Rahul Deodhar's Blog, page 13
February 12, 2015
Austerity V/s Stimulus, Government Spending and Greece
Sometimes it is worth repeating something that is actually right. Let me say this again:
Stimulus works best when you need to push-start the demand engine. Note that it implies that stimulus won't do the work of engine - it will only push-start it. The engine must be in working condition otherwise.
Austerity works best when Government borrowing is crowding out private investment. Usually Government is borrowing too much because it is spending too much. New investment is required to put a new engine in place.
In Greece's case - their engine is not working and their Government is spending a bit more than required. A combination is required when economy stalls - i.e. Government must reallocate/realign the spending targeting it into essential things. It also needs to increase spending once the new "engines" are set up.
In a nutshell - neither Austerity nor stimulus alone will work in Greece's case. A combination of sane reforms and practical stimulus is required. Till such time...
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Stimulus works best when you need to push-start the demand engine. Note that it implies that stimulus won't do the work of engine - it will only push-start it. The engine must be in working condition otherwise.
Austerity works best when Government borrowing is crowding out private investment. Usually Government is borrowing too much because it is spending too much. New investment is required to put a new engine in place.
In Greece's case - their engine is not working and their Government is spending a bit more than required. A combination is required when economy stalls - i.e. Government must reallocate/realign the spending targeting it into essential things. It also needs to increase spending once the new "engines" are set up.
In a nutshell - neither Austerity nor stimulus alone will work in Greece's case. A combination of sane reforms and practical stimulus is required. Till such time...
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
February 5, 2015
Why deflationary forces are so unrelenting?
Despite good GDP numbers and PMI data the deflation does seem to give up. Here are the reasons:
Incomes have fallen and are not rising again : Since 2009 there has been a fall in incomes resulting from retrenchment and layoffs and consequent oversupply. While employment numbers have improved (unemployment is falling), incomes are not rising. In fact they have settled well below their previous highs. Consumption goods prices continue to fall : The fall came from two sources - improved productivity (from about 1990 to about 2000) and thereafter from combination of productivity gains and exchange rate dynamics. The QE era flooded the world with low-cost capital leading to reduced interest rates across the world. This low-cost debt is transposing low-capital-cost-but-high-running-cost human employment with high-capital-cost-but-very-low-running-cost robots. Today the US consumption good prices are still at the mercy productivity gains and exchange rate dynamics but the pressures are more aggravated. The new productivity gain mechanisms are putting exceptional pressure on employment and wages. Further the exchange rate dynamics have morphed into all out currency wars. Investment goods prices are deflating too :When you reduce the interest rate, you increase the prices of assets usually by setting the yield or return scale lower thereby pushing risk-averse investors into risky assets thereby inflating asset prices. Secondly, we coupled lower interest rates with ingenious financial engineering leading to improved credit availability which also advances demand from decades ahead and packs it into short timeframes. The converse is that there is prolonged period of lacklustre demand phase. I believe we are in that phase or may be entering that phase.
Incomes have fallen and are not rising again : Since 2009 there has been a fall in incomes resulting from retrenchment and layoffs and consequent oversupply. While employment numbers have improved (unemployment is falling), incomes are not rising. In fact they have settled well below their previous highs. Consumption goods prices continue to fall : The fall came from two sources - improved productivity (from about 1990 to about 2000) and thereafter from combination of productivity gains and exchange rate dynamics. The QE era flooded the world with low-cost capital leading to reduced interest rates across the world. This low-cost debt is transposing low-capital-cost-but-high-running-cost human employment with high-capital-cost-but-very-low-running-cost robots. Today the US consumption good prices are still at the mercy productivity gains and exchange rate dynamics but the pressures are more aggravated. The new productivity gain mechanisms are putting exceptional pressure on employment and wages. Further the exchange rate dynamics have morphed into all out currency wars. Investment goods prices are deflating too :When you reduce the interest rate, you increase the prices of assets usually by setting the yield or return scale lower thereby pushing risk-averse investors into risky assets thereby inflating asset prices. Secondly, we coupled lower interest rates with ingenious financial engineering leading to improved credit availability which also advances demand from decades ahead and packs it into short timeframes. The converse is that there is prolonged period of lacklustre demand phase. I believe we are in that phase or may be entering that phase.
December 29, 2014
2015: Images from the Crystal Ball!
