Do it yourself

 The benchmark Nifty retraced to it all time high level recorded on 14 January 2020. It erased all the losses incurred due to a disappointing budget (from market expectations perspective) and outbreak of Covid-19 pandemic leading to a nationwide shutdown. In a year full of disappointments and despondency, this small and seemingly irrelevant event brought cheers and ignited hope for a better new year. Not to undermine the enthusiasm and positivity around the event, I would just like to highlight three small points:

1. On a longer horizon, after spending a decade in a flat channel, equity markets had been broadly moving higher in a widening channel since 2003. There could be multiple reasons for this strong up move, punctuated with multiple deep corrections. However, if we have to narrow our search, I would list the following three reasons as the primary drivers of markets:

(a)   Mostly easy monetary policies of the global central bankers.

(b)   Change in valuation dynamics due to dominance of technology and innovation in business rather than the conventional man & material factors of production.

(c)    Globalization of markets due to digitalization & dematerialization (of money, trade & commerce, securities, material, labor, information, etc.)

There is no reason to believe that this widening channel will contract or get sustainably violated anytime soon. Though there could be some temporary violations on either side like 2007 and 2009. The important point to note however is that going forward, as the channel widens further, the market moves could be even larger and volatile. The investors and traders therefore need to brace up for that.

2.    The retracement of Nifty to its all time high is led by only two sectors, viz., Information Technology (IT) (up 32%) and Pharma (up 44%). The financial sector which had driven markets to its all time high in January is still down 15% since 14 January 2020 level. PSU Banks in particular are down 44%. Public sector in general is down 30% from 14 January 2020 level.

Again there is no evidence to suggest that this trend may not prevail for next many months also.

3.    The market breadth in this period is materially negative even though the broader market indices have not materially underperformed the benchmark. This implies huge divergence in performance in the broader market also.

 I have always believed that “equity investment” is a serious business but mostly done in a casual manner. In past three decades I have observed that most investors take equity investment decisions based on factors that are not related to the underlying business of the company they are investing in. While this may be more true for the small household investors (Retail) and High Networth Individuals (HNI); the professional fund managers (Institutions) and large traders are also seen taking decisions based purely on factors like politics, geopolitics, and monthly or weekly data (trade, jobs, production), etc. No wonder the “breaking news” on TV channels causes more volatility in stock prices than the management guidance about the business of the company.

I have seen many Retail and HNI investors spending less effort and time in taking equity investment decisions than they would normally spend on buying a shirt. And worst, they spend much less effort and time in taking a decision to dispose an investment than they would do for disposing an old shirt.

From the interviews and comments of some reputable professional fund managers it appears that they usually assign significantly higher weightage to the macro factors, especially political promise of policy reforms etc., than required, especially when the empirical evidence is materially against placing reliance on such political promises.

I am raising this issue this morning, because I believe that even in normal times, investors face numerous uncertainties and challenges. The consequences of these uncertainties vary vastly and are difficult to assess. Investors have to consistently struggle to assess the impact of fast changing technologies, markets, processes and methods on their investment portfolios. The consistently changing macro environment, e.g., interest rates, inflation, liquidity, demand etc., needs to be incorporated in assessing the sustainable valuations of their portfolio. The information asymmetry, regulatory changes, product innovation and debasement of governance standards at business entity level, are some of the regular challenges that an investor has to face. The challenges rise multifold in the uncertain times, like the present one.

The outbreak of pandemic has created enormous uncertainty in almost all spheres of life; especially businesses. A large number of businesses are struggling for survival. Multifaceted challenges have subjected a host of businesses (and some industries) with extreme uncertainties having material and severe consequences. Unlike the previous crises (dotcom bubble of 1999-2000 and global financial crisis of 2008-09), which mostly impacted one set of businesses, this crisis is more pervasive.

The impact of crisis led disruption is exacerbated by the fact that prior to the crisis the global economy was witnessing massive technology transition. Artificial Intelligence and clean fuel technologies were changing the landscape for many businesses. To make the matter more complex, the widespread trade war (involving USA, China, Japan, EU, and UK) was redefining the global trade and terms of trade. As per some reports, the IMF’s GDP contraction forecast for 2020 is more than double the estimated contraction that took place in 2009, the worst year of the global financial crisis.

The equity investors in India have made sub-optimal returns in past five years. Many investors are indicating that the past five year returns for them are in low single digits, with some reporting even negative return for past three years. In these circumstances, it is critical that investors make a holistic review of their investment process. Especially, those investors who have made material changes in their portfolio in view of the 2014 & 2019 India general elections and 2016 & 2020 US general elections, need to immediately sit with their respective advisers, if any, and make necessary amends.

 My dilemma this morning is whether I should be concerned about the internal politics of the United States of America, as most of my colleagues and financial market participants appear to be! In past 20yrs, we have seen George Bush Jr. (Republican, 8yrs), Barak Obama (Democrat, 8yrs) and Donald Trump (Republican, 4yrs) as presidents of United States. In these 20years, India witnessed Atal Bihari Vajpayee (NDA, 3.5yrs), Manmohan Singh (UPA, 10yrs) and Narendra Modi (BJP, 6.5yrs) as India’s prime minister.

