What could be the next worst thing in financial markets (14 Jan 2011)

I wake up everyday and ask what could potentially go wrong in the Indian Stock market.. I have not got any convincing answers yet.. Many things come to my mind.. Domestic problems like inflation, interest rates, burgeoning current account deficit, scams and corruptions.. International issues like sovereign debt problems of PIIGS especially Spain and Greece, uncertain macro economic environment of US and Europe, alarming debt to GDP ratio of certain countries and premature asset bubble signs are worrying. Also any kind of unknown shock may also be not surprising. The cause of uncertainties is fairly reflected in the stock market where volatility is the norm in the last few days.

However one thing is sure. India is undergoing far larger domestic problems than ever like raising interest rates and current account deficit. Inflation though became a global phenomenon especially the food prices are raising astronomically everwhere. With US looking strong, dollar will gain strength and gold and other commodities will lose its value in short term, may be a 15-20% cut in next one month. This may happen coupled with the sheer reason of investors trying to secure profit from their investments in these asset classes. I am waiting for the policy action of RBI and budget to happen to see the future direction of the market. If i am a policymaker,I continue with bankers' request for not raising interest levels beyond a .25 basis point. Also will cut CRR and inject liquidity in the system to stimulate credit growth which is very essential for economic growth. The current inflation is fuelled by raising food prices which is more of supply constraints reason that requires long term actions and monetary policy has limited effect on it. So raising the interest rates will not serve the purpose. However I still expect a 25 basis point raise in interest rates. Coming to budget, India's fiscal deficit is at its high and expected to reach more than 5.5%, which is the projected number in last budget. So with twin deficits, current account deficit and fiscal deficit, it all says a reason that rupee will depreciate in coming days. Inspite of raising more than a lakh crore through 3G and IPOs and FPOs fiscal deficit is raising.. Thanks to commonwealth games, the money was burnt, keeping the fiscal deficit at bay. So coming year, i expect partial roll out of many stimulus measures that was given in last two budgets. Excise cuts in autos and no respite in direct taxes and more indirect taxes is on cards. The budget may be considered negative for stock market, that may trigger sell offs.

But who can say? Indian ministers can heed to industrialists and continue to frame policies that are anti-poor and have long term pains. Only time can tell, however i have decided i will sit in cash till the sky gets clear.

Dollar strengthening amidst Quantitative Easing

It seems fed did the right thing by way of recent QE contrary to economists' belief. Lets analyse or try and understand what is happening.. The economist in me always wakes up when these kind of interesting thing happens. Lets analyse this way. QE injected about 600bn USD to give Americans to spend, consume and pop up the economy. This QE and subsequent actions make me believe that FED believes in Monetary easing and not the well accepted Keynesian economics that fiscal policy will make the economy rebound.

Now with more money to spend, all what they did was giving more money to financial wizards who invested it in emerging economies. India has got its share and also american stock markets made a rebound. Also these money found its way to commodities and other liquid items. While stock markets are robust for future earnings of american companies while commodities like crude depend on how does the physical demand for the same rises. There isnt any physical demand for these commodities and hence the speculative money that came did not see much returns. This has made the dollar to strengthen inspite of QE. Hence it can be concluded that QE in future can only result in more speculative money entering stock markets and commodities and will not serve the real purpose of increasing consumption and spends.

Will real estate emerges the best asset class of 2011?

Well, I have a belief that the old favorite real estate asset class will emerge as attracting the most money in 2011. Infact after five years of bull run, real estate is all poised to take a breather. The reasons are many. With no restructuring of loans permitted by central bank and hence mounting repayment of real estate companies will force them to liquidate their existing stock of houses, interest rates, stock markets, gold, silver and other alternative asset classes are at their all time highs,  1 lakh crore with the public and hence these funds in search of a high value high potential asset.. All convince me that real estate will be on a roll this year. However the greedy real estate companies will bite the dust after waiting three or four long years in search of higher prices and hence keeping the common men away in owning a home.

Hari, Wish you a very happy new year 2011

You are ushering in a new year indifferently though with high expectations. 2010 has been a year of learning and a dull year for you. Except that you got your graduation and a job after two months of unemployment with only few to support are the major events. The year reinforced your belief that you should not be dependent on others and should excel on your own way. A PSU job at the end with salaries lower than your last paid job was all you have to compromise for your aspired MBA. A point of inflexion of your life indeed as your plans laid out for next kill. There was uncertainties in your life in the last two years which was what you chose after a careful thought and chose an MBA over a coveted and secured job. Well, I am aware about your belief that 'ships are safe at harbor but that was not the reason ships are made for'. I do not know whether you chose the better path for you but you should enjoy and be happy in this journey where you only have the address of destination with no clear path describing it.

You have high expectations in 2011 as usual in line with sales person attitude in you. You want certain milestones to be achieved before you launch yourself in an uncharted path of further uncertainties. I wish you achieve this without any time overruns.

Apart from your career goals, Hari, you should concentrate on keeping yourself fit. Being in a Gym is boring and waste of time is what comes to your mind when you think of exercises. But there is a considerable reduction in your physical activities and your belly is a testimony of this. Every time you look at the mirror and you curse your pouch. Well, i should say you are barking at a wrong tree. I wish you start a new chapter in your fitness.

With these words I sign off and yes once again I wish you a very happy new year. Remember you are your own P&L and balance sheet.

Yours Sincerely,
Your Soul.