»5 Minute Wrap Up by Equitymaster

On This Day - 9 AUGUST 2016
Stock Operators, Paneer Tikka, and the Giant Economic Cauldron!

In this issue:
» Raghuram Rajan's Last Monetary Policy
» How Realistic is the 4% Inflation Target?
» ...and more!
00:00
Ankit Shah, Research analyst

Congratulations! Finally, the Parliament has passed the bill to roll out the Goods and Services Tax (GST). And now the much-awaited reform is finally taking shape.

In other news, today is RBI governor Raghuram Rajan's last monetary policy review. The markets are listless. By the time you read this, Rajan would have announced his final policy. The markets would have reacted to it and closed.

For now, I want to talk about something else.

Ever heard of stock market operators? If you have been in the stock markets for a while, I'm sure you have.

A friend or a broker will occasionally warn you to keep away from a certain stock because it is 'operator-driven'. Rapid rises or declines in stock prices are also seen as the work of stock operators.

So who are stock operators? And what do they do?

Stock market operators are market participants who form a syndicate to manipulate stock prices for personal gain. It is usually a cartel of brokers, speculators, and sometimes even company insiders.

Through a coordinated act, the operators rig stock prices higher or lower, creating a frenzy or panic for a certain stock. Seeing the rapid stock price movements, traders flock in and perpetuate the trend. Meanwhile, the stock operators exit with fat gains at the expense of naive investors.

Now let me tell you, stock operators are a smart, cunning lot. They don't try to manipulate just any stock. They usually target small and mid-cap stocks... The lower the liquidity, the easier it is to manipulate the counter.

Stock operators know their limitations. They rarely venture to manipulate a heavily traded large-cap stock. With so many market participants, the operator wouldn't be able to influence the price. Their plan would fail.

Stock operators understand an important truth. Their plan can work only on a small scale. They cannot apply their success formula on a large scale.

But most people fail to understand this simple logic. They believe that what can be applied successfully on a small scale can be replicated on a larger scale.

Let me offer you an analogy.

One of my favourite hobbies is cooking. I'm no five-star chef, but I do all right. I know that if you apply the right ingredients and cook for the right amount of time, you'll get the desired taste, texture, and compliments. But I'm not always good. Every once in a while, I goof up. Either I forget an ingredient or add too much of another. Sometimes the food is undercooked. Sometimes it's a little burnt. But with experience, I have been able to minimise these mistakes.

Now let's say our Prime Minister Narendra Modi appoints me his chief economic advisor. I apply my cooking skills to the economic cauldron. All it takes is the right ingredients in the right quantity cooked for the right amount of time, isn't it? And lo, you have a gourmet economy...with high GDP growth, wealth, and prosperity.

This means that all we need is a perfect cook...a master chef...an operator. This mindset presumes that all economic variables...the people, the resources, the businesses...are simply ingredients in the process. They just need to be directed and manipulated the right way to get the desired dish.

If this all sounds ridiculous, it's because it is. But the world is driven by exactly this economic orientation. Here's proof...

The US Federal Reserve thinks it can revive the economy by manipulating money supply and interest rates.

Donald Trump thinks he knows the solutions to America's problems. He thinks he can reverse the slide in the American economy with his economic plan.

European central bankers are willing to do 'whatever it takes' to protect Europe from recession.

Japanese PM Shinzo Abe believes that his giant economic experiments can bring Japan out of deflation.

Back home in India, the story is no different. When Narendra Modi came to power at the Centre in May 2014, the stock markets went into a dizzy. People believed that the Modi magic pill would pull the Indian economy out of the slowdown. Then what happened? People who invested solely on the Modi story lost money.

Back to stock operators...

Let me tell you I am not patronising stock operators. They are a nasty lot.

But they are smart. They know their limitations. They know that what works successfully on a small scale and what will fail miserably if applied to a large scale. 'World improvers', to borrow a term from Bill Bonner, are yet to learn this lesson.

By the way, my colleague Vivek Kaul closely monitors the giant Indian cauldron and its many operators. He is constantly tasting the economic and political broth of our country, and presenting his insights and analysis. Recently, he presented an easy-to-read expose on the much-awaited delicacy known as GST.

I strongly recommend that you download Vivek's free report on the GST, What the Mainstream Media DID NOT TELL YOU about GST.

03:05

As expected, RBI governor Raghuram Rajan kept all key interest rates unchanged in his last monetary policy review. True to his nature, he refused to speak about the controversies that dogged his tenure and choose to focus to monetary policy.

He stated that the RBI will continue to maintain its accommodative policy stance while banks continue to pass on previous rate cuts. He re-iterated the RBI's revised stance on maintaining neutral liquidity in the banking system.

Rajan also allayed fears about GST stroking inflation, by pointing out that a large part of the CPI basket is exempt from the GST. The government recently notified the long-term 4% target for CPI inflation (read our view below). The short-term 5% inflation target by January 2017 remained unchanged.

The next monetary policy review will be chaired by a new governor. Many names have been doing the rounds but there is yet no clarity on the matter. However, the next governor probably will not take the big decisions himself, as the policy is to be decided by a monetary policy committee (MPC). Unfortunately, the MPC isn't formed yet. Rajan stated that the formation of the Monetary Policy Committee (MPC) will modernize India's monetary policy framework and build a platform for strong and sustainable growth. Over and above low inflation, it will offer some collateral benefits such as a currency that's not depreciating constantly, higher real returns earned by savers, and lower interest rates paid by borrowers.

We believe, the RBI was in very good hands under Raghuram Rajan's leadership. So, his exit from RBI next month is a big loss. In this regard, we recommend Ajit Dayal's article in The Honest Truth: Why two-eyed Rajan is King!

03:50 Chart of the Day

With Rajan's last monetary policy out of the way, it's a good time to take a step back and revisit the inflation debate. More specifically, we would like to know, how realistic is the government's 4% inflation target? Today's chart shows the IMF's long term inflation forecasts for India. Clearly we have some way to go.

Will We Achieve the 4% Inflation Target?


Of course, the government knows, it will be difficult. That's why the target is long-term in nature. However, in the medium-term, the RBI can work within a range of +/- 2%. The problem with this, as an article in Livemint has clearly pointed out, is that these targets are not cast in stone. There is no clarity in exact definitions of 'long-term' and 'medium-term'. The next governor could very well interpret this in any way he likes. It is conceivable that there could be repo rate cuts even if the CPI is 5.9%.

We certainly hope that the next RBI governor will not be dovish on inflation. The last thing the economy, that's making a fledgling recovery, needs is a return of high inflation. As long as Rajan was in charge, this was never a concern.

Join the inflation debate! What will happen after the next governor takes over? Let us know your comments or share your views in the Equitymaster Club.

04:40

After opening the day on a positive note, the Indian stock markets fell below the dotted line after the RBI kept all key interest rates unchanged. At the time of writing the BSE-Sensex was trading lower by about 179 points (down 0.6%), while the NSE Nifty was trading lower by 59 points (down 0.7%). Most sectoral indices were trading in the red with FMCG and Auto stocks bearing the brunt of the selling pressure.

Speaking of FMCG and Auto stocks, Colgate and Hero MotoCorp have announced their quarterly results. You can read more about them here. Also, Mahindra & Mahindra (M&M) is planning to set up the country's first auto shredding unit in either Gujarat or Maharashtra along with MSTC, a government owned company. You can read about it here.

04:55 Today's Investing Mantra

"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." - Warren Buffett

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