THE eyes of all investors are now on Big Ben (Bernanke) in Washington and not the famous one in London. The Fed is to meet on Oct 31 and the guessing is on whether he will cut interest rates by 25 basis points (which would pump more money into the system and further fuel the boom) or let things ride as they are.
As a recent survey in the Economist (Oct 20) points out, the job of a central banker is a most unenviable one. He has to balance between different objectives, keeping inflation under check, keeping the financial system stable, keeping one eye on the currency and another on economic growth. A bit like walking on a high wire holding a greasy pole! The last cut by Big Ben was of 50 basis points, in a bid to stave off a credit crisis that threatened the stability of the financial system. Sure, it has done so, but in so doing it has pumped more liquidity into the system. Now money, being fungible, finds its way wherever owners of it see profitable returns which is not necessarily into consumption or buying of those assets which would help the economy. Some of it finds its way into stocks, some into real estate etc.
A lot of it came into the Indian stockmarket, once the P note imbroglio had been resolved; SEBI is welcoming more money through the front door, including from rich foreigners (anyone with over $ 50 can come through a sub account, which really paves the way for a lot more fund flowing in). The sensex went up 1693 points over the week, and the NIFTY up 487.
Corporate results for the Sep quarter were by and large encouraging, with excellent performaces from L&T, Grasim, Omaxe, HCC and GAIL.
Funds are also flowing into the real estate sector. Witness the sale of a 15-20% stake by Golden Gate, a Tier II Bengaluru based real estate firm for $125m; by Rahejas of a 40% stake in 8 ventures to Ishaan Real Estate fund and by Sabeer Bhatia (of hotmail fame) of a 33% stake to Goldman in a Haryana development.
Back to Big Ben. On the one hand the credit crisis seems to have dissipated for the moment, albeit not without taking its toll. Merrill Lynch, for example, declared a quarterly loss of $2.3 billion thanks to a $ 7 billion write off of subprime loans. US Corporate earnings are weak, with the CFO of Caterpillar predicting a 50% chance of a full blown recession in 2008. On the other hand, pumping in more money is a moral hazard: people are more willing to lend with lower scrutiny and to riskier assets, assured that they will be rescued from the pains of their folly.
In India, managing this flow of external funds is posing its own set of problems, manifested last week in the attempt to curb unidentifiable P-Notes. Sebi chief Damodaran, with Shakesperean undertones, could well have been debating “to P or not to P, that is the question”.
Finance Minister P. Chidambaram hit the nail on the head in his lecture at Harvard, terming India a poor rich country. Rich in natural resources (iron ore, manganese, coal etc) but poor because vested interests (State Governments, traders) do not allow investment to exploit them. Rich in having a pool of entrepreneurial talent, poor in its inability to frame policies and procedures to allow it to flourish.
The rising rupee e.g. is forcing garment exporters to cut contract labour jobs; Tiruppur is expected to lose some 50,000 jobs. It can also affect job growth in IT/ITES, which has been foremost in creating them. The Government is miserably failing. The rural road connectivity programme, for example, is only one-fifth complete. These programmes have laudable aims but lousy implementation and the funds get eaten away by corrupt officials. The Finance Ministry is then asked for more funds to keep them going, and devises ingenious ways of taxing people, such as a fringe benefit tax on ESOPs, which will hit the IT sector. In effect, you are penalising the most efficient sector to pay for inefficiencies of the most misgoverned one! Pshaw!
So long as the funds tap is open, the market will be liquidity driven. However, people like Dr Marc Faber feel we are already in a bubble stage. The bubble may stretch for a few months more, sure, but it is still a bubble, he says. Enjoy the ride but with your eyes open.