State of Economy – III

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If you need little context, read first two post.

 

State of Economy – I

State of Economy – II

 

World Economy seems to be hanging in balance. Indian Economy seems to be taking a Pause. Are we de coupled from China or that matter world Economy. I don’t think so. Now I am convinced about near term – upto 6 month – 1 year Indian Economic Outlook – Bearish. Real Estate – More bearish.Will Stock Market decline further, most likely

Yes.

What should be Done.

 

Embedded image permalink

Chart is self explanatory. Do not sell. This does not apply, when to Buy. Hold on to Cash. Do not Jump in buying.

End of Commodities Boom.

Posted on Leave a commentPosted in Economics

Interesting Data.

Have we ever thought, price of commodities can go down? But its happening. Worldwide, commodities are at lower than 2008 level. Does it indicate anything? To me, it means, the global economic boom is subsiding.

Purely on Demand/Supply Rule.

 

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Check another chart. %age drop in commodity price.

 

 

Does it help India. Yes. We are biggest importer of Gold – and Second biggest importer of Crude after China. With China Slowing down, it bodes well for us, if worldwide commodities are in decline.

At least CAD – Capital Account Deficit is within Control.

 

 

State of Economy – II

Posted on Leave a commentPosted in Economics

Today market crashed, though, I am not sure, whether we can say market crashed if it goes down by merely 1.96%.

Reason, Biggest Single Day Crash in China.

Once again : quoting from last post : China is a mystery riddle with Puzzle. And any geo political event can impact India, its economy and stock market.

So, While not be judgemental about one event, I would still say the Jury is still out, as to what will happen next.

I am not too optimistic about near term – 1 year for Indian Economy.

Thinking about equity market, are we entering a near term bearish phase? It appears.

State of Economy

Posted on Leave a commentPosted in Economics

Most vexed, complex, uncertain question. No one has clear answer.

We always look backward and connect the dots. No one knew in 2013 that Stock Market would start rising. No one knew in 2008 that economic crisis is looming. No one knew in 2006 that Real Estate Market is about to explode. It is always said that most defining moments in life are known to us, six month after, we passed thru that moment. So is it a futile exercise to forecast future?  As it is proven that forecasting is a bad science, and all so called expert are no better than monkey who is assigned to randomly pick up the consequences of an event.

 

I hold a view that no matter what we assume, we must continue to explore upon the facts, data points, experience, trends, information available with us instead of becoming a turkey, waiting for fate. We may eventually be wrong, but in the process, it would be great fun, thinking about these diverse, seemingly uncertain events.

 

Being an Armchair Economist, I am trying to figure out, the state of Indian Economy and Direction it might take. Let us first reflect on available information. The information is not complete, authentic, riddled with bias, but at least it gives some indication. So beware, do not take advice of Armchair Economist. Read it for Fun.

 

@ Stock Market : Its a barometer of economy. In absolute terms, market has not moved in last 1 years. What it indicates? The stock market is prized properly, forward PE seems to be much less than historic high, Euphoria of last year is gone. Considering it to be any indicator, if at all, It is not giving a confident signal about near term say, 1-2 years, outlook.

@ Real Estate : Market is in decline mode. Today’s Mint states that after more than 5 years, the domestic investment into equity has overtaken the Real Estate. This reflects bearishness in one asset class. i.e. Real Estate.

Both this indicators are supposed to reflect the undercurrent, but if we read it jointly, it suggest, people have more trust in Stock Market, thus, Indian Economy and not in Real Estate, major Contributor to Economy in GDP terms.

At Macro Level : Fiscal Deficit is under control, Current Account Deficit (CAD) is in positive zone. Forex Reserves are Swelling. Rupee is under control. No Sign of any turbulence. Even Inflation is in Negative.

Investment Cycle – Export – Both have not picked up. Export and IIP is in negative Zone.

Finance Sector – Everyone is bullish. Going strongly to build books. More new companies are coming up in NBFC space. I afraid, old days of 2006-2008 rack less lending are back. But that indicates general euphoria.

Consumption & Demographic Story is still intact.

Conjoint Reading:

 

When we read all the above, it gives a very conflicting views, Macro Economic Fundamentals are very Positive, but Micro Economic indicator are not giving comfortable outlook. There seems to be a pause, as if economy is making some adjustment, before it moves into next territory. A sign of inconsistency and indecisiveness.

So, two question:

 

What is state of Economy : It is taking a pause.

 

What will happen next.

 

For that, we must also look at World Economy:

@ China – Its a mystery riddle with puzzle. No one knows, what will happen. Thats scary.

