Often India is spoken of in the West, in some form of a mystical way. A way that portends that India is immune from the troubles of the Western World. Investors need to ask who holds the paper debt for Government Deficits, Debt for PPP projects and the building up of Infrastructure for which returns will not come for may be 2 or even 3 decades. And then you would realise India is no island. It is in a broken boat, that too is sinking rapidly. Dont want to believe me, dont. But look at the West. All of a sudden the S&P 500 and the MSCI Asia indexes have wiped out their 2010 gains and are down 4.2% and 10.6% respectively for the year. We have grown fatigued with the daily conventional and predictable sorties of the market technicians, the timing opportunists trying to reverse a falling market, even the esteemed managers of billions who don't get it. Some people are still blaming the market decline on expectations of inflation. What inflation? The 10-year Treasury note is the most desirable security in the world as it is denominated in the rising dollar and yields a pitiful, but safe, 3.2%. That's a heck of a lot safer than the 10-year Greek government bond that yields 7.7% or Spanish 10-year paper yielding 4.2%. Searching around for a more thoughtful market guru we came upon John Authers, the Financial Times' esteemed columnist, whose new book, The Fearful Rise of Markets, is enlightening and worrisome in its underlying message. "The financial disaster of 2007 to 2009, then," writes Authers, "has not cured any of the underlying factors that led markets to become intertwined and overinflated and to endanger the world economy. This does not mean that another synchronized bubble followed by a crash is inevitable, but it does mean that such an event remains a distinct possibility. Too many investors fell in love with the fastest stock market rally in history in 2009. Surely, the perils in Greek, Portuguese and Spanish debt were a mere smidgen compared to the U.S. subprime meltdown. No, says Authers, listing all the many bubbles that have overcome markets, beginning with gold in 1980, then Latin American debt in 1982, Japan in 1990, the Internet in 2000 and the subprime mortgage nightmare of 2007-09. Why so many bubbles, you might ask? Greed outran fear all the way to dangerous excess in gold, Latin American debt, Internet IPOs, Japanese equities and oil at $147 a barrel. The Fearful Rise of Markets is rather the result of the herd mentality, the result of the steady institutionalizatio
There is current support for this thesis. Last year, apparently, some two-third of all the new money going into mutual funds went to the Vanguard Group, which largely manages index funds of all varieties and geographic distributions. Even more dramatic was the panicky selling of indexed ETFs on May 6, triggered by sell orders in S&P 500 index futures.
Is European debt (an early warning signal for American debt) the makings of a mighty bubble that causes all markets to deteriorate together, perhaps not instantly, but clearly in tandem, as the ramifications get communicated by osmosis and the headlines? Luckily for Greece, Portugal, Spain and The bubble could be in German federal public debt, which now totals 73% of German GDP. Servicing the debt, public sector wages and funding welfare items now total some 75% of the German federal budget. Is this related to Germany's Ministry of Finance proposing on May 25 a blanket ban on short-selling all instruments, including German government debt, unless the trade is a pure hedge and not a bet against Germany? Consider the outcry if the U.S. Treasury ever tried such a prohibition on shorting U.S. Treasury debt. It could also be that the bubble is characterized by foreigners owning 79% of Greek debt and 78% of Portugal's debt or by Spanish banks starting to write down their huge real estate and construction loans while continuing to finance overextended developers. No one cared about these tiresome developments until a few short weeks ago. As Authers underscores, European debt is not a "walled garden" from U.S. debt, just as China's dampened equity markets are not separate from the selloff in the U.S. Markets are interchangeable and prone to bubbles more than ever before. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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