Evidently, a Socialist India (UPA) has lived well with Republican US (Bush); and a free economy supporter India (BJP) has lived well with Democrat (Obama) US. In past two decades, we have achieved progress in our civil nuclear program and we have been able to materially enhance our relationship with key US allies like Japan, Australia, UAE, Saudi Arab, and France; while maintain our strong relationship with Russia and Iran. The relationship with China has been volatile all through these years; though US has supported us in the rough patches of Sino-India relationship.

The issue of VISA, especially H1B VISA, has frequently made news in these past two decades. The volume and profitability from US business of our IT companies has grown manifold in these two decades, despite all this noise. The issue of FDA being particularly strict on Indian pharmaceutical exporters to US has also made to the headlines frequently. The US business of our pharmaceutical industry has also grown multifold in these two decades. The number of USFDA approved facilities in India has grown exponentially in past two decades.

Of course we can debate that the trade could have been much higher; or we did not do as well as we could have due to VISA restrictions, FDA actions etc. But, then we will have to answer some tough questions like lack of ethics and discipline at some of our pharmaceutical manufacturers, protectionist policies of Indian government, misuse of H1B and L1 VISA by some of Indian IT services companies, etc. It is therefore better to go with the empirical evidence rather than dwelling upon some hypothetical outcomes. And the empirical evidence is that Indo-US trade and strategic relations have been widening and deepening consistently. George Bush had famously expressed his “respect” for Atal Bihari Vajpayee, and “Love” for Dr. Manmohan Singh. “Barak” visited India twice (most by any US president) and expressed his reverence to Gandhi, admiration for Prime Minister Modi and commitment to relationship with India. Trump has gone much ahead in showing bromance with Prime Minister Modi and expressing love for “Hindu”. Biden has chosen Kamala Harris as his running mate and has promised favorable H1B regime for Indian IT companies. Regardless of who gets to live in White House for next four years, 2020 election may end up with highest number of Indian American elected as federal and state law makers.

I feel, worrying about the outcome of US elections may be out of habit of worrying too much. I believe, in broader context, the question “Trump” or “Biden” may not be any different from “Suicide” or “Murder” (of SSR).

 The work on developing as crypto currency started in early 1980s. The idea was to create a medium of exchange that is independent of any central authority, is based on trust and is accepted by distributed consensus. The process was formally commercialized in 2009 with release of Bitcoin, the first decentralized crypto currency. May be uncertainty over future of fiat currencies post global financial crisis (which led to printing of unprecedented amount of new money) prompted adoption of an independent currency as medium of exchange. Since then, the crypto currencies based on block chain technology have been gaining popularity. Presently, besides Bitcoin, over 6000 variants of crypto currencies are in vogue. The present value of all bitcoin in circulation is over US$250bn and the average daily trading value of bitcoins id over US$23bn. It is clear that Bitcoin is emerging as a serious challenger to Gold as an alternative currency or medium for exchange of value.

In India, RBI issued a circular in 2018 directing all entities regulated by it (Banks and NBFCs) not to deal virtual currencies or provide services for facilitating any person or entity in dealing with or settling those; thus virtually banning use of crypto currencies in India. The Supreme Court quashed the said RBI circular in March 2020, on the appeal of the Internet and Mobile Association of India, representing various crypto currency exchanges. The SC accepted the argument of the appellant that in the absence of any specific law banning crypto currencies, dealing in these is a “legitimate” activity, hence RBI’s circular banning these is untenable.

In August various media reports suggested that a “note” had been forwarded to the concerned ministries for inter-ministerial consultation to promulgate a legislation banning the use of crypto currencies in India. Reportedly, the inter-ministerial committee headed by the former Finance and Department of Economic Affairs (DEA) secretary, Shri Subhash Chandra Garg (who has been in news recently for criticizing the government for backtracking on reforms) had drafted the Bill of the law to ban crypto currencies. In the meantime, as per various media reports, since March 2020 SC order quashing the 2018 RBI circular, the local crypto exchanges have reported as much as 10x trading volume growth and a significant increase in the number of signups.

The question therefore arises are we blind to the opportunity and numb enough to not sense the winds of change blowing across our faces! The answer is a categorical “No”.

In January 2020 itself, NITI Aayog (the think tank of the government of India on policy matters), had released part 1 of the discussion paper on “Blockchain: The India Strategy”. The well-researched and well-presented paper unambiguously stated that the government recognizes the opportunity, importance and need for blockchain based crypto currencies. For example, note the following excerpts from the discussion paper:

“‘Blockchain’ has emerged to become a potentially transformative force in multiple aspects of government and private sector operations. Its potential has been recognized globally, with a variety of international organizations and technology companies highlighting the benefits of its application in reducing costs of operation and compliance, as well as in improving efficiencies.”

“Blockchain is a frontier technology that continues to evolve. In order to ensure that India remains ahead of the learning curve, it is important to understand the opportunities it presents, steps to leverage its full potential and such necessary steps that are required to help develop the requisite ecosystem.”

“Blockchain technology has the potential to revolutionize interactions between governments, businesses and citizens in a manner that was unfathomable just a decade ago.”

“Blockchain is seen as a technology with the potential to transform almost all industries and economies. It is estimated that blockchain could generate USD3 trillion per year in business value by 2030.”

Obviously, the government recognizes the potential, opportunity, need and importance of crypto currencies. Apparently, however, it wants to tread with extreme caution. For example, the following excerpts from the discussion paper highlight the cautious stance of the government.