We are at the threshold of 2015 with US posting one of the record quarterly earnings, FED talking of tightening, Russia and China on the brink of their own respective crises and some rather tricky security flashpoints - information security breaches and physical security breaches by ISIS, Boko Haram and the usual Al Qaeda and Taliban.
From the markets perspective, we have rather exhilarating ride. Oil prices have hit $60 from $100+ just a year back. Gold prices have softened, US markets are touching all time highs. EU is on the thresholds of a QE for itself. Japan has voted Abe back. Seems like good times are here!
Well they are! The recovery is thanks to the US Fed and so long as Fed does not tighten or initiates another form of QE, we can enjoy the benefits. It is time to make money and build up a solid rainy-day reserve.
The cycles and volatility are our friendsThe year promises to be as cyclical and volatile as previous if not more. This year though I am expecting at least 3 full equity market cycles - as compared to 2.5 (3 peak-2trough or vice versa) I expected last year. Unlike last year though, there will not be a secular up-trend. Thus last year if we missed a peak it was easy to recoup the lost gains by simply waiting. This time we may see some losses in such scenario.
US and developed markets
In general I agree with the Jeremy Grantham's forecast that US markets may move till 2300 -2500 before any correction. His analysis is worth a read. Secondly there is nothing that can shake up the US markets in present circumstances. The shock, if it must come, must be substantial. I think the Fed must continue to be on a pause till the employment outlook improves. This will allow for the growth to get traction. In the early '30s US withdrew the stimulus too soon with disasterous effects. Therefore I presume they will err on side of caution this time around.
The EU on the other hand still sustains itself on internal trade and consumption. EU stimulus, when it comes will be of great benefit. Let us hope to get the mechanics of this stimulus right as EU is more vulnerable to a currency run than USD.
Indian Markets
In general, emerging markets will follow US markets. India should be special, and in general flight to quality to US should affect Indian markets to a lesser degree. Indian markets should have similar pattern like that of US - about 3 cycles over a secular uptrend. It seems 35K on Sensex does not seem out of reach. Within the broad Indian market uptrend we should see some sector rotation. Infra stocks should be back in favour along with asset intensive industries. Expect to see higher volatility in the markets thereby allowing for higher gains than the 27K-35K interval suggests. However, buy and hold will be a risky bet given sector rotation and global risks.
The nature of risks from shocksThe year while positive is fraught with risks:
End of ZIRP?: Yellen's comments in the last Fed meeting have prompted analysts to pencil in a Fed rate hike in calendar 2015. I find that hard to believe. In the very least we should see a prolonged ZIRP pause. We should expect a shock only around June if at all Fed decides to hike.Draghi - Will he won't he?: What Draghi does and when he does it will naturally have a lot of bearing on the nature of cycles. I suspect EU will ease before US tightens. The qantum of QE is likely to be lesser and more directed than US.Japan - Abe it is!: Japan has done quite a bit quite quickly. I think they will have to continue with it and make the stimulus, QE more directed using policy interventions. Japan will be more aggressive on investments across the world.Chinese growth: Analyst expect the Chinese growth to surprise on the downside. I am not sure about China but most likely the numbers may be better than analyst estimation. Lower Chinese growth implies easier commodity prices - sort of a QE by itself.
My Strategy for 2015
The buy-and-hold era ended in 2008. These days the best buy-and-hold stocks never reach the broader markets when there is still money to be made. They sit tight with PE or angel investments. The stock markets are being used by promoters as a sort of exit option. So indeed we must sort and sift through the stocks and keep churning as soon as they fall out of our valuation metrics.
Infra stocks: Infra stocks seem well set to make a comeback. I have been investing in them since 2011 hoping for Indian infra turnaround. The situation is more conducive than 2011 but I have been wrong before.
Commodity stocks: The China crisis seems to have sent some commodities in a tail-spin. Therefore I am not inclined to interfere with metals and non-perishable commodities. Other commodities - like sugar are weathering the oil price shock resulting in lower alcohol demand coupled with excess supply. Sugar should turn around soon. I have been investing in sugar since early part of this year. I will continue to add to my positions.
Banks and Commercial Vehicles: These stocks are leading indicator stocks and I have liquidated my positions in banks and will soon do so in Commercial Vehicles space as well. These two sectors are in for period of good growth and repairing of their balance-sheets. In that sense if there is any correction I will take substantial positions in these. They should turn around pretty quickly once the shock wears off.
