Thursday, September 22, 2011

And then the chickens come home to roost

The US has still not come out of its recession. Europe is teetering on the brink. There is political turmoil in the Arab states. India is caught in a mire induced by corruption and mis-governance scandals. The Chinese growth engine is sputtering. Unemployment onshore is increasing everywhere as jobs are being offshored. Offshore jobs too are going away or being relocated too even more lower cost locations. Stock markets, commodity markets and all other kind of markets are yo-yoing wildly for the last four years, swinging from intense bouts of pessimism to uncertain optimism. 

In Europe, the PIIGS countries are still wallowing in the muck of their own creation. The protected welfare state structures of the past are not going to survive – there has to be a fundamental shift in the way the population lives and the transition is not going to be easy. Transitioning from a life of unsustainable luxury to living within one's means never is.  If Greece defaults, it could take the rest of Europe along for a very bumpy ride, since the lenders to Greece are banks from other European nations, led by Germany. So they will find a way to bail it out, but not without pain all around. Italy will have to tighten its belt and face tough times ahead. Ditto with some of the other countries in the EU. Some of the weaker nations may have to pull out of the EU – it is unlikely that sugar daddy Germany can keep subsidizing them for long. The Euro, which for a while held out promise of being an alternative currency to the dollar, is on its deathbed or at the very least, extremely sick.


China, whose economic might is only rivaled by its political ambitions for influence in the world, is facing its own set of problems. Exports are sputtering because the world cannot afford to buy more and more and is battling its own demons at the moment. Inflation at home is high and interest rates have been raised, just like in India. Wages are rising making exports less competitive. The housing bubble and infrastructure bubble fueled by excess borrowing and unsustainable creation of capital is showing signs of collapsing.


The Arab countries have always been run by the sheikhs, propped up by powerful "friendly" superpowers, in return for favors that oil can bestow. For all their sanctimonious posturing about democracy and human rights, the US is the country most responsible for propping up regimes without any legitimacy for economic and political gain. Some of those cozy equations are being shaken with current developments, and new ones will take time to form.


India is caught in its own web of corruption and mis-governance. We have several versions of the TINA (there is no alternative) syndrome, one of them being "There is no alternative" to corrupt governments! Confidence in the government is low. The economy has slowed down considerably. The common man is facing the pinch after years of sustained inflation, and lower wage increases. The poor are facing it even more since food inflation has been even higher.  A lot of the growth that was in the past led by housing and infrastructure is slowing due to the current high interest rates. In spite of the RBI raising interest rates a dozen times in the last year and a half, inflation shows no signs of abating, while growth certainly is. The stock market is teetering at 17,000 levels, not very sure which direction to head in; in the meanwhile, it swings wildly either way.


The US is yet to emerge from its troubles. The cheap money policy with QE1 and QE2 does not seem to have effected its magic. Growth has stagnated, there are no jobs, the housing market is still in the dumps, politics is in a mess, confidence is at a low, and it seems like the country is running out of options. The irony is that the dollar still continues to be the reserve currency of the world (and will be for some time to come) since There is No Alternative! US budget deficits are unsustainable, which they have been, for a long time. Decades of unsustainably high standards of living fueled by borrowing from the rest of the world is having its impact. Like the proverbial ostrich, the US continues to bury its head in the sand and expects that the problems will go away.

The world over, the chickens are coming home to roost. None of these developments should come totally as a surprise – they are the inevitable consequences of self-induced flow of events. However, the current times seem to be exceptionally uncertain since too many of these things are happening at the same time.

We do not know how each of these events will pan out but can only guess that will all eventually settle into some kind of uncertain equilibrium. Each of these events has the ability to swing markets wildly and none of them has settled into any kind of stable state.   In such a situation, it is perhaps time to re-evaluate investment options and strategies.  The usual mantra of buy and hold for the long term, do SIP, diversify across asset classes including foreign assets, may still hold good but perhaps with a twist. It is time to look at some strategies that are defensive while at the same time being ready to grab opportunities that will inevitably arise in wildly swinging markets like these.


More on that in the next.


Anonymous said...

good article !

bemoneyaware said...

Good summary of the current situation. Looking forward to the next part.