“Blockchain has been positioned as a revolutionary new technology, the much needed ‘silver bullet’ that can address all business and governance processes. While the promise and potential of blockchain is undoubtedly transformative, what hasn’t helped this technology, that is still in nascence of its evolution, has been the massive hype and the irrational exuberance promulgated by a bevy of ‘Blockchain Evangelists’.”

“Despite the fact that the technology is still in a nascent stage of its development and adoption as it continues to evolve, it is important for stakeholders such as policy makers, regulators, industry and citizens to understand the functional definition of the entire suite of blockchain or distributed ledger technologies along with legal and regulatory issues and other implementation prerequisites. Equally important is the fact that this technology may not be universally more efficient and thus specific use cases need to be identified where it adds value and those where it does not.”

“Any transformative technology, in its initial stages of development, as it moves out of research / development phase to first few applications to large scale deployment, faces several challenges. Part of the problem is that such technologies are initially intended to solve a specific set of problems. Bitcoin, which has led to the popularity of decentralized trust systems and has powered the blockchain revolution, was intended to develop a peer-to-peer electronic cash system which could solve for double spending problem without being dependent on trusted intermediaries viz. banks. As Bitcoin started gaining prominence, the potential of underlying blockchain technology started getting traction. However, some of the early design features that made Bitcoin popular, primarily limited supply and pseudonymity, have become potential challenges in wide scale implementation of blockchain.”

Given the nascent stage of evolution of block chain technology and crypto currencies based on it, the cautious approach is understandable. However, the caution must be pragmatic and should not transgress to typical dogmatic bureaucratic paradigm. We may avoid rushing to capture a still uncertain opportunity; but we should not arrive too late either.

(The NITI Aayog discussion paper “Blockchain: The India Strategy” could be read here.)

 There was this very famous soccer player. He was one of the main strikers for his country as well as club team. He won many matches for his teams. He was very popular amongst sports enthusiast, and as such attracted many corporates to become brand ambassador for their respective products. Unfortunately, one day he met with a serious accident in which many of his limbs were fractured. He remained in intensive care for many months. Doctors had to perform several surgeries to keep him alive and make him walk again.

After spending two years in bed, the striker took his first step with the assistance of his wife and walking stick. The hospital management immediately broke the news to the media. The fans were ecstatic and celebrated the news by popping up champagne and ringing church bells. The doctors informed the team management and sponsors (who were keeping a close watch on the health conditions of their star striker), in confidence that their star would never be able to play again and need a stick to walk for rest of his life. They were obviously not as happy as the family members and army of fans. They also knew it well that the fans will hardly take any time in forgetting this star, once they know that he is not stepping on the filed again.

Recently, the finance ministry, informed the media that GST collection crossed Rs1trn mark after eight months, as the consumption in the economy picked up ahead of the festive season. The financial media highlighted this piece of information and presented as a definite sign of economic recovery. The financial market participants received the news enthusiastically and celebrated it by writing buoyant reports of an imminent economic revival.

The finance ministry however did not specify that in each of past two years, the GST collections have failed to meet the budget estimates and this year also there is no possibility of budget estimates being achieved. For past many months the state governments have been at loggerheads with the central government over the issue of GST compensation. The government has been drastically cutting spending on consumption as well investment to save the fiscal conditions becoming unmanageable that could trigger a rating downgrade and panic reaction from foreign investors. In September Government spending was just Rs2.32trn vs Rs3.13trn (yoy).

One can understand the enthusiastic response of traders to each bit and piece of data improvement, but the moot point is whether the investors and businesses should also be celebrating it! This question is pertinent to answer, because the fact is that the Government of India has indulged in the fiscal repression of worst kind, when the states world over unleashing fiscal stimulus of unprecedented proportion.

As per some reports, “Centre will earn an additional Rs 2.25 lakh crore from new taxes on petrol, diesel and other fuels imposed since lockdown began. This is despite global crude prices touching record lows.” It may bbe recalled that the Centre has increased excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol during lockdown besides  increasing road cess on fuel by Rs 8 per litre. State governments have also increased their value added taxes on fuel to make up for revenue loss amid the COVID-19 crisis. The additional tax on fuel is estimated to be 50% more than the GST revenue lost during April – October 2020. If we add to this the additional taxes imposed on alcohol etc., the figure of additional taxation would be much higher than the revenue lost due to lockdown. This is fiscal repression of unsuspecting people, who are still under the impression that the spending cuts etc. are due to shortfall in tax revenue.

The fact is that Indian economy (striker), which was one of the major drivers of global recovery post 2008 global financial crisis, is on crutches. There is little visibility that it will become driver of global economy again in next 3-4years at least. The team management (businesses) and sponsors (investors) may have little to celebrate in the monthly GST or auto sales numbers. Traders (army of fans) may though pop up champagne to celebrate Diwali.

 With each report announcing further success in the endeavors of developing an effective vaccine for SRAS-CoV-2 (previously termed Covid-19) infection, the level of anxiety amongst the stock market traders and investors is rising disproportionately. Most of them appear anxious to find the best trade for the “normalization”. The fact that in past two years, the returns on investment for most of the investors and traders have been sub optimal, is further fuelling the anxiety. Most of them appear to believe that first mover will make extra ordinary gains, while the slow movers will miss this once in a decade opportunity.

Recent discussion with market participants in India, US and Singapore, indicates that they are exploring a variety of ideas that could give extra ordinary return in next one year. Some of the common ideas include technology, healthcare and reflation. Logistics also appears to be fast emerging as one of the favored ideas.

