Sudip Bandyopadhyay’s Blog

Thirty years ago, retailers would be quite content to source the shoes they wanted to sell as cheaply as possible. The working conditions of those who produced them was not their concern. Then headlines and protests developed. Society started to hold them responsible for previously invisible working conditions. Companies like Nike went through a transformation. They realised they were polluting their brand. Global sourcing became visible. It was no longer viable to define success simply in terms of buying at the lowest price and selling at the highest. Human beings are bad at learning and changing. It takes a good crisis to drive home what may have been staring us in the face. So what in particular are the lessons for all those concerned with saving, investment, borrowing and lending? Financial services and investment are today where footwear was 30 years ago. Public anger at the crisis will make visible what was previously hidden. Take the building up of huge portfolios of loans to poor people on US trailer parks. These loans were authorised without proper scrutiny of the circumstances of the borrowers. Somebody else then deemed fit to be securitised and so on through credit default swaps and the rest without anyone seeing the transaction in terms of its ultimate human origin,. Each of the decision makers thought it okay to act like the thoughtless footwear buyer of the 1970s. The price was attractive. There was money to make on the deal. Was it responsible? Irrelevant. It was legal, and others were making money that way. And the consequences for the banking system if everybody did it? Not our problem. Now we are paying the price in trillions of dollars for that imprudent attitude.

In the international trading space,Gold is exhibiting all the classic signs of being in a structural bull market. On fears of inflation in early 2008, it rallied. Then, on fears of deflation in late 2008, it rallied again. So does gold perform better during inflation or deflation? That question may be the wrong starting point. On the contrary, the rationale for owning gold, as it once again approaches the $1,000 an ounce level, is the prospect of mounting monetary disorder. The US Federal Reserve, having flooded the market with liquidity by more than doubling its balance sheet in less than six months, may be unable or unwilling to withdraw it in time for fear of precipitating a secondary relapse in economic activity. Other central bankers will also face intense pressures to “support” their domestic economy by weakening the currency, leading to competitive currency devaluations. The race to the bottom in fiat currencies has begun and hard assets, particularly gold and silver, should be the primary beneficiaries. Gold is a prime candidate to become a “mania asset” once its demand becomes chiefly financially driven as opposed to jewellery and/or industrial demand driven where its upside could be capped by “sticker shock”. Gold is experiencing unprecedented buying by exchange-traded funds, offset by substantially reduced jewellery demand. The fall in the Indian rupee has meant Indian gold prices have reached record levels. This is causing a slowdown in jewellery purchases & even though rupee expenditure levels are holding up, the tonnage of gold imports is suffering.

Indian Capital Market corrected sharply in the week gone by with both Indices Nifty & Sensex falling by around 8%. The sentiment was badly impacted by the sharp fall witnessed in global markets on growing recessionary economic concerns .Despite President Obama’s recently announced fiscal stimulus, the US Fed forcast that the U.S. Economy would be contracting by 0.5 -1.3% and unemployment rate likely to shoot up to 8.8% in 2009. Indian Interim Budget for FY2009-10 turned out to be a non event for the markets, which was riding high on expectaions of wide ranging tax reliefs and sops for ailing sectors. This resulted in disappointment and triggered unwinding. Also with the government revising its FY09 net market borrowings target upwards to Rs 2.62 trln and FY10 net market borrowing pegged at Rs 3.08 trln made RBI give a cautious view on the Indian Economy & indicating that the gross fiscal deficit to GDP could be near to 10%. The efforts of the Central and State Governments at this stage is rightly centered around ensuring that the two fiscal stimulus packages announced during the last couple of months should start working effectively on ground. Implementation of the plan is extremely critical, at this stage, to ensure that the economy gets the necessary phillip the government is seeking to provide for putting it back on a growth track.

During the current week Markets are likely to see some actions, being ‘Expiry’ week in F & O. Drying volumes and lesser participation makes the situation worrisome. Negative global news-flow could also trigger fresh round of sell-offs in the already nervous markets. In absence of any triggers, global news-flow are likely to drive the markets in this truncated week. For the Indian economy ‘Inflation’ continues to be the only bright spot in the current tight economic scenario. Falling Inflation has given much needed comfort to RBI to go ahead with the cut in benchmark rates and there is very little downside to this, given the inflationary expectations The positive trigger for at least a short term rally can be the more than expected sharp cut in benchmark rates by RBI. Favourable RBI action will change the market sentiments.

( ** this is the transcript of the weekly column I write for Economic Times )