The market has found yet another reason to short equities. This time its the concerns over PIIGS! Isn't it amazing how the world has changed over the last 2 years (since the collapse of Bear Sterns). After a deep correction which lasted almost a year we did see some amount of recovery in the global only to challenged by the enormity of fiscal situation in Europe. A lot of people were concered about the "W" and it looks like the 3rd vector of this "W" is about to commerce.
However, PIIGS is a no less than a big scam in my opinion. The fiscal situation in developed Europe has never been good and yeah rome wasn't built in a day. The situation has been ongoing for about a decade now. Fortunately for Europe borrowings came cheaply until the recent squeeze of credit which led to rising borrowing and servicing to such an extent that it became impossible to continue with the fiscal deficits. I don't want to quote figures here because there is nothing new to talk about. I just had a pop on Bloomberg quoting almost a 10% fall for Dow Jones, and couldn't resist writing. I am sure the trading data would reveal something erroneous!
Jim Roger's yesterday said that it is time to short emerging markets and this may work for short- term. I believe the next big thing to happen now will be printing of currecies in the developed world ... my bet is long emerging market currencies and short the developed market one's( a medium to long term view). I believe that the big scam of building fiscal deficits for the sake of socialism is over for now and most of the European nations including UK will have to take tough measures to bring the situation in control. On Sunday, while having our morning meeting we were discussing the effect on Euro and today it touched a low of $1.26. I believe EUR has a bit more to do, with GBP to follow post the election results. USD will be next in line against the emerging market currencies. Commodity inflation is going to be back and I would now start to hold commodities than any other asset class given massive inking's by governments. Bring's me to the view that commodity exporting countries should do well one more time.
For the short term, emerging markets should suffer some bit of pain on the back of increasing govt. paper yields in Europe. Last rally (since March 2009) in the emerging markets has been fuelled by decent foreign flows which may be pulled out on the pretext of de-risking. However, in medium to long run this money should be back in the emerging markets. Europe is a "structural sell" at the moment and if USD loses its power so would be the US. Money in the long run always chases growth and I hope to see emerging markets doing well in times to come.
For now I wait for scamters to compensate .............
Thursday, May 6, 2010
Saturday, June 6, 2009
Reflation Winners ....
(this post is futherence of my last post on economic depression)
Since the begining of FY 2009 we have seen many policy announcements across the globe by governments trying to restore confidence into their respective economies. All possible monetary and fiscal measures have been adopted to abate the impact of recession / potential recession in economies across the globe. However, allow me to speak more on monetray measures rather than fiscal in this post of my blog.
It is really amazing looking at the amount of money that has got printed and is getting distributed to the needy sectors across the globe. Every one now seems to have made up his/her mind up that the worst is past us and we should see better days in the near future. Hmm... interesting! One doesn't have to be Einstein to figure out that when 1 dollar is printed it creates liquidity worth 10 and these 10 dollars are going to hit the market sooner or later. In some cases they already have. The equity markets have validated this fact in the recent past .. so what is happening after all?
My belief is this is 'Reflation'. Reflation usually is an outcome of increased money supply in the economy which clearly is the case this time. Also, the equity markets gave us a reflationary signal with commodity companies being real gainers in the recent rally. If one is a believer in this economic theory; commodity companies should continue to do well in this reflationaty phase as once may expect this reflation to eventually transform into an inflation (no matter how much time it takes) and inflation to push the commodity prices to new levels.
Rising commodity prices should also build a case for investing in emerging markets as most of these countries are producers of some of important commodities. Go long on the oil producing countries (who knows oil can be at $200 in the next 2 years). Similarly with currencies; commodity currencies should do well over the next inflation phase. Go long on the real assets as these are the safest bet against inflation. Inflation overall is bad for equity markets however will certainly boost the commodity companies in the coming year.
Reflation though also needs to be understood in the context of a fall. One may have several reflationary spikes in a recessionary fall and therefore the real question remains: whether this reflation is a rise within a fall or a spike within a rise (the U-Curve)? .. I just hope its the later.
Since the begining of FY 2009 we have seen many policy announcements across the globe by governments trying to restore confidence into their respective economies. All possible monetary and fiscal measures have been adopted to abate the impact of recession / potential recession in economies across the globe. However, allow me to speak more on monetray measures rather than fiscal in this post of my blog.
It is really amazing looking at the amount of money that has got printed and is getting distributed to the needy sectors across the globe. Every one now seems to have made up his/her mind up that the worst is past us and we should see better days in the near future. Hmm... interesting! One doesn't have to be Einstein to figure out that when 1 dollar is printed it creates liquidity worth 10 and these 10 dollars are going to hit the market sooner or later. In some cases they already have. The equity markets have validated this fact in the recent past .. so what is happening after all?
