November 1st 2009
In the Indian family context, until the first child is born, the question that a couple is most often badgered with is - when is the good news coming? Atleast that was the case over a decade back (thats when we had our babies, so obviously after that thankfully we stopped getting those questions).
And in the context of the stock markets, though the 'good news' had been discounted for a long time (remember the 'green shoots'?), yet when it actually came, there was much excitement around it. I am referring to the latest numbers reported for the US economy showed that the US GDP had grown by 3.5% YoY during the quarter ended September 2009 (3Q09). See the graph below.
For real?
Many though, are still doubtful whether this is sustainable. This is given that a large part of this growth in US GDP has been brought about by the government's stimulus program that has helped raise consumer spending, and housing and automobile demand.
For instance the cash for clunkers program. This is the program wherein the US government was offering a cash subsidy to consumers to exchange their old cars for new ones and was done with a view to bail out auto companies, which stood on the brink of bankruptcy. This has pushed up the automobile output during the September quarter by a massive 158% YoY, which in GDP terms, according to the US Bureau of Economic Analysis, added around 1.6% to the US GDP growth figure reported. Thus without it, GDP growth would have been only 1.9% (3.5% minus 1.6%) during the third quarter.
Sauce-Bearnaise Syndrome
I heard of this term only recently. Basically if you end up eating something that violently disagrees with your system and you end up vomiting, you'll likely find yourself suffering from Sauce-Bearnaise Syndrome. Otherwise known as taste aversion, it causes us to associate the taste of the food we've puked up with the illness that caused it to such an extent we're unable to face eating it again.
If from my notes you get the distinct feeling that I am being too pessimistic in my views of the stock market, then you know the equivalent of the Sause-Bearnaise syndrome is working on my mind where investing is concerned. I still haven’t quite forgotten the paper losses of just a few months back.
People who came out of the Great Depression in the US are known to have been highly risk averse when it came to investing. Including the great Ben Graham, the eventual teacher to some of the greatest minds on the investing landscape, including Warren Buffett and Walter J Schloss. So I am in August company where this feeling is concerned.
The sky is falling!
I read somewhere that losing in the stock market is an everyday reality: Stock prices go up and down daily. Inflation corrodes the purchasing power value of investments-day after day. The challenge-and the opportunity-is to lose less.
General George Patton said it this way: "Let the other poor, dumb son-of-a-bitch give up his life for his country." They are all talking about the same thing: Don't be heroic. It doesn't pay.
I am not the only one with the feeling that notwithstanding the streaming economic good news, all is not well in the stock markets.
Renowned economist Nouriel Roubini said on Oct 31st that we can possibly have a market crash all over the world. The reason? He is of the opinion that everybody is currently busy shorting the dollar, borrowing and investing in assets all over the world. That has helped push the dollar to a 14-month low.
People are essentially borrowing at zero percent interest rates in the US and investing in other countries, which is even more beneficial for them because we currently have a falling dollar. But according to him, the dollar will eventually rebound. And when that happens, everyone will have to close their short positions and dump their assets, and this is how we can have a market crash all over the world all over again!
A journalist on the FT, who I respect for his views also said that the next ‘correction’ in the stock markets will be caused by the foreign exchange markets, predominantly the US Dollar.
There is no doubting that the greenback has taken a beating. The rupee has gained ~5 per cent since this time last year, the euro has gained ~18 per cent, gold has risen in value by 17 per cent against the dollar since the start of the year etc.
The oil-exporting world is worried, since oil is priced in dollars. As is the Indian infotech industry since the bulk of its earnings are in dollars. The Chinese are practically paranoid, for they are the world's biggest lenders to the US. You would be too, if you had invested $2.27 trillion mostly in US government bonds. The governor of the People's Bank of China, wrote in a recent essay that the world needs a new global currency to replace the dollar.
Some of the dollar's recent losses are, of course, a manifestation of the perceived return to normalcy in the financial world, and a reversal of global capital's "flight to safety" in the dollar last year at the height of the financial crisis. As appetite for riskier investments returns, capital is moving out of the dollar comfort zone in search of better returns.
But more deep-seated concerns about the structural weaknesses in the US economy -- principally, a toxic mountain of debt and the absence of a strategy to overcome it -- are giving rise to a chorus of concerns that the dollar is at risk of collapsing and being dislodged from the pedestal of its global reserve currency status.
As if till now you weren't convinced of my negative views on the markets, I am going to quote another interesting article - this time something that I saw on the Wall Street Journal. This one said that the markets in the emerging economies could be headed for a downturn irrespective of how the developed countries fare in the future.
Basically as per this theory, if the US and Europe continue to grow sluggishly, countries relying on exports such as China and Brazil will be hit hard. So if the world economy slows further, commodity prices will plunge. On the other hand, if the US economy for instance starts growing at a strong pace, interest rates will head upwards and the dollar will appreciate thereby taking the sheen off emerging markets.
Damned if I do, damned if I don’t!
Despite the interesting insights that these theories provide, why should we concerned on this? Because foreign money flows into the Indian markets are the ones that move our markets. As seen from the chart above, there emerges a very close connection between how FIIs (foreign institutional investors) have behaved in the past and how the Sensex has danced to their tunes. And as compared to the FIIs, inflows from Indian mutual funds have been relatively steady and small.
When Warren Buffett was asked in 2006 whether there was a bubble in commodities, Buffett observed that, like most trends, it was driven by fundamentals at the beginning and then speculation takes over. 'As the old saying goes, what the wise man does in the beginning, fools do in the end.'
This was in the May 2006 period when the stock market was booming, just ahead of its correction. Every second fund manager was aware of the market's potential fragility and Buffet's analogy resonated with many investment people. 'It's like being Cinderella at the ball,' he said. 'You know that at midnight everything's going to turn back into pumpkins and mice. But you look around and say “one more dance" and so does everyone else. The party does get to be more fun-and besides, there are no clocks on the wall. And then suddenly the clock strikes twelve, and everything turns back to pumpkins and mice.'
For us, this means that till the time the FIIs decide to stick around, well and good, but when its time for the clock to strike midnight - for whatsoever different reasons - could be the dollar, could be their reporting periods or their percieved attraction to another market - they will go home.
And?
Well, while everyone has to have an their own independent line of thinking on investments. From my standpoint: Wait.
Mohnish Pabrai, said in an interview recently that one of Warren Buffett’s key trait that he has followed is that “you make few bets, you make big bets, infrequent bets and you only make bets when the odds are heavily in your favor.”
I so whole heartedly agree. I was having difficulty finding real values in the Indian stock markets. And notwithstanding the recent ‘correction’ in the Indian stock markets (probably caused by the exit of some fickle fund money), I am not waiting with bated breath on the big crash which may or may not happen. I would invest when the odds are heavily in my favour.
It is in times like these when interesting opportunities usually start to appear. I hope I can write soon about those.
Because that would be the real good news.
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