@ Geo political instability.

@ US Interest rate hike. End to Cheap Money. Squeezing of global liquidity.

@ Euro Crisis.

 

Though, we are decoupled from world economy. We can not abstain from major economic shock.

Essentially, near term, there does not seems to be any upward indication for economy ( i.e. growth in Stock Market & Real Estate – its a long cycle and we are certainly in declining). However, any major world event, would see a sharp correction in Equity Market and some uncertainty, observed in 2008. What are the chances of that happening. I  have no Idea.

Let us wait and observe, before finally concluding.

 

 

Greece – Jury is Out – Leadership Failed People.

Posted on Leave a commentPosted in Economics

If you have not read my post on Greece, read it first here... to get the context of the current post.

It was certain the Greece Referendum was a Joke.

 

I had ended post :

 

“Ultimately, Greeks will have to bite the bullet and accept much harsher measures, than they would have or ought to have in first instances.

This way some time Democracy Fails.”

 

No, I am not writing to prove, I am right. It was conventional wisdom, that I had written,

 

It’s about:

 

How

Crowd Wisdom/ Democracy Fails.

Leadership Fails.

 

Why

Complex problems can not be reduced into Yes/No.

Greece PM failed in Negotiation.

 

Yesterday, Greece Banks opened, the bail out package is harsher than previous one. Mid term polls are likely to happen in September-15. Capital Controls are still in vogue. Whether it will continue to be part of Euro Zone, its unpredictable. And in Accountant’s language, Going Concern is not Certain, so, if one has to sign Greece Balance Sheet, it will be qualified.

 

 

Why China Stock Market is crashing

Posted on Leave a commentPosted in Economics, Stock Exchange

Since last 3 weeks, China Stock Market is crashing. Thats known Fact.

Why?

china-margin-of-debt_1024.0

The Chart indicates %age of Borrowed Money to the Investment into Stock Market as compared to free floating stock. This is called Margin Debt. Borrowed money is fuelling the China Stock Market Bull rally…Untill 2010, People could not invest the borrowed money into Stock Exchange, but after relaxation, as chart indicates, it is climbing uphill.

Why Every one is worried.

50% of Stocks are under circuit breaker.

Because, once unwinding happens, price starts dropping, lender ask for more security or start liquidating the security, resulting into downward spiral. As you know, it’s a cascading effect. The China Stock Market is very huge. In fact, in last 3 weeks, the value equal to 13 Greece Economy has been wiped off.

It’s like contagion.

Courtesy : Vox.com

Economic Dilemma of Greek

Posted on Leave a commentPosted in Economics

“Baggers are not choosers”

A quote, very unfortunate, less then polite, derogatory and full of hubris.

But, when it comes to mob mentality, it sound truism, if we look at what will happen to Greek.

The referendum on whether to accept Austerity Measure ( aka cut in pension fund, public spending etc.) put by the creditors are rejected by 60% of Greek Population by Saying No. This may imminently lead to Grexit. The referendum means, public WILL prevails over the decisive political will. The collective decision by public can never trump the sound, rational and logical economic policy. Human mind desires to reduce complex problem into very simplistic formula to arrive at solution. When one looks at the larger problems, in life, a YES/No, can never be a simple solution. Politicians across the World believes in passing the buck. Very few exception could be witnessed in History, lime Henry S. Truman, US President, who kept a plaque on this desk at Oval Office : “Buck Stops Here”. Firstly, a complex problem is reduced to Simple Answer without any alternative is farce.

What Greek P.M. did, passed the buck, and put entire nation on the further down hill.

Once greek defaults, they will be forced out of Euro. What option do they have to bargain with creditor, None. What will happen, next. No one knows, What could have happened?

If the PM would have shown little gut and spine, he could have negotiated little bit. Unfortunately, by leaving the table, the doors on negotiations are closed. The country will live on Hope and Prayer, assuming that other Nation would lend them some support. Its worse than being put on ventilator. Atleast, they could have salvaged some pride.

In negotiations, unless between equals, dominant party always…get away with what it wants. IMF and other European Lenders, only hopes to loose their money. Unlike, commercial bankers, they are not driven by profit or to recover their funds. They simple follow the policy, and if they amend policy for one, they will have to do it for every one.

Even, India had the similar position in 1991, when our Forex Reserved could only finance 3 weeks of Import. Mr Narsimha Rao, P.M. along with Mr. Manmohan Singh, then Finance Minister, shown wisdom and accepted lot of austerity measures, devaluation of rupee etc..They did not took easy path, by absolving themselves from the responsibilities.