My belief is this is 'Reflation'. Reflation usually is an outcome of increased money supply in the economy which clearly is the case this time. Also, the equity markets gave us a reflationary signal with commodity companies being real gainers in the recent rally. If one is a believer in this economic theory; commodity companies should continue to do well in this reflationaty phase as once may expect this reflation to eventually transform into an inflation (no matter how much time it takes) and inflation to push the commodity prices to new levels.
Rising commodity prices should also build a case for investing in emerging markets as most of these countries are producers of some of important commodities. Go long on the oil producing countries (who knows oil can be at $200 in the next 2 years). Similarly with currencies; commodity currencies should do well over the next inflation phase. Go long on the real assets as these are the safest bet against inflation. Inflation overall is bad for equity markets however will certainly boost the commodity companies in the coming year.
Reflation though also needs to be understood in the context of a fall. One may have several reflationary spikes in a recessionary fall and therefore the real question remains: whether this reflation is a rise within a fall or a spike within a rise (the U-Curve)? .. I just hope its the later.
Wednesday, January 21, 2009
When do they start printing?
In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and is corrected by a brief decline.
Year 2009 hasn't had the best of start from an economic point of view. We are in midst of a widespread depression (if one may call it so) around the globe and quite honestly future looks bleak at this point in time.
In this post I have tried to identify the precusors of a downturn, tried to decipher what happens during a depression and finally how do we get out of it.
Begining of a Recession:
As mentioned in the first sentence of this post, recession begins when expansion begins an unsustainable state. This depression has been no different. What the world had seen in the past 4 years was a volumenous increase in the Money Supply (essentially coming from the velocity side of it). Securitization (a financial innovation) meant money could be recylced faster than ever before and there was widespread prosperity in almost all economies of the world. Growth was the only mantra for governments world wide with inflation being over looked slightly longer than expected. So here's a list of lesson's learnt (not exhaustive by any means):
1. Money supply widened - velocity effect dominated
2. There was growth in the system - demand economics played a vital role
3. Inflation caught up with growth - again the money supply + demand effect
4. Unemployment was low (usually a low unemployment rate of 4% in US signals begining of a recession)
5. Marginal propensity to save was almost Zero .. people could afford luxuries
Governments woke up one day to realise we are growing too fast and inflation needs to be checked. This led to all governments raising interest rates.
During a recession:
Having read how it all began lets now look at the characteristics of a recession:
1. The phenomenon which begins as an inflation control measures actually stifles out business apetite. Governments raise interest rates to such an extent that Cost of Funding become greater than the Return on investments expected out of a particular business.
2. This leads to production cuts as the marginal produce which was profitable for business would suddenly become unprofitable. Hence, there is no choice but to lay off all resoruces needed to produce this marginal good. This is leads to unemployment.
3. Wide spread unemployment leads to cut in spending and expenditure which in turn affects the economic growth. Typically in a recession it is not surprising to see negative growth for 2 or 3 quarters on a trot.
4. The inflation now starts to moderate as well because prices are no more affordable and producers are willing to cut prices due to cost savings on laid off reseoucres.
Finally the Government starts to cut rates and tries and correct the liquidity mismatch in the sytem. One fine day the monetary policy measures of the government exhaust themselves (interest rate is Zero)
What ends a recession then?
Recession's can be long lasting and every measure taken to overcome them may not help in the short run (short term may even be 10 years). However, like every expansion, every recession ends as well. Once the recession is well recognised in the system, governments across the world start resorting to Fiscal measures:
1. Cutting taxes and duities: Reducing corporate and personal taxation may serve as a useful trigger in countering recession. As previously mentioned, if the post tax ROI is greater than cost of Funding business apetite would rise, leading to new employment and circularity of spending.
2. Deficit financing: A deficit financing means that the government is spending more than what its earnings. In other words local government would borrow from foreign governments. However in this recession money is in short supply all round the globe and hence governments all arounnd the world would have to start printing currencies and supply it into the markets. Printing currencies may not lead to inflation if there is very high unemployment in the economy (I wonder if governments all round the globe are waiting for this to happen). Also printing money may change the foreign currency dynamica, however, its surely better to slow death.
It remains to be seen now when goverments resort to this last emasure of countering recession. Hopefully soon...they should all start priting.
Year 2009 hasn't had the best of start from an economic point of view. We are in midst of a widespread depression (if one may call it so) around the globe and quite honestly future looks bleak at this point in time.