Gold: Gold is the only buy and hold thing I can think of currently. Only if you are in a currency that has potential for appreciation vs the USD then you can ignore gold for short term. The current USD strength is good for buying gold. The currencies of economies where the private sector and consumer is not leveraged and public sector is reasonably benign will ultimately appreciate in relation to USD.
In Sum
The year promises to be exciting year, a rare patch in a lifetime where we can ride multiple cycles within a year itself. The experience of recent past tells us to be nimble with a healthy respect for cash. Let us see how we can capitalize on this coming year.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
From the markets perspective, we have rather exhilarating ride. Oil prices have hit $60 from $100+ just a year back. Gold prices have softened, US markets are touching all time highs. EU is on the thresholds of a QE for itself. Japan has voted Abe back. Seems like good times are here!
Well they are! The recovery is thanks to the US Fed and so long as Fed does not tighten or initiates another form of QE, we can enjoy the benefits. It is time to make money and build up a solid rainy-day reserve.
The cycles and volatility are our friendsThe year promises to be as cyclical and volatile as previous if not more. This year though I am expecting at least 3 full equity market cycles - as compared to 2.5 (3 peak-2trough or vice versa) I expected last year. Unlike last year though, there will not be a secular up-trend. Thus last year if we missed a peak it was easy to recoup the lost gains by simply waiting. This time we may see some losses in such scenario.
US and developed markets
In general I agree with the Jeremy Grantham's forecast that US markets may move till 2300 -2500 before any correction. His analysis is worth a read. Secondly there is nothing that can shake up the US markets in present circumstances. The shock, if it must come, must be substantial. I think the Fed must continue to be on a pause till the employment outlook improves. This will allow for the growth to get traction. In the early '30s US withdrew the stimulus too soon with disasterous effects. Therefore I presume they will err on side of caution this time around.
The EU on the other hand still sustains itself on internal trade and consumption. EU stimulus, when it comes will be of great benefit. Let us hope to get the mechanics of this stimulus right as EU is more vulnerable to a currency run than USD.
Indian Markets
In general, emerging markets will follow US markets. India should be special, and in general flight to quality to US should affect Indian markets to a lesser degree. Indian markets should have similar pattern like that of US - about 3 cycles over a secular uptrend. It seems 35K on Sensex does not seem out of reach. Within the broad Indian market uptrend we should see some sector rotation. Infra stocks should be back in favour along with asset intensive industries. Expect to see higher volatility in the markets thereby allowing for higher gains than the 27K-35K interval suggests. However, buy and hold will be a risky bet given sector rotation and global risks.
The nature of risks from shocksThe year while positive is fraught with risks:
End of ZIRP?: Yellen's comments in the last Fed meeting have prompted analysts to pencil in a Fed rate hike in calendar 2015. I find that hard to believe. In the very least we should see a prolonged ZIRP pause. We should expect a shock only around June if at all Fed decides to hike.Draghi - Will he won't he?: What Draghi does and when he does it will naturally have a lot of bearing on the nature of cycles. I suspect EU will ease before US tightens. The qantum of QE is likely to be lesser and more directed than US.Japan - Abe it is!: Japan has done quite a bit quite quickly. I think they will have to continue with it and make the stimulus, QE more directed using policy interventions. Japan will be more aggressive on investments across the world.Chinese growth: Analyst expect the Chinese growth to surprise on the downside. I am not sure about China but most likely the numbers may be better than analyst estimation. Lower Chinese growth implies easier commodity prices - sort of a QE by itself.
My Strategy for 2015
The buy-and-hold era ended in 2008. These days the best buy-and-hold stocks never reach the broader markets when there is still money to be made. They sit tight with PE or angel investments. The stock markets are being used by promoters as a sort of exit option. So indeed we must sort and sift through the stocks and keep churning as soon as they fall out of our valuation metrics.
Infra stocks: Infra stocks seem well set to make a comeback. I have been investing in them since 2011 hoping for Indian infra turnaround. The situation is more conducive than 2011 but I have been wrong before.
Commodity stocks: The China crisis seems to have sent some commodities in a tail-spin. Therefore I am not inclined to interfere with metals and non-perishable commodities. Other commodities - like sugar are weathering the oil price shock resulting in lower alcohol demand coupled with excess supply. Sugar should turn around soon. I have been investing in sugar since early part of this year. I will continue to add to my positions.
