Price slide continues. RBI under pressure to drop rates.

Oil price, both Brent and WTI falling again today after a brief rise on Friday. Oil price is at a four year low and falling and expectations are of further fall. Reports said earlier that Russia is preparing for a big fall in oil all the way to $50 a barrel.

With it is falling our Indian inflation too. With Consumer Price Inflaion down to a little above 5% now in India, we now have a real positive interest rate. At 8%. CPI at 5+% is now below Rajan's 6% target he wanted to achieve in 2016.

As per RBI data now, deposits growth is increasing in India and loan growth is slowing due to high interest rate.

Growth in aggregate deposits accelerated to 12.3 per cent in September 2014 from 11.5 a year ago whereas gross bank credit decelerated to 9.5 per cent from 15.1 per cent during the year. This acceleration in aggregate deposits as well as deceleration in gross bank credit was broad based and observed across all population groups.

With slowing Europe, China and Japan now in recession, the deflationary forces are now in India too.

RBI will be very hard pressed to justify not reducing rates. I guess they might reduce rates in next meeting if oil price world wide continues to slide.




Rajan himself said earlier that his actions will be data driven. Now that data is all down, pressure on him to down the rates are up.

Expect bond holders to gain and bank and other credit dependent stocks to rally when that happens.

Alan Greenspan: Gold better currency than Dollar(or Rupee)

Now this man, Alan Greenspan is a former US Fed chairman and if anything, he certainly would know about money more than a lot of other people. And this is what he said few days back in a meeting in Council on Foreign Relations with Gillian Tett of Financial Times.

"Look, remember what we're looking at. Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it. And so that the issue is, if you're looking at a question of turmoil, you will find, as we always have in the past, it moves into the gold price.

Intrinsic currencies like gold and silver, for example, are acceptable without a third party guarantee. "

I can't agree with him more. Gold is not an investment. It is money itself. So don't compare gold to stocks, real estate or bonds. But compare it to other currencies like Dollar, Euro, Yuan or Rupee.


Fiat currencies like Rupee have no intrinsic value. They are trusted by people because of the monopolistic power on violence by government. When govt. ceases to exist, the only thing you can use or store your wealth is in gold and silver.


If you think govt. ceasing to exist is almost impossible, just look at Syria, Iraq, Ukraine, Somalia etc. now.

Not only that, gold and silver saves you not only when govt does not exist, but it also saves you when govt does exist and has gone mad. Look at Zimbabwe or Argentina.


Here is the link to the CFR trascript.

Low interest rates create income inequality.

Axel Merk of Merk Investments said something very interesting in this video. With all the talk of income inequality increasing in the Western countries, he said that low interest rates allow already rich people with assets and capital to "gear up" more or leverage more to get further rich. In contrast, the poor who don't have assets or capital and can not get easy loans, fall further and further behind.

Not only that, those who can gear-up with easy money drive asset prices such as houses higher and that pushes the poor even further out of the market.

It seems like a logical observation. Here full video.

start from 17:50 for this topic.

Long term Equity Investment gives good returns. Really?

For something to be true, it has to be true in all circumstances. Especially the popular notion that in long term stock market investment is very profitable. Is it really always true? Also, how long is "long term"?

Here, when it is not true. Below is chart of Japanese Nikkei  index since early 80s to 2014. Japan was a booming economy in 60s to 80s except during a brief period in 70s during the world Oil crisis. Suppose an imaginary person, lets call him 'Nobita', born in post world war Japan in 1960s enjoyed the boom time economy of Japan and followed the usual "long term go to equities" mantra.

Lets say he joined the labor force in early 80s and ended up enjoying a great stock market boom all the way till 90s. Since early 90s when Japanese stock market peaked, it's been going down for 25 years now. That is a long time. Does this qualify as long term?

NIKKEI

Now our Mr. Nobita has been investing in equities for 35 years now and has been losing money for 25 years. He is now 55 years old and ready to retire and has very little money saved for retirement.

Did our Mr Nobita knew that this is how it would turn out when he started in 80s? No!

So, there goes the "equity good in long term" mantra.

For those who think Real Estate is great, know that before the peak of 90s, Japanese imperial palace was worth more than the entire country of Canada! It has collapsed just like stocks since then.