Jury is still out as to whether action by Greek Public is sensible or not. To me, its not public, but leaders at top, who failed in taking decision. One view still prevails that Austerity measures offered by Lenders were too harsh and only option available with public is to reject any further conditions. Unemployment is nearly 25%, average income is very low, thus Greek’s don’t find it acceptable to further cut the social welfare. Thus, referendum was very clear, if poor have to choose between starving today or starving for tomorrow, one would choose to starve today. Thats what happened.

Ultimately, Greeks will have to bite the bullet and accept much harsher measures, than they would have or ought to have in first instances.

This way some time Democracy Fails.

 

RBI Governor – Dr Raghuram Rajan – World may exeprience Great Depression of 1930 – Again

Posted on Leave a commentPosted in Economics

Dr. Rajan is credited with predicting the economic crisis of 2008. Actually, in the year 2005, while presenting a paper title “Has Financial Developments have made world Riskier?” to the NBER – USA, he was categoric in stating.

Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite for risk may expand over the cycle. Not only can these intermediaries accentuate real fluctuations, they can also leave themselves exposed to certain small probability risks that their own collective behavior makes more likely. As a result, under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past. The paper discusses the implications for monetary policy and prudential supervision. In particular, it suggests market-friendly policies that would reduce the incentive of intermediary managers to take excessive risk.

He concluded his paper by stating.

We also need to continue improving the intrinsic flexibility of our economies, so as to better ride out the downturns that, almost inevitably, will occur.

If you are interested, you may find entire research paper in pdf here.

Yesterday, while giving a speech to the London Business School, he reiterated the fears for Global Economy.

He believes that excessive monetary policy intervention and quantitative easing by the Central Banker would weaken their balance sheet and thus we need to redefine the Rules of the Games to regulate the action by the Central Bankers. To me, it means, if every one continues to print the money, without considering the intrinsic value, as if, we are living in isolated world, and economies are uncoupled, the action by Central Bankers would bring in the Depression itself.

You may read story on International Business Times.

Rule of 72

Posted on Leave a commentPosted in Economics, Investment

Only objective of Investment is to get a good return. However, we forget the rule of compounding. Even, if we remember, we certainly do not know, how to compute realistically the return, we will get by applying principles of Compounding. The basic benchmark is to know, how long will it take to double the money. The simple way to calculate is by applying ‘Rule of 72′

DEFINITION OF ‘RULE OF 72′

A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.

The rule of 72 is a famous shortcut for calculating how long it will take for an investment to double if its growth compounds on itself. According to the rule of 72, you divide your expected annual rate of return into 72, and that tells you how many years it takes you to double your money.

Considering that large, blue-chip stocks have returned roughly 10% over the last 100 years and investment grade bonds have returned roughly 6%, a portfolio that is divided evenly between the two should return about 8%. Dividing that expected return (8%) into 72 gives a portfolio that should double every nine years. That’s not too shabby when you consider that it will quadruple after 18 years.

Look at Chinese Market to understand Dalal Street

Posted on Leave a commentPosted in Economics, Interesting Idea

DO you wish to know, why Stock Market in India is going up and down. Read this.

“BULL market” does not adequately describe the frenzied buying of Chinese shares in the past two weeks, so local media have started calling it a “super-bull”. China’s stockmarket has surged 21% in the last ten trading days, and that is building on a 20% rally over the previous four months. One of the world’s worst performers for three consecutive years, China has suddenly shot to the top of the table for all major markets in 2014. The rally has also propelled China ahead of Japan as the world’s second-biggest equity market by value, with a total capitalisation of more than $4.5 trillion.

Courtesy : Economist.com. Read full story.

Today (9.12.2014) Indian Stock Market fell by 300 points..Look at Shanghai Index. Its down by 5%.

Though, correlation does not mean causation, in the stock market parlance, its a high beta phenomena.

I desist from making any final comments, or I may be completely wrong in drawing the parallel, suffice to say, far more complex events shape the Stock Market, and we naively assume its got to do with Macro Economic Fundamentals.

Crude Price is very low..There are N numbers of theories, yet I am unable to find reasons for such sharp decline and why no one predicted it happening. With every reduction in CAD (Current Account Deficit) our economy should improve, yet CAD is very high, may be due to lifting of Gold Import Ban in the last few months, despite dwindling crude price. Take your pick, choose whatever reasons to suit your prediction.

All this leads me to believe that Not to Believe in Macro Economics Indicator. In any case, mostly with complex financial world, it’s nearly impossible to collate macro economic data. So, maybe it’s time to look at new indicators.