center Congress is striving hard to establish its Hindu credentials and Hardline Hindu Shiv Sena is preaching secularism.

The Indian National Congress which started with the Leninist concept of planned economy driven mainly through public sector; inserted the word “socialist” in the preamble of the Constitution of India”; curtailed free speech by imposing national emergency ended up as a strong votary of disinvestment of public sector; right to information; free trade and larger role for private sector.

BJP gained power on the promise of “less government” and is affording more power to the government; stifling transparency and free speech; has not pursued privatization in the past 8yrs of rule. ``Free ration”, “cheap (free) medicine” and cash subsidies have been its primary campaign slogans in most of the recent elections. The party with difference is now happy to be led by a strong leader who has vowed to destroy all its opponents.

Socialist parties like BSP, SP, RJD, LJP, TMC etc. have mostly become fiefdoms of leading families and appear more feudal in their conduct than anybody else.

The middle class people raised their voice against the rampant corruption of the Congress led UPA government leading to a nationwide movement that resulted in the birth of Aam Aadmi Party. The same party is now seen as a party of the poor financed by corrupt businessmen. Some of its leaders are facing allegations of serious corruption and communal rioting. Most professionals who enthusiastically joined the party have deserted it alleging lack of internal democracy and autocratic ways of the top leadership.

The traditional ideologies like free market, socialism, communism etc. have absolutely no role to play in the Indian politico-economic paradigm. The global transition might also have some reverberation in India also. However, insofar as the latest round of elections is concerned the results would hardly change anything in the broader context. Congress has nothing to lose in these elections; though stakes are high for both AAP and BJP. There could be some setbacks for both.

Relative return argument vs absolute return strategy

 The benchmark Nifty 50 index has given almost no return in the past 12 months. Nifty Smallcap 100 Index is down over 13% and Nifty Midcap 100 index is down about 2.5% over the same period. Adjusted for dividends and inflation, the real returns would be worse. On a comparable basis, the benchmark S&P 500 index of US yielded a negative return of ~15%; Stoxx500 of benchmark index for Euro Area returned negative 12% and Hang Seng, benchmark for Hong Kong market, returned a negative yield of ~30% over the same period.

This is a popular set of statistics that is used by market participants like advisors, portfolio managers, and wealth managers etc., to advance arguments in support of their past performance and future prospects of investments made now.

Investors use this set of statistics in a variety of ways. For example—

·         Investors following a relative return strategy may find comfort in the fact that their portfolios have performed better than the benchmark indices, though they have lost money or earned a negative return on their investments.

·         Investors who are invested for a long term, may argue that Nifty 50 3yr CAGR is still 15.5%, which is a decent real return of over 10% p.a., accounting for inflation and dividends.

·         Some investors may draw comfort from relative outperformance of Indian benchmark indices, as compared to the global peers; even though their own portfolios have yielded negative returns.

In my view, however, this could be a serious mistake most of the investors might be making. The relative return argument (or “strategy” if you prefer to use this jargon) serves no purpose for those investors who are depending on their portfolio of financial investments to meet key goals of their life, e.g., financial freedom and retirement planning etc. To the contrary, this argument could actually lead them to a false sense of security and comfort; whereas their primary objective of investment might be getting defeated.

The investors whose investment objective involves any one or more of the following ought to prefer an absolute return strategy, instead of a relative return argument. For their investment objective would invariably involve a defined cash flow over a definite period of time.

1.         Retirement planning – regular income to supplement the loss of salary/wages.

2.         Goal based investment, e.g., buying a house, children education expense.

3.         Financial freedom - assured minimum income to allow

Such investors should ignore the noise and resist excitement in their investment endeavors. Their investment strategy must focus on making a reasonable rate of absolute return over the “defined” period of time. Beating the benchmark index should be the least of their concerns.

However, the investors whose investment objective is primarily wealth preservation and/or reasonable growth; and regular cash flows from investment are not required to sustain (or improve) their lifestyle may accept a relative return argument; for historically the benchmark indices have been able to yield decent positive real return. These investors can afford to bear intermittent volatility since they do not need regular cash flows or lump sum redemptions at defined intervals.