In this post I have tried to identify the precusors of a downturn, tried to decipher what happens during a depression and finally how do we get out of it.
Begining of a Recession:
As mentioned in the first sentence of this post, recession begins when expansion begins an unsustainable state. This depression has been no different. What the world had seen in the past 4 years was a volumenous increase in the Money Supply (essentially coming from the velocity side of it). Securitization (a financial innovation) meant money could be recylced faster than ever before and there was widespread prosperity in almost all economies of the world. Growth was the only mantra for governments world wide with inflation being over looked slightly longer than expected. So here's a list of lesson's learnt (not exhaustive by any means):
1. Money supply widened - velocity effect dominated
2. There was growth in the system - demand economics played a vital role
3. Inflation caught up with growth - again the money supply + demand effect
4. Unemployment was low (usually a low unemployment rate of 4% in US signals begining of a recession)
5. Marginal propensity to save was almost Zero .. people could afford luxuries
Governments woke up one day to realise we are growing too fast and inflation needs to be checked. This led to all governments raising interest rates.
During a recession:
Having read how it all began lets now look at the characteristics of a recession:
1. The phenomenon which begins as an inflation control measures actually stifles out business apetite. Governments raise interest rates to such an extent that Cost of Funding become greater than the Return on investments expected out of a particular business.
2. This leads to production cuts as the marginal produce which was profitable for business would suddenly become unprofitable. Hence, there is no choice but to lay off all resoruces needed to produce this marginal good. This is leads to unemployment.
3. Wide spread unemployment leads to cut in spending and expenditure which in turn affects the economic growth. Typically in a recession it is not surprising to see negative growth for 2 or 3 quarters on a trot.
4. The inflation now starts to moderate as well because prices are no more affordable and producers are willing to cut prices due to cost savings on laid off reseoucres.
Finally the Government starts to cut rates and tries and correct the liquidity mismatch in the sytem. One fine day the monetary policy measures of the government exhaust themselves (interest rate is Zero)
What ends a recession then?
Recession's can be long lasting and every measure taken to overcome them may not help in the short run (short term may even be 10 years). However, like every expansion, every recession ends as well. Once the recession is well recognised in the system, governments across the world start resorting to Fiscal measures:
1. Cutting taxes and duities: Reducing corporate and personal taxation may serve as a useful trigger in countering recession. As previously mentioned, if the post tax ROI is greater than cost of Funding business apetite would rise, leading to new employment and circularity of spending.
2. Deficit financing: A deficit financing means that the government is spending more than what its earnings. In other words local government would borrow from foreign governments. However in this recession money is in short supply all round the globe and hence governments all arounnd the world would have to start printing currencies and supply it into the markets. Printing currencies may not lead to inflation if there is very high unemployment in the economy (I wonder if governments all round the globe are waiting for this to happen). Also printing money may change the foreign currency dynamica, however, its surely better to slow death.
It remains to be seen now when goverments resort to this last emasure of countering recession. Hopefully soon...they should all start priting.
Tuesday, December 30, 2008
Bye bye 2008!
I never thought that world would see a 1929 again, however, I should have remembered that history always repeats itself. 2008 was a mixed year; while the first half began with a huge promise of making this world a happy place despite what had happened in August of 2007, the second half saw a free fall in the world markets. Situation went just worse from bad leaving thousands jobless and probably many more to go. The equity markets, commodities markets, currencies and fixed income markets have witnessed a once in a century event. Financial history text books in future would refer to 2008 as a year of error(s) ... "an error of optimism"
The world paradigm has shifted and to what extent - gone are the days of easy personal loans, gone are the days of making quick bucks in the stock / property markets and with that has gone down the legacy of many institutions around the world which were considered to be the best in their business. I don't have much experience of down falls. The first even correction known to me was the Indian market correction post the HM era. Second known was the dot-com bubble. However, this is my first ever live correction. I was one of the fotunates to have joined the market when the trend was always on the upside; only to see the fall now.