The following are the arguments I have heard from market participants in support of their favorite ideas:

Healthcare: The outbreak of pandemic has drawn attention of global community towards the lacunae present in the global healthcare system. A significant added emphasis shall be given to preventive healthcare; and building of capacities to handle subsequent outbreak of novel viruses. The endeavor to develop vaccine for SARS-CoV-2 pandemic shall provide new dynamics to the collaborative research in the field of pharmaceutical. And of course, the vaccine for novel corona virus does hold material profit opportunity for developers in next many years.

In view of these, the healthcare sector as a whole present material business and investment opportunity for next many years. Personal hygiene, nutrition, supplements, testing, vaccination, medical equipment (for new capacity building as well as upgrade of existing facilities) are some specific opportunities that are being talked about by investors.

Traders are however more interested in “the vaccine” for SARS-CoV-2 that will give immediate revenue to the developers and distributors.

I am inclined towards the investing opportunity in the healthcare sector, but I am not sure about the trading opportunity. In my view, pandemic is a highly sensitive political issue globally. Profiteering from vaccine will be difficult. In Indian context for example, the government has already indicated free vaccine shots for citizens. This means that the procurement of vaccine will be on government tender basis. Making extra ordinary profit in such a scenario will be difficult in my view.

Technology: The pandemic has definitely changed the way we live, work, and travel. Much of these changes may stay. Changes in technology platforms to incorporate the new digital protocols, consolidation of businesses and integration of processes, working from remote locations, need for higher security of data and IPR, in addition to the ongoing shift towards AI and digital, has created tremendous investing opportunity in technology sector.

Again, I am inclined towards investing opportunity in the technology sector, especially IT services; but given the fact that most of the low hanging fruits have already been plucked, I am not sure about the trading opportunities.

I have already written about my views on the so called reflation trade (see Hyperinflation - Highly improbable and Rush to gold as safeguard from hyperinflation could be quixotic

Logistics is a tricky area. I need to explore this a bit more. I shall share my thoughts on this in some later post.

 The latest quarterly bulletin on employment and unemployment indicators released by the Ministry of Statistics and Programme Implementation, Government of India makes interesting reading. The latest data presented in the bulletin in based on the Periodic Labour Force Survey (PLFS) carried out between July-September 2019, i.e., well before the lockdown forced by the outbreak of SARS-CoV-2 pandemic. The key highlights of the survey are as follows:

·         For the purposes of the Survey, the “Labour Force Participation Rate” (LFPR) is defined as the ratio of population which offers itself for employment, whether currently employed or unemployed. The “Worker Population Ratio” (WPR) is the ratio of employed workers in the total population of the country.

·         As per the latest data, in urban areas, LFPR was ~37%. For the young people (15-29yrs) the rate was at ~39%, while all people above 15yrs of age, the LFPR was ~47%.

·         There still exists a significant gender gap in the labour force participation in the country. The female LFPR is just 16% vs male LFPR of ~57%. Even in the younger population (15-29yrs) female LFPR is ~18% vs male LFPR of ~59%.

·         The WPR in India is ~34%. For younger people (15-29yr) WPR is ~31%, while for all legal workers (15yr and above) WPR is ~43%. In WPR also, a significant gender gap exists. The male WPR is ~52% while female WPR is below 15%. For population aged above 15yrs, male WPR is 68% while female WPR is ~18%.

·         More than 50% workers in India are either self-employed or are engaged as casual workers. Only ~49.6% workers have regular wage employment.

·         More women (57.4%) are in regular employment than men (47.5%). About 9% women workers are employed as unpaid helper in household enterprises. For male workers this ratio is ~4%.

·         In urban areas 62% workers are engaged in tertiary (service) sector. About one third workers are engaged in secondary (industry) sector. More female workers (65%) are engaged in services sector than male 61%.

·         Overall unemployment rate during Survey period (July-September 2019) was 8.4%. For youth (15-29yrs), the unemployment rate was at ~20.6%, while for all workers 15yr and above, the unemployment rate was 8.3%.

·         More young (15-29yrs) female workers (24.1%) were reported unemployed than the male workers (19.6%).

To conclude, we can say—

(a)   The gender gap in work force is alarming and does not augur well for the acceleration in the growth rate. If we juxtapose this data with the education statistics, we find that bridging of education gap between male and female population has not resulted in equal opportunity for female in employment.

(b)   Prevalence of higher unemployment amongst youth (15-29yrs) may be an indicator of serious skill mismatch.

(c)    High ratio of self-employed and casual labor, inter alia, indicates (i) lower employment elasticity in the organized sector and (ii) skill mismatch.

 Many readers have found my thoughts on “hyperinflation” yesterday little abstract (see Hyperinflation - Highly improbable). They want me to elaborate further on why I think that “hyperinflation” is highly improbable in foreseeable future.

I do not mind sharing the bases of my views on this topic. However, before elaborating my views of “hyperinflation”, I would like to clarify that when I say “hyperinflation”, I do not mean the term in its literal sense, because in that sense it makes no sense in the present day conditions. In the current context, by hyperinflation, we should understand episodes of sustained high inflation over a period of many months.

To put this in further context, please note that “hyperinflation” is generally used to describe situations where the monthly inflation rate is greater than 50%. At this rate, an item that cost Rs1 on January 1 would cost Rs130 on January 1 of the following year. At least, in past few centuries, there is no instance of a global episode of hyperinflation. In the first half of 20^th century there were few localized episodes – the most famous being Germany (1922-23) and Hungary (1945-46).