Survival is the key for now

 If I must choose one word to define the current global situation, it will indubitably be “tumultuous”. There is commotion, agitation, emotional outbursts, upheaval, chaos, distraughtness, indecision and haphazardness in almost all spheres of life – be it economics, finance, governance, politics, or geopolitics. As the trust deficit deepens and widens further, the leaderships are dissipating fast.

USA and UK which have provided political leadership to the world in most of the past hundred years, no longer enjoy wide acceptability. In fact both the countries are struggling to manage even their own internal conflicts. The trends elsewhere also suggest that people are choosing perceptibly stronger and decisive leaders to lead in these tough times. Some examples are Brazil, Israel, Sweden, Italy, and China.

Geopolitically, the hegemony of NATO is facing serious challenges from the new alliance of Russia, China, and North Korea, who have not shown much respect for the extant global order. The largest energy supplier to the world, OPEC also appears inclined to move away from the present system of petrodollars and dominance of western developed economies.

Despite the pandemic; severely inclement weather conditions prevailing for the past couple of years over the most parts of the world (especially the developed world) and extremely painful energy crisis in Europe; the global leaders gathered in Sharm-el-Sheikh (Egypt) for COP27 conference are least likely to come to an equitable and effective agreement over climate change.

The global markets are in turmoil. The illusion of stability created by central bankers of developed economies post the global financial crisis is fading fast. Most of the money printed by the central bankers to keep the wheel of markets moving has been used to fuel prices of financial assets and boost bank reserves. Very little went into building new productive capacities. The unscrupulous politicians were happy to unleash a regime of blunderous fiscal profligacy using the abundant and cheap money.

The deceptive wealth effect created by artificially inflated asset prices, especially financial assets, has been crushed by the shortages of food, energy, and workers unwilling to work etc. The business models built on “dreams” are crashing down. The stock prices manipulated through leveraged buybacks using zero interest borrowings are correcting to their realistic valuations. The gullible investors who ran ahead of time and mistook crypto (a medium of exchange) for valuable assets are also facing a reality check. They are also realizing that all NFTs may not be as valuable as a work of Picasso.

As things stand today, we may soon find ourselves standing at the same crossroad where we stood in autumn of 2008. The markets may implode. The inflated asset prices may burst. The headlines might again be dominated by scary jargon like PIGS. Many Lehman-like castles may come crashing down. Globalization may take several steps back, before a new world order emerges.

Many may find these thoughts unnecessarily provocative and scandalous. There could be strong arguments in favor of India as an oasis of stability and growth amidst all this global chaos. But I am not a great admirer of Ms. TINA. I shall not live under any illusion of the Indian economy and markets escaping a global Tsunami; though I am confident that India shall survive it and soon get back on her feet. The key however is to “survive”.

Also read…Stay cautious

Stay cautious

Yesterday some media reports indicated that according to an internal assessment by the finance ministry “India balance of payment (BoP) is likely to slip into a $45-50 billion deficit in the current fiscal year.” (see here) This is obviously not good news for the INR exchange rate. Nonetheless, USDINR has rallied to its best level in almost two months, in the past two days.

It is pertinent to note that India’s current account has remained mostly negative since the global financial crisis (2008), with a brief period of surplus during Covid-19 pandemic. India’s current account deficit was $23.9 billion in the quarter ended June 2022, the worst since the last quarter of 2012. India had witnessed a serious current account crisis in 2013 that required the RBI and government to initiate some drastic measures like reducing limits under LRS. Of course, the present situation is not as dire as 2013, since we have a much stronger Fx reserve position now as compared to 2013. Nonetheless a close watch is warranted on the foreign flows, both portfolio and capital account. In the first nine months of the calendar year 2022, RBI has drained over US$100bn from the Fx reserves. The RBI has specified that this reduction in Fx reserve is due to two factors – (i) valuation adjustment (fall in value of non-INR denominated bonds and fall the relative value of Non-USD currencies in the Fx reserve); and (ii) intervention in Fx market to support INR exchange rate.

Various analysts have estimated that over 50% of drawdown in the reserves could be attributable to the valuation adjustment and the rest to the RBI’s forex market intervention.

