Sudip Bandyopadhyay’s Blog

“To believe that there is no way out of the present crisis for capitalism is an error” said Mr. Vladimir Lenin exactly 90 years ago, in March 1919, faced with another economic crisis, While discussing the dire straits of capitalism, he made the aforesaid comment and was  unwilling to write an epitaph of capitalism. That particular expectation of Lenin’s, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the Second World War, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years.

The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. The economic difficulties of today do not call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.  There is no need for radical surgery on capitalism.  Adherents to Keynes’s message were so eager to get this simple policy implemented, that they failed to notice –  that the General Theory also had a deeper, more fundamental message about how capitalism worked. It explained why capitalist economies, left to their own devices, without the balancing of governments, were essentially unstable. It also explained why, anti-cyclical policies must not be adopted only when a crisis is under way. Applied in advance – they can be the guarantors of a more just and democratic society.

The domestic capital markets last week remained range bound and were driven more by global news flows rather than local events. Both the indices Sensex and Nifty closed moderately up by around 4-5%, which was triggered by short covering in local markets. Last week saw the Dow Jones moving up by around 8% with the Nasdaq also surging by about 10% typically being a bear market pull-back rally. The World Bank in its recent report estimated global contraction of about 1-2% in CY2009. This is the second institution to officially confirm a sharp global slowdown after the IMF.   Perhaps the greatest reason for hope at present is that almost all hope seems to have been lost.  The latest global sell-off of stocks has been accompanied by commentary that no longer speculates on a rebound but instead tries to work out how much worse things could get.  Last week’s comment by Warren Buffett, still easily the world’s most respected investor, that the economy had “fallen off a cliff”, only helped to underline this mood.  He had previously garnered headlines during the crisis with calls to buy stocks.  Meanwhile, “good” news is ignored.  Commodity prices are rising, which might imply an early revival in economic activity.  Oil was up 50 per cent from its December low at one point last week.  Yet no one is seizing on this as an excuse to be optimistic about shares. Extreme negativity does not mean that the market is well into the “revulsion” phase, when it finds a bottom at which all the worst possible outcomes have been priced into shares.  If the world economy somehow outperforms that most gloomy prediction, it might then even be possible to make some gains.

On the domestic front, Jan 09 IIP numbers showed negative growth for second consecutive month. Inflation kept on moderating further and reached a 3 year low of 2.43% as against 3.03% last week. FIIs sell off in cash segment continued although it has slowed down considerably. This was also reflected in pressure on the rupee which registered a low of Rs 52.03 against dollar during the week. Markets typically witnessed a bear market pull-back from technical support levels, however upside still remains capped as higher levels are being used by FIIs for exiting positions. Looking at March-end scenario, domestic mutual funds are also likely to see cash outflows which may also put pressure on markets. In the absence of any further triggers, the market on the whole is likely to remain range bound, going forward in the medium term. Any monetary action by RBI , may act as a positive surprise for the market, during this week.

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

Wen Jiabao the Chinese premier announced last week that  “we will spend our way out of the crisis and the country  must not loosen its grip on exports even though trade protectionism was rising and the global financial crisis was yet to hit the bottom”.   In his address to the National People’s Congress, he outlined seven ways to strengthen exports, pillar of the chinese economy.  They included increasing the foreign trade development fund to help small and medium-sized businesses export, boosting export credits and expanding services outsourcing.  Wen Jiabao, also said that Beijing will run up a record deficit and predicted this year would be “the most difficult of  this century”.  It is clear that China will use whatever money is necessary to avert a sharp slowdown. Since Barrack Obama was elected US president in November, stocks have witnessed a triumph for the audacity of hope.  But hope won in China, not the US.  Since November 4, China’s Shanghai Composite Index has out performed the US S&P 500 by a cool 75 per cent.  November’s announcement of an economic stimulus package helped start the rally.  In recent days, data showing revived economic activity, and official hints of another stimulus, have buoyed it further.  Meanwhile, Mr. Obama has had the most negative welcome from the stock market of any president since 1900.  Plainly the market is not happy with the new team so far. It is hard to attribute this to objections to the huge Obama stimulus package, as China has revived confidence with exactly the same policy; or to complaints about Mr. Obama’s alleged socialism, as China is run by avowed communists.  Instead, markets may be disliking the American-style democracy.  China’s autocrats can announce a stimulus and get on with it – in the US, it must be refracted through Congress.  Ideally, economic policy should not be written by committee:  and there is plain dissatisfaction that the Obama team left the detail of its stimulus to Congress.  Second, there are the banks.  China’s are in good health, with both loans and deposits rising American counterparts are not.  Finally, there is confidence in officialdom.  Since Tim Geithner, the US Treasury secretary, made his terribly received speech on plans for the bank sector, the S&P has dropped 20 per cent.  Market may not have expected a “silver bullet”, but did expect the new administration to have a clearly stated “plan A”.  The realisation that it did not was a severe blow to confidence.  Meanwhile, hope – maybe too much of it – is pinned on the audacity of Chinese officialdom and its ability somehow to keep their economy on course.