In past 70yrs, Peru (1980s), Venezuela (2014-16), Yugoslavia (1989-1994), Armenia (1992-93), Turkmenistan (1992-93) and Zimbabwe (2004-08) have seen episodes of hyperinflation. It is conspicuous that all these episodes resulted from either geopolitical reasons (war or collapse of extant political order) or civil unrest within the country resulting in collapse of political and/or financial system. Most of the countries facing hyperinflation were either closed economies or were facing global trade restrictions or disruptions. Besides, all these economies were too small to impact global economy, trade and commerce in any significant measure whatsoever. It would therefore be totally unfounded to expect that hyperinflation could strike a major economy of the world like US, EU, Japan, China, or India in foreseeable future.

Insofar as the probability of the episodes of sustained high inflation occurring over a period of many months in a major economy is concerned, I believe that the chances of that are almost Nil in short to medium term (1-10yrs), unless a major war or civil war breaks out involving some major economies of the world, causing sustained disruption in the global supply chain. The bases of my belief, as stated below, are simple and mostly intuitive:

·         Unlike in 20^th century, the global trade and commerce is now mostly dematerialized. The material, money, and labor move digitally. The rebalancing of demand and supply equilibriums is much faster and efficient than before.

·         Demand elasticity for most products, including food and energy has increased significantly. Alternative products and sources of supply are available to mitigate the impact of any supply shock.

·         The discretionary demand dominates the consumption in most of the developed and large developing economies. The inflation for discretionary products, like electronic gadgets, personal care services, etc. is already high. A large part of global consumption (in value terms) may not be essential and could be scaled back with small effort, without having any substantial impact on human life or global order.

·         The productivity of essential goods, like food, energy, clothing etc has significantly increased in past five decades and there is enough inventory of essential goods in the world to mitigate the impact of any supply shock due to natural calamity etc.

·         The global trade and commerce is much larger, faster and easier as compared to five decade ago. An episode of higher inflation due to supply shock is not likely to last longer.

·         The global economy is significantly more integrated now as compared to first half of 20^th century. The impact of higher inflation in a major economy is more likely to spill to the global economy rather swiftly. Hence, it is highly unlikely that supply shocks in a major economy will remain unattended by global trade partners for longer periods.

·         Given the technology and advancement in the weapon systems, the chances of a prolonged war between major global powers are next to NIL.

·         The “tons of money” that we are bothering about is actually not physical money. Most of it is ‘bytes of money” or digital money. If need arises, this can be destroyed as easily as it is being created. In fact, I firmly believe that all the money created by central bankers of developed economies in past 12years shall be destroyed by the central bankers, as soon as it threatens to spark unwanted inflation.

·         There is enough spare capacity of productive infrastructure and housing, etc. in large economies to absorb excess liquidity of money. I believe that US$1trn of additional flows could be easily absorbed in Indian economy in one month, without stoking inflation of essential items.

Insofar as the reflation of depressed commodity prices (many like Zinc and Nickle have traded below cost of production for many months) is concerned, it is not something to worry about. If at all, it may actually be a cause for celebration as it would signal normalization of the global markets and may mark reversion of extraordinary monetary efforts made in past 12years. Terming this as “hyperinflation” and rushing to the “safe havens” like gold etc. to safeguard from it would actually be quixotic, in my view.

 It was particularly gloomy winter evening of 2008 in South Mumbai. The global financial markets had their knees frozen. One of the top global financial institutions, Lehman Brothers had collapsed a couple of months back. Another global financial giant Merrill Lynch lost its identity to Bank of America. Some peripheral European countries were on the brink of defaulting on their sovereign obligations. The bankers in the financial hub of India (South Mumbai) were staring at massive job losses. Numerous businesses were on the brink. Many large investors had also suffered huge losses in their portfolios. For younger investors and bankers in their 20s and 30s, the conditions were totally unprecedented. The fear, uncertainty, scale of value destruction was overwhelming as they had not experienced anything like that before. Most of the then had seen 5yrs of strong bull market in credit and capacity building in infrastructure, energy and housing. Suddenly, all the credit started to look bad and all the capacities worthless.

The US Federal Reserve (Fed) had launched its Quantitative Easing Program (QE1) a week ago. Many other central bankers, including European Central Bank (ECB) was expected to follow the Fed soon. The commitment of central bankers to do “whatever it takes” had calmed the markets only slightly.

In this setting, I had the opportunity of hearing one of the most famous global commodity traders and fund manager in person. The gentleman was in Mumbai at the invite of a local fund house which had launched a Natural Resource Fund just a few months back. This gentleman, in his idiosyncratic style and attire made a passionate pitch for investment in global commodities. He strongly argued that the massive new money printed under the QE program of central bankers will inevitably result in hyperinflationary conditions in the global economy leading to sharp rise in prices of commodities. Quoting from the classical monetary theory books, he presented some hyperbolic charts and diagrams reflecting his projections of commodity prices.

I had many questions for the debonair looking trader cum fund manager, but I chose not to ask any, since I was fully convinced that inflation is certainly not one of the threats to the global economy in foreseeable future. Any question to the expert therefore would have been plain sophistry.

In hindsight, I feel it was a right decision to go with my conviction instead of arguing with the expert and weakening my conviction. As we all know that despite multiple rounds of QE and vigorous efforts to create some inflation, the global economy has continued to struggle with deflationary forces in past 12years. Many commodities are even yet to see their respective 2007-08 prices.