As of this morning, there are little indications to suggest that this trend of fall in reserves, either due to valuation adjustment or market operations, may not continue for at least next 6-7 months; given the forecasts of a deeper recession in Europe (more fall in the value of EUR, GBP, CHF and European treasuries); persistent weakness in JPY; and slowdown in the US economy. Poor export growth and thinner FPI/FDI flows might keep India’s current account and Balance of payment under pressure.

The private sector capex is showing no sign of a significant pickup. Most of the capex so far seems related to maintenance, upgrades, debottlenecking etc. The outlook for exports is also not very encouraging.

The government has frontloaded capex, especially in roads, defense and railways. 2HFY23 might witness some slowdown in government capex as the fiscal position tightens (1HFY23 fiscal deficit has been higher due to front loaded capex despite buoyant tax collections).

Overall, we may have some strong macro headwinds for markets in 2023. Investors need to remain watchful and not get carried away by the recent recovery in benchmark indices.

What colour glasses are you wearing?

 The year 2022 is proving to be a bad year for the global investors. The investors’ wealth erosion in the US financial markets, in the past one year, matches the losses suffered during the global financial crisis in 2008-09.

 

If we consider the top 10 global stock markets, in terms of market capitalization, eight of these markets have yielded negative returns this year (in local currency), whereas the rest two are unchanged. Given the USD strength against most currencies this year, the returns would be much worse for the global investors who participated in these markets by investing US dollars.

 

Hang Seng, the benchmark index of the Hong Kong stock market that is mostly used by the global investors to invest in Chinese companies through ‘A’ shares of these companies, has seen 33% draw down in the past one year. With this draw down the 10yr return of Hang Seng is negative 25%.

NASDAQ Composite, the benchmark index for technology stocks listed in the US, is the second largest stock market in the world with a market capitalization exceeding US$22trilions. This Index has lost over one third of its value in the past one year. European (Euronext) and Japanese (Tokyo Stock Exchange) equities have also seen a value erosion of over 10% in the past one year.

Besides stocks and bonds, other asset classes like Bitcoin (-70%); Gold (-13%) and US residential real estate (-13%) are also down materially. Even the cash positions are effectively down by 3 to 5%, given the negative rates on saving deposits.

This is however plain statistics. This may be interpreted in a variety of ways by various persons; depending upon which vista point the interpreter is viewing these data points and what colour eyeglasses they are wearing. For example—

(a)   US$100 invested by an investor in US Tech 10yrs ago is still worth US$250, despite it diminishing by one third in the past one year. But, a large number of investors who started investing (or increased their exposure significantly) during the pandemic may be sitting on material losses.

(b)   An investor in US equities who was leveraged 3x in the past one year may have lost his entire capital, regardless of when he started investing or what he earned in the past. The losses would have been worse if the investor was leveraged in US treasuries. Whereas, an investor following a strict asset allocation strategy with no leverage, may not be doing as bad, though he might have also witnessed a drawdown of ~20% in the past one year.

(c)    A handful of highly skilled traders and hedge funds might have made very good profits by taking short positions on various assets, though a large majority of investors and traders have suffered losses.

(d)   A foreign investor, e.g., Japanese or Indian, parking his money in USD deposit may have outperformed a large majority of investors; whereas a US investor investing in Asian securities might have fared much worse.

(e)    Many investors are terming this sharp fall in value across asset classes as a once in a decade opportunity; citing that historically this kind of fall has invariably been followed by sharp rallies. Whereas, there is no dearth of experts who believe that we are not even half way through the corrective phase; and asset prices will fall much more to adjust for the reversal in QE programs unleashed by the central bankers and fiscal profligacies of the governments.

Goal incongruence

Recently the government of India launched Mission LiFE (Lifestyle for Environment). The Mission is “designed with the objective to mobilise at least one billion Indians and other global citizens to take individual and collective action for protecting and conserving the environment in the period 2022–28. Within India, at least 80 percent of all villages and urban local bodies are aimed to become environment-friendly by 2028.”

In the current fiscal year (2022-23) Mission LiFE is focusing on “Change in Demand, by nudging individuals, communities and institutions to practice simple environment-friendly actions (LiFE actions) in their daily lives.”