Banks and Commercial Vehicles: These stocks are leading indicator stocks and I have liquidated my positions in banks and will soon do so in Commercial Vehicles space as well. These two sectors are in for period of good growth and repairing of their balance-sheets. In that sense if there is any correction I will take substantial positions in these. They should turn around pretty quickly once the shock wears off.
Gold: Gold is the only buy and hold thing I can think of currently. Only if you are in a currency that has potential for appreciation vs the USD then you can ignore gold for short term. The current USD strength is good for buying gold. The currencies of economies where the private sector and consumer is not leveraged and public sector is reasonably benign will ultimately appreciate in relation to USD.
In Sum
The year promises to be exciting year, a rare patch in a lifetime where we can ride multiple cycles within a year itself. The experience of recent past tells us to be nimble with a healthy respect for cash. Let us see how we can capitalize on this coming year.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
November 29, 2014
To RBI: A Case against Rate Cut
The Reserve Bank of India (RBI) is under considerable pressure to reduce its benchmark interest rates in its upcoming monetary policy meeting. However, prudent monetary policy needs to keep rates at the current level rather than a premature easing for various reasons.
First, the present high inflation problem was caused by supply-side constraints combined with demand-side factors induced by rural wage growth. Over the past few months, rural wage growth has moderated and the government is also prudent and is not increasing MSPs. This has eased demand-side pressures and hence the recent inflation strength can be attributed primarily to supply side factors.
Our strategy to counter supply-side inflation has been to boost supply through increased infrastructure investment coupled with measures to improve ease of doing business. To make it work, we must let supply overtake the latent demand by such a margin that any easing thereafter should unleash a positive demand catch-up spiral. The risk with a premature rate cut is that it creates demand even before supply-side catches up, in turn pushing the inflation trajectory higher. Therefore it is better to err on the side of caution and reduce rates later rather than risk another inflation spurt.
Second, higher interest rates combined with lower inflation augur well for positive real savings return. This has twin benefits. On one hand it redirects household incomes away from consumption into savings; and on the other hand it will creates a corpus of domestic saving that can be re-invested into the economy making Indian investments less dependent and more resilient to external / global shocks.
Third, high asset prices, particularly real estate prices, are a more substantive burden on economic growth than interest rates. A premature cut can re-invigorate the real estate cycle, adding to the countries financial vulnerability. As the BIS has stated, central banks should focus not just on the business cycle, but also the financial cycle. Higher real interest rate will maintain a pressure on asset prices thereby creating beneficial conditions for sustainable economic growth.
Fourth, higher interest rates (more capital inflows) coupled with exchange rate sterilization measures are helping the RBI create a war chest to counter any external currency shocks. This was indeed the learning from the South East Asian crisis of 1990s – make hay while the sun shines. The RBI, rightly so, expects the near future to be tumultuous in light of US Fed tightening and changes in divergent monetary policies in developed countries. Higher rates will ensure that the RBI has enough dry powder in case of a global economic shock.
In sum, calling for the RBI to cut interest rates – just when the inflation battle is being won- is premature, short-sighted and tantamount to declaring a victory even before the enemy has been defeated. In a world where global central banks are creating conditions for future instability, the RBI should remain a beacon of stability.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
First, the present high inflation problem was caused by supply-side constraints combined with demand-side factors induced by rural wage growth. Over the past few months, rural wage growth has moderated and the government is also prudent and is not increasing MSPs. This has eased demand-side pressures and hence the recent inflation strength can be attributed primarily to supply side factors.
Our strategy to counter supply-side inflation has been to boost supply through increased infrastructure investment coupled with measures to improve ease of doing business. To make it work, we must let supply overtake the latent demand by such a margin that any easing thereafter should unleash a positive demand catch-up spiral. The risk with a premature rate cut is that it creates demand even before supply-side catches up, in turn pushing the inflation trajectory higher. Therefore it is better to err on the side of caution and reduce rates later rather than risk another inflation spurt.
Second, higher interest rates combined with lower inflation augur well for positive real savings return. This has twin benefits. On one hand it redirects household incomes away from consumption into savings; and on the other hand it will creates a corpus of domestic saving that can be re-invested into the economy making Indian investments less dependent and more resilient to external / global shocks.