A lot of people ask me where has the money disappeared from the market? Who gained out from this kind of selling in the market? .. My answer to this question is 'No One'. Hard to believe isn't it. No one gain's..how's it possible? Like I mentioned previously, we all have been caught in an error of optimism at the same time. Bad luck! may be. Some of the common features of this error of optimism are as follows:
1. Banks start to lend money freely - they want to earn more and thereby risk more capital
2. Suddenly every one in the markets tries and discounts cash flows which are gonna occur in 3 years from now and sells you a forward 3 year P/E
3. Even a hawker on the street talks about investing long term
4. Growth becomes the ultimate goal of every soveriegn in the world, be it with inflation - doesnt matter
5. A lot of new players enter into the Asset Management, Private Equity and Real Estate business
6. The term 'Value' takes an entirely different meaning...
An error of optimism is nothing but the fact that every one around you is overly optimistic about the state of the world. Unfortunately, we all get stuck into the markets when things look bright and are caught for not exiting because we are too optimistic. Happens to everyone! ... even the writer of this blog ;-)
The good news is that 2008 is coming to an end and 2009 makes new promises about the happy state of markets. May be this correction will soon see its bottom and there will be some massive consolidation in 2009. I just hope 2009 doesn't turn out to be as bad as 2008 was. (I am still optimistic :-) ...hopefully I am not making that error again). Bigger, better, joyous and fruitful 2009 is all I want!
The world paradigm has shifted and to what extent - gone are the days of easy personal loans, gone are the days of making quick bucks in the stock / property markets and with that has gone down the legacy of many institutions around the world which were considered to be the best in their business. I don't have much experience of down falls. The first even correction known to me was the Indian market correction post the HM era. Second known was the dot-com bubble. However, this is my first ever live correction. I was one of the fotunates to have joined the market when the trend was always on the upside; only to see the fall now.
A lot of people ask me where has the money disappeared from the market? Who gained out from this kind of selling in the market? .. My answer to this question is 'No One'. Hard to believe isn't it. No one gain's..how's it possible? Like I mentioned previously, we all have been caught in an error of optimism at the same time. Bad luck! may be. Some of the common features of this error of optimism are as follows:
1. Banks start to lend money freely - they want to earn more and thereby risk more capital
2. Suddenly every one in the markets tries and discounts cash flows which are gonna occur in 3 years from now and sells you a forward 3 year P/E
3. Even a hawker on the street talks about investing long term
4. Growth becomes the ultimate goal of every soveriegn in the world, be it with inflation - doesnt matter
5. A lot of new players enter into the Asset Management, Private Equity and Real Estate business
6. The term 'Value' takes an entirely different meaning...
An error of optimism is nothing but the fact that every one around you is overly optimistic about the state of the world. Unfortunately, we all get stuck into the markets when things look bright and are caught for not exiting because we are too optimistic. Happens to everyone! ... even the writer of this blog ;-)
The good news is that 2008 is coming to an end and 2009 makes new promises about the happy state of markets. May be this correction will soon see its bottom and there will be some massive consolidation in 2009. I just hope 2009 doesn't turn out to be as bad as 2008 was. (I am still optimistic :-) ...hopefully I am not making that error again). Bigger, better, joyous and fruitful 2009 is all I want!
Monday, October 20, 2008
Emerging Markets...
In last few years emerging markets investments proved to be extremely fruitful and everyone on the street wanted to be invested in the emerging markets..why not? Between 2003 and 2007 MSCI Emerging Market index annualized 48% in returns. However at the begining of 2008, when we were deciding our allocations to long short managers we had done a small study if emerging markets were gonna continue to do well or not? In hindsight not increasing our emerging market exposure seemed to be fruitful this year to date.
The study done was really simple..we analyzed the significance of the Emerging Market Index against the World Index. The ratio of price between the world index and the emerging market index touched a low of 0.2446 in 1998 after hitting a high of 0.92 in 1994. This ratio stood at 0.8 at the begining of the year and things weren't looking that good fundamentally (I will explain this in the fundamentals sections)
Also, when we looked at the Alpha generated by the emerging markets over the world index we found that this alpha was never significant in the long run. The 20 years weekly data gave an alpha of 0.016 and the standard error of alpha was 0.011 (0.016 +/- 0.011*1.96 would include 0). However during the period between 2003 and 2007 this alpha was actually significant and emerging market index did produce excess returns over world index.Fundametals:
So when do emerging markets tend to perform better?
1. Commodity boom: Commodity boom explains the most significant factor contributing to the positive excess performance of the emerging markets. If we look at all the emerging markets; they have one thing in common..excess commodity .. may it be minerals, oil & gas, agro commodities or most importantly labour
2. Global Liquidity: Global liquidity is another major reason for the emerging markets to do well. Liquidity drives consumption which drives demand for emerging market commodities. Hence, now when the global liquidity is drying up we see dwindling growth rates for the emerging markets.
At the begining of 2008 both of these factors seemed to had ran out of steam, however we did see a final frenzy rally for commodities till the middle of 2008. The ratio of emerging market index to the world index now stands at 0.60; a decline of 20% YTD. Emerging Market Index has declined 52% YTD against a decline of 37% for the world index. I believe this ratio will fall further; emerging markets would underperform the developed markets for some time to come. I wont be surprised if we see this ratio going down to 0.40 in the coming months. Long term mean of the ratio is at 0.48 with std dev of 0.16 and I am sure we are going to see one std.dev move on the downside. We shall all wait for the global liquidity to come back with a bang for emerging markets to do well in future.