Japan is a very specific situation. Different countries have different circumstances. India is not Japan. But the "long term equities is good" notion that is peddled everywhere is definitely not true. Mostly you will have time to make only one long term mistake, because if you do, you will not have time to recover or correct that mistake in your rest of productive life time. So be careful in whatever you do with your money. This does not mean that stocks are a bad place to invest. Understanding the circumstances and the risks is very important in anything.

As Mark Twain said, " It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

RBI says no rate reduction soon. But what if they do reduce?

Like I was guessing earlier, RBI Deputy Governor came out today and said that the decline in inflation doesn't seem like a long term thing instead is likely to go up in near future and so rates may not come down soon.

The fall in price of crude oil and other commodities is beneficial to the Indian economy, but policy makers cannot jump to the conclusion that the trend was firmly established. "Inflation still has a long way to go," the deputy governor told the audience at a chief financial officers' summit organised by industry body CII.

There is a fight going between deflation and inflation. Most developed economies are deflating and they are printing currencies and trying to encourage more debt creation there to fight it. While emerging economies like India are having inflation because all that easy money from developed economies are actually coming here.

But what happens when RBI does reduce rates? If they reduce by 1% and you are a retired person living with say 20 lakh savings, then your annual income falls by Rs 20000. So your monthly income falls from Rs15000(assuming 9% interest) by about Rs 1600.

But where does all that money go that so many interest earning retires lose due to interest rate reduction? It goes as interest rate savings to the pockets of younger people who have home loans, car loans etc. It also spurs new borrowing by people who could not afford loans due to higher rates.

Rate reduction is essentially a wealth distribution from the savers who did a life time of work and saved for retirement into the the pockets of new borrowers in economy.

Do the retired people agree to give up their income? No, they have no say in this. Govts and Central Banks will decide how much money they need from you and take it, whether you like it or not.

On top of that, a lower rate will increase inflation and you lose about 7% or more of your savings that way too, whether you like it or not.

India Growth down, Sentiments High and Stocks Highest

When I hear non-financial papers like Times of India post stories that sensex is at record high of 28000, it always feels as a good time to sell. Besides, these record high valuations are bad for investors in the sense that it is now too risky to invest. No one can say for sure how much more the markets will rise fulled by easy money from abroad through FIIs.

Economictimes as usual prints stories like "Sensex on track to 30000". As if Sensex is a train and next station is 30000 or reaching there will be an accomplishment like building a new bridge in Himalayas.

Personally I like it when I read record lows or market collapse type of news. Because that is when it is likely that you will find good stocks at decent valuations.

Meanwhile, India's growth is slowing. Service sector growth stalled in October. HSBC Composite Output Index — that maps the manufacturing as well as the services sector output — stood at 51, down from 51.8 in September, indicating that growth of private sector output in India eased to the weakest in five months.

Also, housing sector is slowing. Launch of new homes dips by 21% in top eight cities in July-September.

But the sentiments are high. Everybody thinks business will pick up soon, perhaps in early 2015. May be Mr Modi's govt will deliver some dazzling new reform in next budget.

These reforms, if they happen, will take time to implement and then even longer to show up as profit in company earnings. Will stocks keep rising until then? Probably not.

Stocks are just front running the future actions. They always do. But nobody knows future. When something surprising comes that doesn't look "bullish", valuations just fall to where you could actually buy.

Is the next "Stimulus" on the way?

It would seem so, if you see the continuing oil price collapse due to slowing demand and US shale oil boom. Oil prices have been falling for almost six months now. It is almost a four year low. The same goes for gold price. I will write a post on oil and gold co-relation in future.

Then, European Commission cut the growth forecast for EU region as shown below. They have been cutting this for a long time now and it generally to the downside which suggest they are always more optimistic than they should be.

In its autumn estimates, the EU executive said the euro zone's economy would expand 0.8 per cent this year, 1.1 per cent next year and by 1.7 per cent in 2016 - a level the Commission said six months ago would be achieved next year.

Then, after the initial jump in Nikkei in Japan due to "stimulus", the stock growth is faltering.

How long before another stimulus comes? Probably not long.

Should you get into stock market in India? If you want to do speculation then yes, but of course after the slight dip that will come right before the stimulus that will push the central banks to do something.



The fact however that is coming to the fore is that even with all the stimuluses since 2008, real economic growth is not happening in advanced economies. But that is unlikely to stop them from doing more of it. Since the new money mostly goes into stocks and the Govts and Central Banks want it that way, this will take stocks to higher values. But this is a purely speculative adventure.