Since the Mission LiFE has been launched in the 75th year of India’s independence, a comprehensive and non-exhaustive list of 75 individual LiFE actions across 7 categories has been identified by the NITI Aayog (implementing agency for Mission LiFE). (see details here)

This is a brilliant initiative, inasmuch as it seeks to solicit active cooperation of all citizens through specific, measurable, easy to practice and non-disruptive actions. The objectives are indubitably noble and desirable.

However, if we evaluate this Mission in light of the current macroeconomic and social conditions especially inequality; poor quality of human life, e.g., malnutrition and hunger; food inflation etc. the difficulties in implementation are too obvious.

For example, consider the following:

The list of 75 actionable, inter alia includes the following entries:

“64.      Prefer consuming natural or organic products.

67.       Practice natural or organic farming.”

It is widely accepted that the fundamental right to life enshrined in the Article 21 of the Constitution of India encompasses the right to live with dignity that includes the right to food and other basic amenities. Accordingly, providing food security to the citizens has been one of the most common programs of all the governments in the past seven decades. However, the concept of food security has undergone considerable changes in the past couple decades. In the earlier days, it was focused more on food sufficiency in the country; whereas in the past couple of decades the focus has shifted to make the households food secure in terms of calorie intake rather than making the food available. We can say that the focus of food security programs has now shifted to ‘nutrition’ from ‘starvation’ in earlier days.

The National Food Security Act (NFSA) 2013, accordingly marked another “paradigm shift in the food security from welfare to rights based approach”. NFSA legally entitled about two third of the Indian population to receive highly subsidized food grains under the Targeted Public Distribution System. Presently approximately 81.34 crore persons are entitled to receive benefits under NFSA. This includes beneficiaries under the Mid-day Meal program and Integrated Child Development Services. (See here for details).

Recently, the central government has cleared the release of GM Mustard Hybrid seed DMH11 - based on the recommendations of GEAC under the Ministry of Environment, Forests and Climate Change. The decision to remove “unscientific ban” on GM crops has been hailed as “in the best interest of our farmers and the nation” (see here). The decision disregards all the concerns of environment experts, and even Swadeshi Jagran Manch (SJM), an associate organization of the ruling party.

Obviously there is goal incongruence. The climate goals and the objectives of Mission LiFE are at odds with the need to augment food production, especially oil seeds, to achieve the objectives of food security, and self-reliance (Aatmnirbharta), price stability, doubling farmers’ income, faster economic growth and improving current account.

It will be challenging to strike a balance between the climate goals and immediate socio-economic targets. A successful negotiation to find optimum solution would be the key to success. I shall be watching this space keenly to see how the battle evolves.

Fed stays the course

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) has decided to hike the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008. It is an unprecedented fourth hike of 75bps each at the consecutive meetings. The Committee indicated that “ongoing increases” would still likely be needed before the rates become “sufficiently restrictive” to slow down the inflation.

In a post meeting press statement, the Fed Chairman Jerome Powell said, “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” He added that it was “very premature” to discuss when the Fed might pause its increases.

 

Further hikes could be lower than 75bps

The FOMC statement promised to take economic risks more clearly into account in deciding the size of any further rate increases. The FOMC statement read, “in determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

The statement is being widely interpreted to mean that the future hikes, from the FOMC’s December 2022 meeting onwards, could be lower than 50bps. Though no dot plot (a traditional indicator of Fed official’s view on future rate hikes) was released after the meeting.

No recession, but less chance of a soft landing

Chairman Powell expressed hope that the U.S. economy can escape a recession as the Federal Reserve raises interest rates to lower inflation. He was however skeptical about the soft landing of the economy. He said that given the persistence of price pressure this year, the window of opportunity for a "soft landing" has narrowed; though he is still hopeful of a soft landing.

"Has it narrowed? Yes," Powell said at a press conference after the Fed's latest rate hike. "Is it still possible? Yes."

It is pertinent to note that signs are emerging in the US economy that a hard landing is now probable. The latest PMI came at 45. The stress in households is becoming more evident as personal savings are collapsing; credit card debt is rising at a much faster rate; over a third of the small businesses are unable to pay rent on time. The larger engine of the US economy, the consumer, has already started to stutter.