Third, high asset prices, particularly real estate prices, are a more substantive burden on economic growth than interest rates. A premature cut can re-invigorate the real estate cycle, adding to the countries financial vulnerability. As the BIS has stated, central banks should focus not just on the business cycle, but also the financial cycle. Higher real interest rate will maintain a pressure on asset prices thereby creating beneficial conditions for sustainable economic growth.
Fourth, higher interest rates (more capital inflows) coupled with exchange rate sterilization measures are helping the RBI create a war chest to counter any external currency shocks. This was indeed the learning from the South East Asian crisis of 1990s – make hay while the sun shines. The RBI, rightly so, expects the near future to be tumultuous in light of US Fed tightening and changes in divergent monetary policies in developed countries. Higher rates will ensure that the RBI has enough dry powder in case of a global economic shock.
In sum, calling for the RBI to cut interest rates – just when the inflation battle is being won- is premature, short-sighted and tantamount to declaring a victory even before the enemy has been defeated. In a world where global central banks are creating conditions for future instability, the RBI should remain a beacon of stability.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
November 1, 2014
What we need to estimate effects of multi-country QE?
I was thinking about ways to estimate impact of QE on potential offered by different equity markets in general or asset markets in general.
Currently we do not have money inflow metrics (i.e. indexed price and volume data) for all asset classes. Nor do we have an exhaustive asset class database (types of asset classes e.g. art). Without these metrics it is difficult to construct a true impact of QE on global markets in general and specific markets in particular. Maybe someone can construct some sort of blended index.
I suspect when we do construct some quasi-indicators we will find that M3 has grown disproportionately with GDP and the difference can be explained by blended asset class inflation.
Once the global effect is understood, the specific country level effect can be understood using a parametrized gravity model. Such model will tell us how the excess liquidity will move.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Currently we do not have money inflow metrics (i.e. indexed price and volume data) for all asset classes. Nor do we have an exhaustive asset class database (types of asset classes e.g. art). Without these metrics it is difficult to construct a true impact of QE on global markets in general and specific markets in particular. Maybe someone can construct some sort of blended index.
I suspect when we do construct some quasi-indicators we will find that M3 has grown disproportionately with GDP and the difference can be explained by blended asset class inflation.
Once the global effect is understood, the specific country level effect can be understood using a parametrized gravity model. Such model will tell us how the excess liquidity will move.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
July 9, 2014
Welfare v/s Austerity - India's issue
Many people including some experts, attribute Indian growth of about 5% to the welfare schemes of the UPA government. Their honest belief is that UPA government's welfare schemes helped alleviate some of the harshness of the global economic slowdown. They also point to Chinese stimulus as something to emulate. Thereby they believe Modi's promised subsidy rationalisation (euphemism for reducing welfare) is not a good idea. I disagree.
First, there is a difference between global issues and Indian condition. Global economic engines have stalled, while India's remain switched off for want of fuel (investment and clarity in policy making).
Second, fixing the engines requires fuel which is currently diverted to subsidies. Thus, if there were an ideal subsidy level, current burden is most likely higher than this level. Therefore, naturally, to bring sanity back this will have to be rolled back.
Finally, what is required is to push-start the engines is additional effort which will eat away more subsidy than generally required. Thus, push-starting this engine will cause subsidy to dip below this ideal levels. The blame for this does not lie with present government but with UPA which killed the engine long time ago.
Fix the engines and Indian engines can hum along for quite a while creating economic growth and surplus necessary to smoothen the income disparity in later years. Acche din aane wale hain!
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
First, there is a difference between global issues and Indian condition. Global economic engines have stalled, while India's remain switched off for want of fuel (investment and clarity in policy making).
Second, fixing the engines requires fuel which is currently diverted to subsidies. Thus, if there were an ideal subsidy level, current burden is most likely higher than this level. Therefore, naturally, to bring sanity back this will have to be rolled back.
Finally, what is required is to push-start the engines is additional effort which will eat away more subsidy than generally required. Thus, push-starting this engine will cause subsidy to dip below this ideal levels. The blame for this does not lie with present government but with UPA which killed the engine long time ago.
Fix the engines and Indian engines can hum along for quite a while creating economic growth and surplus necessary to smoothen the income disparity in later years. Acche din aane wale hain!
