Sunday, September 6, 2009

It’s all a matter of letters – U,V or W

It’s all a matter of letters – U,V or W!

How these letters – U,V, W or L are now part and parcel of any discussion on local and global economy now a days that one gets convinced and at times confused on the economic and financial implication of these English letters, which we learnt in our nursery days!!
There are numerous discussions and view points as to which of these letters will be a reality that future will only tell, but it still remains a mystery at this moment for us all.

The other dimension to this is that different countries and regions will experience and embrace these simple English alphabets of ‘U’, ‘W’, or ‘V’. For the financial and economic fraternity, this is of utmost importance, as to when and which countries of the world will go which way.

There is always a perception and a reality which is bound to happen, sometime in the next 2-3 quarters. The stock markets across the globe are betting on the letter ‘V’, and the price movements in the last 3-4 months bears testimony to that fact. The Indian markets are up almost 70% this year and the US markets are also up almost 50%. The markets seem to believe that the economic revival will be pretty steep and are pricing this to perfection. Historically it can be said with relative certainty, that anything priced to perfection on the future economic fundamentals and related assumption, runs the risk of a steep downturn from price perspective surely.

From the global standpoint, there is a liquidity flood that has been pushed by all the Central Banks and this is supporting the economies currently. It will be unfortunate, if we discover in hindsight that all it did was support stock and commodity markets, rather than supporting the needy people who require the most. It is surely supporting the commodity universe , stocks and real estate, but it remains to be seen how durable will be the economic support, which is the basic reason behind trillions of dollars thrown to the system.

From the Indian context the story line is the same as what is globally from Equity market perspective. We have our poor monsoon which is more of a localized reason in the global context of liquidity. As agriculture forms the back bone of our economy, from social perspective more and economic perspective less on a relative basis, it may not bring down the GDP growth rate much more. I guess we better leave the GDP growth rate discussion and surmise to the RBI and the politicians.

But what I find disturbing, purely from social context is that a large part of the population will be thoroughly exposed to miseries due to the monsoon failure and we will have ‘global’ fund managers making a mere mockery of the situation, in terms of how it has in terms of certain low % impact on the GDP growth. I guess the ground reality will be totally different.
The same applies to ‘inflation’ numbers, which is negative on the wholesale price index and double digit at retail price level. The most unfortunate part is that food inflation is at all time high, and this impacts the poor much more than the rich. How true was the saying – “Lies, damn lies and Statistics”

Coming back to the alphabets, which is of great interest across the world as regards the economic recovery part, a few hard facts needs to be understood. The US consume $9.7 trillion dollars of goods and services in 2008, compared to about $ 3 trillion of India and China combined. The US is in no position to grow currently, and if that is true then it will be really be almost a miracle if the saviors of the world – India and China can offset this. Going by the sheer figures it is a tall order for sure. The other big blocks of EU and Japan also are not in a position to negate the huge consumption shortfall of US.

I do not want to surmise as to which letter will be reality. The equity markets are clear in their verdict which is “V”, some of the economists are predicting ‘ U’ and ‘W’. As for me, I have a liking for ‘W’. The reason for my liking is just a couple of data – large unemployment in US and across the globe and secondly the Central Banks do not have the luxury to reduce the interest rates below zero now. So unemployment and inflation risks can kill the fragile recovery and we may again have an economic downturn lurking in the corner.

1 comment:

HR said...

So correctly you said Saptarsi.Your referral of SGD's Damn lies and Statistics was so proper. SGD's honest attempt to narrate the plight of common people for unbridled price rise of consumables was a delight to read. But it needed an expert to define the issue in an economic term. You did it in your write up. The other day I was going through Economic Times. It appears that the economists are seriously working on the issue of no match situation of limitless price rise of food grains and other consumables in one hand and dwindling inflation on the other. It seems that the list of brand commodities based on which WPI is being evaluated has not been updated since 1994. It is seen that some of the brand are almost on the verge of extinction. So what more we can expect with such a decaying system. It is again that the effect of price of consumables is very little on the actual inflation rate. I do not know whether I am correct or not but this is what I understand as a layman.
Anyway your write ups are always full with information , periodic analysis and technicalities. Your speculation of economic downturn is really generating fear in my mind...
Nice write up.. keep it up..