(P.S. World Index does include a proportion of Emerging Market Index in its composition)
Friday, October 17, 2008
The big slide ...
For past few days, as every other analyst on the financial street, I am trying to figure out when this turmoil going to come to end .. or whether there is some steam left in the sell off's we have witnessed globally ..
Incidentally I pulled up the charts of S&P and Dow Jones since 1990 and tried to figure if one could draw any conclusions from these weekly charts ... .
So here's the chart for S&P 500. It has seen two major falls in the past 18 years ... one was when the S&P peaked in 1998 and we had the russian bond crisis and the crisis of asian currency. The fall had lasted for nearly 4 years ... obviously this peiod had 9/11 happening as well dampening the spirits in the market. Interestingly look at the recent fall on the extreme right you may see the the velocity of the fall has been far more striking .. in just one year (from July 2007 to Sept 2008) we have had a fall similar to 4 years during 1998 to 2002. S&P is now approaching a very important support level of 800 ... if this support gets taken out ... the double top suggest that we may fall another 700 points...
Similiar is the story for the dow jones index as . The index had a trend upwards since the begining of Dec 1993 till 1998 and then a consolidation during 1998 to 2002. A strong trend again from 2003 to 2007 before finally reversing in July of last year. I fear based on the chart that INDU may go down to 7300 levels and may be there's a big support waiting for us then ..
These two charts indicate that we are very close to important supports and if we break these ... may be thats gonna be the end of the finance world!!
Thursday, October 9, 2008
Doom strikes ...
Last few days in office have not been less than sheer disaster and this day, 13th October 2008, I see one of the hedge funds being the scapegoted purely because of whats going on in the financial markets world-wide.
This incidentally is (was) the first fund (and only till date) that I created by myself. Right from deciding on the capital allocation to checking the custody agreements and blah blah was done by me when we had launched this fund in August 2007. Wasn't perfect timing; however, everything we could do to protect our capital was done....infact the fund outperforms its benchmark by more than 10% YTD.
Sometimes I wonder what financial sense is? .. is to redeem out of relatively better performing positions or is it staying away from the bad one's. Incidentally whats been happening off late is that investors are selling good positions to fund some of the bad one's. How is that logical... when the market is at peak every one wants to be a part of it and when it turns bad everyone wants to leave ... bizzaaare isn't it ... however that behavioral finance. It feels disgusting to the fund manager though when peer's lose more than you do and you are bashed because you were better than the rest .... I am always gonna keep this email from my boss which said that investors are redeeming all their money from our fund and we have to close it down.... and most f*$%king thing of all we had to prepare the proposal ourselves.
Sometimes when you get up in the morning you feel there is something not right .. this has clearly been a bad day ... right from 9AM (when I saw this mail) the mood's just been terrible ...
Just as I write this blog ..my boss walked into my office ... and I said ... 'what a dis-appointing day ... we are left with only one fund ... I fail my driving license final test ...' and my boss told me strikingly ...'atleast you have a job' (pun intended)
This incidentally is (was) the first fund (and only till date) that I created by myself. Right from deciding on the capital allocation to checking the custody agreements and blah blah was done by me when we had launched this fund in August 2007. Wasn't perfect timing; however, everything we could do to protect our capital was done....infact the fund outperforms its benchmark by more than 10% YTD.
Sometimes I wonder what financial sense is? .. is to redeem out of relatively better performing positions or is it staying away from the bad one's. Incidentally whats been happening off late is that investors are selling good positions to fund some of the bad one's. How is that logical... when the market is at peak every one wants to be a part of it and when it turns bad everyone wants to leave ... bizzaaare isn't it ... however that behavioral finance. It feels disgusting to the fund manager though when peer's lose more than you do and you are bashed because you were better than the rest .... I am always gonna keep this email from my boss which said that investors are redeeming all their money from our fund and we have to close it down.... and most f*$%king thing of all we had to prepare the proposal ourselves.
Sometimes when you get up in the morning you feel there is something not right .. this has clearly been a bad day ... right from 9AM (when I saw this mail) the mood's just been terrible ...
Just as I write this blog ..my boss walked into my office ... and I said ... 'what a dis-appointing day ... we are left with only one fund ... I fail my driving license final test ...' and my boss told me strikingly ...'atleast you have a job' (pun intended)
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