Will India Face a Taper Tantrum?

Feb 8, 2021

Vijay Bhambwani, Editor, Fast Profits Daily

The stock market is on a roll. The indices closed at a new life high today.

In such a situation, it may seem silly to talk about a correction.

But I believe, this is exactly the time when we should be talking about it and preparing for the same.

Remember, forewarned is forearmed.

In this video, I'll show you where you need to look for hints of a correction and why you need to be prepared.

Let's dive in...

Hi. Friends, I remind you of an old saying, those who forget lessons of history after condemned to repeat them. Now financial markets also have history, and it pays to pay attention to the history, recapitulated and learn our lessons from the past.

I'm Vijay Bhambwani. I am a professional trader with 35 years of trading experience under my belt, 28 of which are as a founder, promoter, CEO of a limited company that trades for a living.

In this video, I want to help you prepare yourself for a time when the markets can possibly correct. I'm not saying that the time has come now, but these are the hints that you should pay attention to as and when they transpire.

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So let's dive right in about when we can possibly get the hints from the markets itself, when the market might just correct. You see, we all known that the market rally has been triggered by abundant supply of money and that too low cost money with interest rates almost zero.

Now there's an old saying in Wall Street that easy money, cheap money or free money is like mother's milk to a bull market. You see, a new born child survives only on mother's milk and in the first 4 to 6 months multiplies his weight, surviving only on mother's milk. So easy money and easy availability of money at either very low interest rates or free money acts in a similar fashion.

Now just see how the indices have doubled from their March 2020 lows and you know what I mean. Now, what can actually worry in the markets?

Interest rate hikes. This means the cost of money going up. No more will the finance be as cheap as it is available now.

You see, when the government wants to stimulate the economy because right now it needs some amount of hand holding. Cheques are being sent out. Moratorium on interest payments and EMIs etc are temporarily being provided.

But after a why the double entry system of accounting will kick in and debits will have to equal the credits if the books have to tally. So sooner rather than later there will be hikes in interest rates because at these low rates, no money lender on no investor will invest in the fixed income securities market, which, by the way is 20 to 30 times bigger on a global level as compared to the equity markets.

So consider the bond market as the fountain of all money supply and the equity market, the recipient of this money supply. We are basically putting the horse ahead of the cart by saying that we will focus only on the equity markets and not look at the bond markets or the interest rates.

If you go back in 2009, 2010, 11 and 13, you will realise that after the global financial crisis of 2008, the US Federal Reserve did exactly what it has done in 2020 which is to flood the market with money and cut interest rates very, very aggressively.

And yet, after 2011 end or maybe 2012 mid, there were talks about the US Federal Reserve shrinking back its balance sheet. Now very polite way of saying stop doling out more money and increasing the interest rates. Now that Wall Street guys gave it the name, called taper tantrums.

Is there a possibility that the doles that the federal government is giving, the central governments and central banks are giving to financial markets could be tapered off? I think so. At some point in time, you will have to stop distributing free money because the markets may not really be all that in a dire state to want an oxygen line all the time.

And when that happens, the bulls will basically feel the shortage of money power backing them up to push asset prices higher and higher. In the budget, the honourable finance minister laid out the road map for the government of India's borrowing programme for the coming year. She said, the Indian government will raise 12 lakh crores from the bond market in the coming year so as to basically raise money for the day to day business of the government.

The first thing that happened was that the bond markets witnessed a selloff. Bond prices fell. Therefore, bond yields rose to the extent that we are now within kissing distance of 6.15. 6.15 is a multi-month high.

The banks, which are the biggest holders of government bonds, are seeing a huge loss on their mark to market portfolio of their bond holdings. So far, the bull market is turning a blind eye and disregarding this phenomenon.

But should interest rates go up, in which case, the bond yields will rise further because the existing bonds giving a lower rate of interest compared to what the government will borrow ahead at, will see another round of sell off.

At that point in time, you will see two things happen. Equity prices will come down because easy availability of low cost money will then come to an end and India will face its own taper tantrum.

And secondly, many of you my viewers who are holding debt funds, liquid funds, and other debt instruments, will see a decline in your NAVs because the bond prices will fall, the asset, which is the bond, will impact the NAV and your debt funds will suddenly start compressing your returns.

These are very first signs that the equity markets are topping out and will therefore prepare you for a corrective decline ahead. I am not saying that this would be a hard top and an absolute end of the rally. All I am saying is that this would be a meaningful correction because the very source, the very reason why the rally has occurred, which is cheap money would then have ended.

So the cause and effect theory tells you that if you remove the cause, the effect must also be removed. When easy money goes out of the window, so will the bull market, temporarily at least. Please keep your years to the ground for the bond yields and let yourself be forewarned because forewarned is forearmed.

On this cautionary note, I bid goodbye to you in this video. I wish you have a very profitable day ahead. Vijay Bhambwani signing off for now. Thank you for watching my videos. Take care. Bye.

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "Will India Face a Taper Tantrum?"

VISPIGENERAL

Feb 9, 2021

Good to hear from you.

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Ramesh B

Feb 8, 2021

Right Sir ! but low rates is compulsion for advanced economies.
Virus is not yet controlled. Those economies may have aftershocks.
You also wrote about Radit, gamspot earlier. They may create big volatility,
if they wish to. Like they did in gold and silver. May be temporarily.
Lastly, is it foreign money only, or....rally to unload the planned disinvestment?
Or another big game by big 'miscreants'!!?
But you are too right. Mkt is too hot by all means. Horror of 2008(upto 9mar.09
unforgettable.
And why not SEBI is not introducing more stringent laws to curb speculation?!
with best wishes, Great Sir!

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