In the week gone by,  Indian capital markets continued to display extreme volatility and sentiments were spooked with both Indices Sensex  and the Nifty touching three year lows. It was relentless selling from FIIs in the cash segment coupled with continued negative news flows from the global markets which, shook the sentiments of the markets.  Global Markets also  saw a big meltdown during the week  and the Dow Jones plunged below 6600 mark. The sharp fall in U.S. markets was triggered by rising recession concerns.   RBI announced rate cuts of 50 bps in both Repo  and Reverse Repo. A slowing economy and falling inflation gave RBI enough room and reason to reduce rates and although this was not one of the ‘big bang’ rate cuts, it was a welcome move.  With this move, the RBI has cumulatively cut the repo rate by 400bps (from 9% to 5%) and the reverse repo rate by 250bps (from 6% to 3.5%) since September 2008.  However these rate cuts failed to boost the market sentiments as these measures were already discounted and probably viewed as only incremental steps in a situation where drastic action was required.Monetary policy must reach out and influence asset prices all across the economy, through a well functioning monetary policy transmission.  In India due to absence of Bond-Currency-Derivatives nexus and multiple regulations the impact of monetary policy changes takers ages to percolate down to the economy.  In some cases like equity market, the transmission is very weak as bank lending to equities is walled off.  Also words no longer move markets.Action backed by details and some cold hard cash, however can have an effect.

Current week, a short one with just three trading sessions will continue to remain choppy. FIIs pulled out about Rs 2000 crs from markets in just last one week pushing rupee to a new low of Rs 52.18. This has resulted in indices cracking significant levels and closing nervously.  With Election programme now being announced, uncertainty in the markets is likely to stay with absence of any other positive triggers.  Inflation remained the only silver lining for the economy moderating to 3.03%. This is one of  the lowest in last one year. The fiscal measures taken by the government during the last three months have slowly started to show some results on ground.  To a great extent, the fate of our economy during  the next few months would depend on the appropriate and timely implementation of these fiscal and monetary measures including making adequate credit available to the industry. On the whole markets could remain edgy with global news flows driving the sentiments.

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

It looks as though the international financial crisis has now given way to the international economic crisis that it caused.  Japan gives the best evidence.  Japan’s banks did not, as a rule, load up on toxic US mortgage debt.  Yet the crisis affected the country deeply.  For many years while leverage was easily available, the “carry trade” – borrowing in yen at its low rates to park cash elsewhere kept Japan’s currency cheap.  Then, once the credit market turned, bringing the carry trade down with it, there was a prolonged period when the yen functioned solely as a perverse “safe haven”, gaining whenever volatility was rising.  The carry trade appears to have been squeezed out of the system by about late November, The yen has weakened in recent days even as volatility has risen, showing that economic fundamentals have at last taken over from the perverse correlations of the credit bubble.  The problem now for Japan and everyone else, is the health of those economic fundamentals.  For Japanese trade, the financial crisis had two critical effects – it made its exports too expensive, thanks to the yen appreciation and it slashed away global demand for those exports.

The sight of half-laden container ships plying the seas is another clue that this is no ordinary global slowdown. Japanese exports almost halved in January. A geographic breakdown of  46 per cent year-on-year drop in exports shows the buyers’ strike is global. Japanese exports to the US fell 53 per cent and to the European Union and Asia by 47 per cent. This follows an 18 per cent drop in China, 33 per cent in South Korea and 44 per cent in Taiwan. Statistics are skewed by the Chinese lunar New Year holidays. But lead indicators suggest there is worse to come. Throughput at China’s once bustling ports is thinning. After growing at an annual 20-30 per cent from 2004, volumes have now returned to 2006 levels. Chinese import processing, which leads exports by a month or two, plunged 50 per cent, year on year, in January..

Domestic Capital markets continued to trade indecisively in the week gone by, with both Nifty and Sensex displaying a flat trend. During the week positive news flows in the form of a third fiscal stimulus package, benefiting sectors like Steel, Cement and Autos supported the otherwise weak market sentiments. Also Global news flows were supportive, post President Obama’s first 2009 budget proposals, which reassured Banks of continued fiscal support with a view to boost the U.S. economy. Markets are exhibiting indecisive trend with dismal volumes, indicating lack of participation of institutional players. FIIs remained net sellers in equity markets and outflow of dollar continued pushing rupee to a new low. With the Elections likely to be announced soon, markets will be pushed into uncertainty till political clarity emerges.  Markets are likely to remain in a range with domestic and global economic news flow driving the sentiments.