In past couple of months, the hyperinflation has again started appearing in headlines. Numerous reports and articles have been written on how the global economy is fast racing towards hyperinflation. Many strategists have suggested trades for this - gold and silver being the most common. Many traders have taken positions. The Natural Resources Fund launched in 2008 is being marketed again aggressively.

Some wise and smart traders and fund managers are calling it “reflation” instead of “hyperinflation”, indicating that the price rise may be short trading opportunity and not a global trend.

Regardless, my view continues to remain the same as it was in 2008. I strongly feel that hyperinflation, as we know it from classical monetary theory, is a highly improbable event in the modern economic conditions. The present day trade and commerce dynamics, technology, and demand-supply matrices do not support any extraordinary inflationary flare up. And if the hyperinflation premise based on imminent demise of US Dollar, it may also be unfounded.

 A few month ago, the banking and monetary regulator in India, the reserve Bank of India (RBI), assumed the responsibility of stimulating the economic growth, in addition to its primary responsibility of regulating & supervising the banking & money market institutions, formulating & implementing monetary policy to achieve the objectives of financial stability and price stability. Given the state of economy, no one could find any fault with the RBI assuming this additional responsibility. In fact the RBI was commended for taking this extra load.

It is very well accepted that a well-functioning, deep and robust financial market is a must for economic development. On Wednesday, the financial market regulator, the Securities and Exchange Board of India (SEBI) assumed the additional responsibility for reviving the sagging Indian economy. SEBI’s chairman reportedly said “SEBI is considering multiple steps to reboot the economy through financial market reforms”. He said, “It will be challenging to achieve the government’s ₹100 trillion investment target for infrastructure by 2024-25 unless the bond market is adequately developed.”

Market regulator recognizing their role in the overall economic growth and development of the country is a very comforting. They committing to efforts for promoting economic growth and development is also welcome. However, the regulators actively assuming responsibility for growth may not be appropriate after all. All institutions and all citizens have a defined role in the functioning of the economy. If all perform their assigned roles as per their best abilities, the growth will happen automatically. The growth is hampered when the one or more segments of the economy fail in the performance of their assigned roles.

It is widely recognized that crisis in financial sector is materially responsible for economic slowdown in India. Obviously, it reflects poorly on the RBI’s ability to regulate and supervise the financial institutions and delivery of credit.

In this context, it is pertinent to note the conclusions made in a recent Working Paper of RBI, titled “Bank Capital and Monetary Policy Transmission in India”. The “paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence credit supply of banks depending on their capital position. (emphasis supplied)”

The paper also concludes that “Presence of non-performing assets in a bank also weakens monetary policy transmission and lowers the loan growth rate. These results support the need for bank capital regulation in India.”

Similarly, multiple scams and malfunctioning of securities’ market institutions like Mutual Funds and Stock Exchanges have negatively impacted the investors’ sentiments. SEBI must share some responsibility for this also, and focus more on “Regulation” rather than “Reforms”. For, “Reforms” is a function of policy making and not of regulation.

A large section of the market participants and investors believes that “over regulation” and “misdirected regulation” by SEBI in past few years may have caused more than damage to the capital markets and therefore economy than SEBI’s reform measures would have helped anyone.

In my view, building a vibrant retail debt market is imperative for the sustainable economic growth of the country. But this is a function of the government. SEBI’s role should be limited to efficiently regulating the market.

 In past one month I have read a lot of commentary about the smart investing, sectoral shifts, trade rotation, reflation trade, emergence of old economy etc. in the India equity markets. I find it pertinent to note the sectoral performances over three time periods – One year; Since Lock Down (25 March 2020); and Past three months when the unlock exercise meaningfully started.

Some of the key features of sectoral performances over these time frames could be listed as follows:

·         Nifty has given positive return over all three time frames, but one year return in miniscule 2.6%, much lower than the bank fixed deposit or liquid fund return.

·         Only two sectors IT and Pharma have consistently outperformed the benchmark Nifty over all timeframes. PSUs as a sector have been consistently the worst performer on all time frames.

·         Energy, Infrastructure, and PSUs have been worst performers in past three months. This is in spite of the enthusiasm in the heavyweight Reliance Industries.

·         Auto sector has performed well post lock down. While FMCG has mostly stagnated in past three months, underperforming Nifty over one year time frame.

·         Financials have also underperformed majorly over all timeframes.

·         Despite all talks about reflation trade, metals have underperformed over one year and 3 month timeframe, marginally outperforming the benchmark Nifty since lockdown.

On a closer look the market may appear fast rotating to relatively under owned sectors or sectors with material short positions, but when looked from a distance, it could be clearly seen moving in circles, going aimlessly round and round. The investors should therefore cut out the noise, and sit tight with their portfolios. In the end quality businesses that negotiate the pandemic and economic slowdown well and maintain sustainable growth shall indubitably do well. Jumping one sector to other in the hope of making some quick bucks will only lead to frustration. Remember, grass on the other side may or may not be greener, and the traffic in the other lanes may or may not be moving faster.

 In the aftermath of devastation that took place due to the second world war (WWII), some key global institutions were created and multilateral agreements signed to (i) avert chances of another major war; (ii) enhance global cooperation for accelerated reconstruction work; and (iii) promotion of globalization of trade and commerce to ensure equitable growth and development. Bretton Wood agreement signed in 1944 was one of such efforts.