Markets disappointed

Stock markets corrected sharply after the Fed’s decision, with benchmark S&P500 shedding 2.5% and Nasdaq Composite diving 3.6%. Volumes were large as the market dived post Powell’s press statement, indicating heavy unwinding of positions.

US Dollar Index (DXY) ended more than half of a percentage point higher to close above 112.

Gold and Bitcoin were lower.

The Benchmark 10yr treasury yields were higher by 87bps at 4.10%.

 

No need to stay awake till midnight

 The US and European equity markets had a strong counterintuitive rally in the month of October. The benchmark indices gained 6 to 15% amidst reports of worsening economic and geopolitical conditions. The benchmark Dow Jones Industrial Average (DJIA) gained 14%, its best monthly gains since January 1976. Of course these gains have come on the back of some of the worst months in history and a pathetic overall performance in the year 2022 so far. Nonetheless, these gains have provided some relief to the embattled investors, keeping the hopes alive.

The latest meeting of the Federal Open Market Committee (FOMC) of the US Federal Reserve is being watched even more intensely, as its outcome tonight is widely expected to determine the market direction from here. One of the largest global brokerage firms J P Morgan Chase & Co. has reportedly stated that “The S&P 500 could surge at least 10% in one day if the central bank raises interest rates by a slower-than-expected half of a percentage point, and Chair Jerome Powell signals willingness at the press conference to tolerate elevated inflation and a tightening labor market”.

Apparently, lots of bets have been placed on softening of the Fed’s stance on monetary tightening. If the Fed disappoints tonight, we may see these bets unwinding; or even changing direction towards a bearish stance. A sharp reversal in the US stock markets might reverberate across markets – USD might strengthen; bonds may weaken; gold and silver may correct; and emerging markets may witness some outflows and hence give up some of the gains made in the past one month.

We shall see the expert engaged in animated discussions over Fed’s strategy and likely outcome. The market economists will term the rather hawkish monetary stance of Fed as totally unwarranted and counterproductive, citing elevated inflation and heated job markets as evidence of the ineffectiveness of the Fed’s aggressive tightening. The macro economists on the other hand would call for even more aggressive policy to completely destroy the menacing inflation and restore the credibility of monetary policy.

We shall also see buzzwords like “imminent housing crash”; “dollar debasement”; “crypto crash”; “deep recession” dominating the headlines in every form of media. A variety of experts will make prophecies about the imminent apocalypse; so that on a later date they could say “I told ya so”.

On the other hand, if the Fed obliges the markets by hiking less than 75bps; or hiking 75bps but hinting that Fed might pause sooner than earlier expected (pivot) – the market might respond as enthusiastically as people at J P Morgan et. al. are expecting. We might see an intense battle as the ‘shorts’ rush to cover and ‘longs’ happily lighten their positions.

Regardless of what Fed does and says, or refrains from doing or saying - few things appear certain:

·         The mortgage rates in the US and elsewhere will rise further.

·         Putin will maintain its hard stand on Ukraine and Europeans will be paying through teeth this winter to keep their homes warm.

·         China will continue to push its agenda of “larger role for China in global order” more aggressively.

·         Inflation will come down from a combination of demand destruction and demand transformation (as consumers move to alternative products, methods and technologies). The rate hikes will have a role to play in demand destruction but with a lag. To the contrary the impact of rate hikes on efforts to augment supplies will be visible much earlier. Higher costs would discourage capex, inventory building and debottlenecking; especially when the inflationary expectations are being managed to moderate.

Anyways, I will not stay awake till midnight to hear Mr. Powell. I am also not waiting to hear Mr. Dass tomorrow either, even in the less likely event of him choosing to make a statement post the unscheduled meeting of MPC.

As I understand from the notice of the meeting, this meeting has been called under section 45ZN of the RBI Act. The meeting under this section is called for the limited purpose of discussing and finalizing the contents of the letter to be written to the government explaining the reasons for failing to meet the set inflation targets and enumerate a corrective plan of action. Policy changes are not discussed under section 45ZN. For that a meeting under section 45ZI needs to be called.

However, if the MPC does choose to make an unscheduled hike tomorrow to catch up with the Fed, I may consider a 10-15% underweight on equities for 2023, in my investment strategy, simply because I do not like a central banker who is not in full control of monetary policy and is just managing the spreads with the US Fed.