GDP data released last week for Q3 FY09 shows that Indian economy grew at 5.3% as against 7.6% in Q2, much lower than the consensus expectation of 6.1%. The Real GDP growth for the period of Apr-Dec stood at 6.9%. Inflation continues to be the bright spot in the economy and has dropped to a new 14 month low of 3.36% and is likely to fall further by end of Mar09. Further monetary easing from RBI is probably warranted at the earliest to take advantage of this continuously declining inflation. This action will provide the necessary boost to investment and consumption in interest sensitive sectors of economy.  Three fiscal stimulus packages announced by the government over the last three months have probably started working on ground slowly and there are visible signs of the same emerging from the semi-urban and rural markets, leading to political demands for extension of employment generation schemes to urban population as well.  However, to provide further impetus to this gradually building momentum, optimum and urgent monetary action at this stage is critically required.  At this stage RBI should probably focus on growth and not get too worried about the exchange rate.  We should not fall for the need to retain high interest rates just because it can backstop rupee.  May be a radical rate cut and not an incremental / gradual one, will bring life back into the economy and the markets.  Public finances need structural changes and the next government will need to focus on that, but the momentum generated by fiscal concessions should not be lost by pondering over those, now.

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

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 )

The Greenspan idea that monetary and regulatory policy cannot prick asset price bubbles but should deal with the consequences when the bubble has burst – now looks dangerously quaint.  The intellectual justification for the Greenspan idea – was that identifying equilibrium levels of asset prices is difficult; and policy tools to prick or limit bubbles are limited. The unmentioned but perhaps real rationale is a kind of implicit market fundamentalism: markets value assets best, and even if markets make mistakes, policymakers can never be sure in advance whether and to what extent mistakes have been made. Such “asymmetric” policy responses are out. But if they are to be replaced by more symmetric, counter-cyclical policies, then explicit or implicit target or guidance zones for the prices of all main assets – shares, housing, exchange rates and perhaps even oil – are unavoidable.  However, the wreck that is today’s financial system is testimony to the catastrophically flawed nature of that doctrine. Policymakers have no choice but to have a view on what constitutes a reasonable or equilibrium level of all asset prices. Of course, determining such levels is subject to uncertainty. The most it is prudent to contemplate is that policymakers should determine not reasonable levels but reasonable zones for asset prices. One of us has in the past argued for exchange rates to have target zones with a margin of 10 per cent around the central estimate.

Unfortunately, we are in the midst of a global economic crisis.  But much of this is already in the price of global financial assets.  This is not to say we are on the cusp of a sustainable rally in global equities and credits.  There is room for disappointment with regards to how long the recession lasts.  But it is now important to realize that while global equity rallies will be dragged back by the economic news, we are probably not too far from the bottom either.   We are close to the bottom because policy makers are finally fumbling towards a “bad bank” solution to the crisis. The “bad bank” is the tried and tested solution to previous crashes. Bad assets are put into a government funded pool without an accounting or funding requirement to sell assets early, removing distress from the markets and giving private investors confidence to return to cleaned up banks

Indian Capital markets was largely flat last week with marginal gains in both the Indices  Nifty and the Sensex. Global news-flows largely dominated the sentiment , especially news pertaining to President Obama’s fiscal stimulus of $789 bn. However volumes were still lacking from larger institutional players indicating a cautious mood. On the domestic economy front,the minus 2% growth in the index of industrial production (IIP) for December 2008 is the lowest on record since 1993, when the index was first compiled.  The sharpest slowdown, of minus 12.8% , came in consumer durables – the fate of consumer non-durables was also negative, at minus 0.1%.  The consumer durables sector has borne the burnt of consumers shying away from taking loans at very high rates in difficult times.  Needless to say, manufacturing has also taken a hit  on account of the interest rate regime, which  needs to urgently factor in global and domestic realities.  Perhaps the silver lining in all the dismal numbers surrounding the economy is the steadily falling rate of inflation – it is now down to 4.3%.  The latest figure is for the week ended January 31, which would have only incorporated the first-round effect of the cut in fuel prices. Inflation will fall further, creating more room for rate cuts.  On the other hand due to surging expenditure bill and dwindling tax revenues, the Government announced its intention to borrow additional Rs 46000 crs from the market over the next 2 months.  RBI must respond soon with bath rate cut and liquidity increasing measures, if the economy is to avoid a worse-than-possible 2009-10.  An insufficient response means we may end up short.

Market did witness a mild pre- budget  rally in anticipation of some Tax relief in Indirect Taxes and some sops to badly hit sectors like Auto’s, Real Estate, Textiles etc. However the movement in the markets could largely remain news driven and Profit taking may set-in once the news is over. Consistent follow up buying is needed to take the Indices further. This week the market will eagerly await the expected relief in both direct and indirect taxes,from the interim budget on monday.  Expectations are building around possible announcement of tax free Infrastructure bond issuance by Infrastructure or Infrastructure Financing Companies in the Public Sector  for  boosting  infrastructure spending. From the current trend of retail investments, it can be safely concluded that such instruments will be greatly in demand & should succeed in raising significant amount of funds from retail.  Market would also welcome removal of irritants like Securities Transaction Tax .Appropriate budgetary measures aimed at providing boost to growth will definitely be appreciated  by the market.
( ** this is the transcript of the weekly column I write for Economic Times )