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Reducing Importance of the budget
The first budget of the new Indian government is scheduled to be announced in a few hours. However, I believe budget announcement has outlived its excitement value.
I would rather see the past expenditure analysis session and a strategic planning session replace what is currently made into a single event.
There is absolutely no discussion about effectiveness of past expenditure as against their objectives. I don't want to see how welfare expenditures have contributed to the economy as it would be too premature to so such analysis making the budget useless. I would rather see how effectively were the cash transfers were made, what was the loss, what was the cost required to transfer that cash, etc. I also want to know that how fiscal deficit target was achieved using cash accounting jugglery by simply delaying payments.
Similarly, we do not have a strategic planning session. The presidential address to both houses intends to do that but is hardly ever used that way. The election manifesto is the strategic plan we look to. I think that is inadequate. However given the level of understanding in the houses of the strategic issues, one wonders if it is better to not let the parliament do strategic planning. Most of the MPs are "knowledge proof" as the popular adjective goes.
In sum in a few hours you will see much hula boo about a non event. Let us hope Arun Jaitley breaks another norm.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
I would rather see the past expenditure analysis session and a strategic planning session replace what is currently made into a single event.
There is absolutely no discussion about effectiveness of past expenditure as against their objectives. I don't want to see how welfare expenditures have contributed to the economy as it would be too premature to so such analysis making the budget useless. I would rather see how effectively were the cash transfers were made, what was the loss, what was the cost required to transfer that cash, etc. I also want to know that how fiscal deficit target was achieved using cash accounting jugglery by simply delaying payments.
Similarly, we do not have a strategic planning session. The presidential address to both houses intends to do that but is hardly ever used that way. The election manifesto is the strategic plan we look to. I think that is inadequate. However given the level of understanding in the houses of the strategic issues, one wonders if it is better to not let the parliament do strategic planning. Most of the MPs are "knowledge proof" as the popular adjective goes.
In sum in a few hours you will see much hula boo about a non event. Let us hope Arun Jaitley breaks another norm.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
March 26, 2014
Make or break elections in India
As the election nears, the political discourse has become shrill, divisive, rhetorical but seldom, if at all, insightful. From the economy and markets perspective, there was never a turning point as pronounced as this.
The market favours Narendra Modi, BJP’s prime ministerial candidate. However, the electoral numbers present a challenge. The BJP is strong in North and West, marginal in East and almost absent in the South. As per recent opinion polls, North and West are firmly backing BJP. The East will be crucial test for BJP’s party machinery while South will depend upon alliances.
At the same time, opponents are getting their act together. Aam Admi Party despite its ludicrous politics, enjoys continued support amongst its followers. If not anything AAP may limit BJP’s seat share below the 180 mark. Congress may gain from its many populist gifts to rural India in the past decade. Congress is a shrewd tactician at election games and can still ratchet up 150+ seats simply because of it truly national presence. The third front is realigning itself to increase the bargaining power at the time of government formation. The lack of coherent leadership within third front makes it a target for alliances and partnerships, legitimate or otherwise.
A rational result hints at BJP winning 190-200 seats. This number was adequate to run stable coalitions in the past. However, Modi’s polarized image may present a problem and a lot will depend on tally of other parties. If Congress wins 150+ seats, there is a reasonable possibility that BJP may be sitting in opposition even after winning 180 seats. BJP needs at least 230-240 seats to decisively win the mandate.
From market’s perspective, there are three likely outcomes of this national election – a coalition led by strong BJP, a coalition led by weak BJP and a indecisive-mandate.
The first case will allow Modi to implement a model of economic reform he has articulated. It is a big challenge as there is little time to address the breadth of issues facing the economy. In case of a weak BJP-led coalition, things will become uncertain. We must realize that the national mood is pro-Modi and not exactly pro-BJP, and BJP continues to be riddled with its old problems even today. In a weak coalition Modi-detractors may not allow a broad-based economic reform. This situation will test the political ability of Modi to maintain stability, something Vajpayee achieved with help of Brijesh Mishra.
However, in case the electorate throws up an indecivisive-mandate, we are positively doomed. Our present predicament leaves less room for experimentation or populist adventurism. It will result in a lost decade and some of the damage caused may leave deep scars. A lack of coherent policy may make low growth endemic and entrench our structural problems.