The Bretton Woods agreement established the U.S. dollar as the reserve currency for world. The idea was to prevent competitive devaluations of currencies, avert trade wars and promote international economic cooperation for growth & development. The Bretton Wood signatories agreed to maintain fixed exchange rates between their respective currencies and the US Dollar. The US dollar in turn was pegged to the price of the gold.

Until WWI, most countries followed the gold standard for their respective currencies; which essentially meant that they promised to exchange their currencies for gold of equivalent value as per the current international prices of gold. This significantly constricted the flexibility in their monetary policy, as only a few countries had enough gold reserves to back their monetary requirements for development efforts needed in post war period. Abandoning the gold standard, they printed massive amount of money leading to hyperinflation, which eventually led to great depression and another great war.

Post WWII, most countries considered reverting to gold standard. However, since at that time, US had held more than three fourth of global gold reserves at that time, it was felt that making the gold pegged USD the reserve currency, instead of gold, would provide the necessary flexibility in monetary policy (since unlike gold, the USD supply could be flexible) to support growth and development.

The energy price led stagflation in US eventually led to the demise of Bretton Wood agreement. To get the US economy out of stagflation (no growth and high inflation) President Nixon sharply devalued the USD. Thus sharp devaluation led to a run on the US gold reserves, forcing the US to unpeg USD from gold prices and thus violating the Bretton Wood Agreement. The gold peg ended in 1971 but USD continued to remain the reserve currency of the world in absence of a viable alternative.

Last week, Kristalina Georgieva, IMF Managing Director, in her speech called for a new Bretton Wood Moment for the world (see here). Comparing the damage to the global economy caused by Covid-19 pandemic, she emphasized on the greater need for global cooperation to put the global economy back on growth path. She said, “Today we face a new Bretton Woods “moment.” A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4 % smaller this year and strip an estimated $11 trillion of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades. Once again, we face two massive tasks: to fight the crisis today — and build a better tomorrow.”

She further adeed, “We face what I have called a Long Ascent for the global economy: a climb that will be difficult, uneven, uncertain—and prone to setbacks.

But it is a climb up. And we will have a chance to address some persistent problems — low productivity, slow growth, high inequalities, a looming climate crisis. We can do better than build back the pre-pandemic world – we can build forward to a world that is more resilient, sustainable, and inclusive. We must seize this new Bretton Woods moment.”

She specifically called for “Prudent macroeconomic policies and strong institutions”, “people centric policies” and “climate change” as three imperatives for the new system.

Obviously, the emphasis is on greater global cooperation, sustainability and equality. Unfortunately, a number of analysts, traders and strategists have read her comment to mean return of gold standard.

Neils Christensen, quoted some of the popular comments in his blog post (see here) highlighting how the people are misreading her comments for a BULL call on gold—

“Gold is on its way back to monetary policy in a direct way. The IMF last week confirmed they WILL NOT sell gold reserves. Now they are calling for a new Bretton Woods arrangement. WELCOME TO THE ERA OF GOLD ? — Gold Telegraph

Imf calls for a new Bretton Woods. A new gold standard. Sit tight. Evidence is piling. — Gold Ventures

IT'S OFFICIAL IMF CALLS FOR 'A NEW BRETTON WOODS' 'A New Bretton Woods Moment'— Willem Middelkoop

A New Financial System Backed By Gold. It Will Never Happen You All Said Bretton Woods Was A Gold Backed Monetary System. The Best Is Yet To Come? Baba & Riddlers”

In my view, a new global order will definitely emerge out of this pandemic. The new order will address sustainability and equity issues. Gold will not be a key component of the new order. USD may retain its dominance but it shall face serious challenge from other currencies, including the digital currencies.

 Last weekend I did my annual festival market check. This year, besides the main markets of Delhi, I visited some local markets in predominately lower middle class areas; and some markets in rural areas of North Delhi. I managed to speak with some very large importer and traders of consumer goods; auto dealers, farmers, real estate developers and owners of leased properties. Based on my observations, interactions and information, I would like to share the following feedback with readers:

·         The overall demand situation this festival season is materially worse than the last year. It is pertinent to note that the last year was also not good per se.

·         A large importer and trader dry fruits, mainly almonds and walnuts, indicated that global dry fruit prices are down over 25-30% as compared to last year. In India despite supply disruptions due to broken logistic chain, the prices are lower as compared to last year. The retail demand for almonds and walnuts has seen sharp rise as these are seen as immunity boosters. However wholesale demand from sweet and confectionary makers is very poor. Overall, he expects 30% lower volumes this festival season.

·         A large importer and trader of confectionary, mainly chocolate, lamented both supply and demand issues for poor business. As per him, import of confectionary was greatly restricted due to breakdown in global supply chain and slow clearance of consignments at Indian ports. He cited 3months delay in clearance in his inbound shipments. On demand side, the festival gifting demand is very slow, especially the corporate demand. Retail sale is gradually picking up but still materially lower than last year.

·         Two famous sweet shops in Delhi have witnessed gradual pickup in demand in past two weeks. The sales are about 50% lower as compared to last year. The delayed and curtailed marriage season and minimal corporate gift bookings are major sentiment dampeners. They see a definite trend in lower affordability.