There is hardly any margin of error this time but then Indian voter has demonstrated surprising political maturity in the past. So let us hope for sanity.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
The market favours Narendra Modi, BJP’s prime ministerial candidate. However, the electoral numbers present a challenge. The BJP is strong in North and West, marginal in East and almost absent in the South. As per recent opinion polls, North and West are firmly backing BJP. The East will be crucial test for BJP’s party machinery while South will depend upon alliances.
At the same time, opponents are getting their act together. Aam Admi Party despite its ludicrous politics, enjoys continued support amongst its followers. If not anything AAP may limit BJP’s seat share below the 180 mark. Congress may gain from its many populist gifts to rural India in the past decade. Congress is a shrewd tactician at election games and can still ratchet up 150+ seats simply because of it truly national presence. The third front is realigning itself to increase the bargaining power at the time of government formation. The lack of coherent leadership within third front makes it a target for alliances and partnerships, legitimate or otherwise.
A rational result hints at BJP winning 190-200 seats. This number was adequate to run stable coalitions in the past. However, Modi’s polarized image may present a problem and a lot will depend on tally of other parties. If Congress wins 150+ seats, there is a reasonable possibility that BJP may be sitting in opposition even after winning 180 seats. BJP needs at least 230-240 seats to decisively win the mandate.
From market’s perspective, there are three likely outcomes of this national election – a coalition led by strong BJP, a coalition led by weak BJP and a indecisive-mandate.
The first case will allow Modi to implement a model of economic reform he has articulated. It is a big challenge as there is little time to address the breadth of issues facing the economy. In case of a weak BJP-led coalition, things will become uncertain. We must realize that the national mood is pro-Modi and not exactly pro-BJP, and BJP continues to be riddled with its old problems even today. In a weak coalition Modi-detractors may not allow a broad-based economic reform. This situation will test the political ability of Modi to maintain stability, something Vajpayee achieved with help of Brijesh Mishra.
However, in case the electorate throws up an indecivisive-mandate, we are positively doomed. Our present predicament leaves less room for experimentation or populist adventurism. It will result in a lost decade and some of the damage caused may leave deep scars. A lack of coherent policy may make low growth endemic and entrench our structural problems.
There is hardly any margin of error this time but then Indian voter has demonstrated surprising political maturity in the past. So let us hope for sanity.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
January 30, 2014
Banking and the Post Office
Yves Smith blogged about post office providing banking services. Here is my take on it.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Double whammy of withdrawal of funds from emerging markets
In the past few trading sessions, there has been a considerable withdrawal of funds from the emerging markets. We can attribute this to two basic reasons.
Firstly, we have seen reduction of QE from $85 billion to $65 billion in the last four months. Secondly, we have seen an upward pressure on interest rates in the developed world. These two factors have combined to create A double whammy. At the time when funds are scarce, we have a reverse potential difference that is pulling money towards developed markets. This perverse situation will lead to substantial abatement of money flows from emerging markets to the developed markets.
In addition, there is already in place, an incentive to emerging markets sovereigns to invest in developed market treasuries for mercantilistic reasons.
I believe, these three forces will lead to substantial correction in equity markets in developing countries. Hence, we will see drastic correction in Indian equity markets. I also think, the same logic will hold for other developing countries.
I will be trying to close my open positions as soon as I can. Let us hope that we are able to ride out this turbulent phase. However, I do not think that this turbulence will last more than three months. Therefore, it is essential to get into the market say around end-April.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
Firstly, we have seen reduction of QE from $85 billion to $65 billion in the last four months. Secondly, we have seen an upward pressure on interest rates in the developed world. These two factors have combined to create A double whammy. At the time when funds are scarce, we have a reverse potential difference that is pulling money towards developed markets. This perverse situation will lead to substantial abatement of money flows from emerging markets to the developed markets.
In addition, there is already in place, an incentive to emerging markets sovereigns to invest in developed market treasuries for mercantilistic reasons.
I believe, these three forces will lead to substantial correction in equity markets in developing countries. Hence, we will see drastic correction in Indian equity markets. I also think, the same logic will hold for other developing countries.
I will be trying to close my open positions as soon as I can. Let us hope that we are able to ride out this turbulent phase. However, I do not think that this turbulence will last more than three months. Therefore, it is essential to get into the market say around end-April.
Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".