·         Textile traders, both wholesale and retail, also cited very slow return to normalcy. None is expecting to reach the 2019 level of demand even in 2021. The demand from rural markets in neighboring states is very poor. Shorter marriage season, restrictions on number of guests, poor affordability, slow return of migrant laborers, and high inventory are bothering the textile traders. Most of them are staring at significant inventory write off.

·         It is well known that in many communities, the marriages are arranged with a pre-determined budget for the bride side. The people from these communities are indicating payment of more cash & jewelry, higher end automobile and communication devices to compensate for the lower spending on ceremonies.

·         Building material and furniture dealers appeared more sanguine about return to normalcy. They are seeing better than expected retail demand for home improvement and replacement. For the wholesale demand, inquiries are good. They hope for better start to 2021.

·         Auto demand has picked up well. Two wheelers strong due to non-availability of normal public transport and fear of using public transport. Cars at pre lockdown level which was not great per se. Tractors and SUVs continue to see strong demand, reflecting the faster recovery in rural demand.

·         Home decoration item importers and traders are staring at a washout. With little fresh arrival and low inventory, they expect festival sales to be 50-70% lower. Contrary to popular expectation, the demand for Chinese items remains strong.

Marigold flower prices at Rs70-75/kg, are one third of the last year. Even at these prices demand is poor.

·         The scene at local markets in lower middle class colonies and slums, is that of despondency. The need for clothing, utensils, and other household items is visible but the demand is lacking due to poor affordability. The markets are crowded as usual but the sale is much less. People are constantly looking for deals to suit their pockets.

·         The markets in rural areas are though much better off. The sale is brisk and people are not averse to up-trading.

·         The real estate developers and dealers highlighted that the number of inquiries has increased significantly in past one month. These inquiries are however not yet converting into deals. They feel it will pick up strongly once registration offices begin working normally.

·         Owners of leased real estate let out as PG accommodation, working women hostel, shops etc indicated significant vacancies. They do not expect normal tenancy at pre lockdown rental to be restored even in 2021.

·         Almost everyone complained of poor working capital financing. NBFCs and Private sector banks have materially curtailed working capital and small capex financing due to poor quality or illiquidity of the collateral and tighter credit norms.

·         Almost everyone is working with lesser number of workers compared to pre lockdown period. No one indicated returning to normal workforce level in 2021. Most traders are focusing on survival for 2021. Growth does not seem to be a priority for now at least.

·         Farmers in Delhi villages were surprisingly well aware of the implications of the latest legislative changes relating to agriculture sector in India. Most of them believed that these changes are structurally positive for the sector; regardless of the noise being made by the opposition parties and some NGOs. (Caveat: The infrastructure, resources and access available to these farmers is very different from an average farmer in the hinterland. Their opinion may therefore not be reflective of the mood in general.)

·         Most people I interacted with and observed seem to have accepted Covid-19 as an uninvited guest in their house which cannot be wished away. They have learned to live with it and are willing to suffer some losses (monetary and human life) for their freedom to work and move around. The public campaign for safety against corona is totally ineffective in most cases and counterproductive in many cases. For example to avoid listening to Corona caution played before each phone call, most of the people prefer to use Whatsapp call now. Inappropriate, dirty and unhygienic face masks are hanged around chin to avoid monetary fines and harassment by authorities. Hand sanitizers have vanished from most public offices. No water is available in the tanks placed in public places for hand washing. No one could care less to discuss whether the government handled the pandemic efficiently. They just want to move on to lead their normal life.

 With each passing day, the realization is growing that it will “years” not months or quarters before the normalcy returns to the global economy. Regardless of the statistics on global trade, national income and corporate earnings, the impact of pandemic on humanity, especially poverty, inequality, and suppression is overwhelmingly devastating. The pandemic has indubitably undone the decades of efforts in poverty alleviation and public health in numerous developing and underdeveloped countries.

As per a recent Bloomberg report based on a study conducted by the World Bank and Philippine’s local agencies, “almost half of shuttered businesses were unsure when they could reopen”. As per the report, “in emerging parts of Southeast Asia, where a wave of job losses and weak social safety nets mean millions are at risk of losing their rung on the social mobility ladder. The region is likely to come in second behind the Indian subcontinent in charting the number of new poor in Asia this year.” This points to a long, drawn-out recovery. Southeast Asia’s GDP is estimated to be to be 2% below the pre-Covid baseline even in 2022.

As per last year’s projections, South Asia was expected to add more than 50million people with $300bn in disposable income to middle class strata. This attracted many global corporations to invest huge amounts in building capacities in this region. With the poverty levels rising and prospects of growth acceleration fading, the viability of these capacities is now questionable.

As per the Bloomberg report, “As many as 347.4 million people in Asia-Pacific could fall below the $5.5 a day poverty line because of the pandemic, according to the United Nations University World Institute for Development Economics Research.  That’s about two-thirds of its worst-case global estimate, and underscores the World Bank’s forecast of the first net increase in worldwide poverty in more than two decades.”

As per HSBC research, The magnitude of the economic free fall in Southeast Asia’s five biggest economies was severe in the second quarter. Indonesia shrank 5.3% year-on-year, Malaysia 17.1%, Philippines 16.5%, Singapore 13.3% and Thailand 12.2%, data compiled by Bloomberg show. Vietnam, which was among the few trade-war winners, will see its three-decade economic ascent grind to a near halt this year. Contractions could persist through early next year.” That’s signalling a prolonged financial squeeze for Southeast Asians.