This is an important week for the world financial system and stock markets. The US central bank will announce its decision to issue fresh round of bailout money to revive the faltering US economy. Termed as Quantitative Easing II or QE-II, this latest round of stimulus sounds like the name of a hydrogen bomb waiting to be dropped on the global financial system.
QE-II will involve the US central bank - Federal Reserve - releasing billions of dollars (or probably more than a trillion) to add fuel to the US economic recovery. What it is not willing to appreciate is that the current economic malaise was created by such cheap money itself. So curing a drug addict (the US economy and financial system) by offering it more drugs (easy money) for free isn't going to work in the long term. In the short term, what it will do is offer tonnes of cheap money to foreign investors looking to borrow at zero interest rate (in the US) and invest in high-return assets like emerging markets stocks and bonds.
So QE-II is likely to boost stock prices in emerging markets, and India is also being talked as a beneficiary. But what you must understand is that this is, and will always be,like a grand Ponzi scheme that will entail taking from the retirees (as bond yields will fall) and giving it to speculators who will continue to speculate in hot assets.
As far as its impact on the real economy is concerned, we believe it won't have much impact. This fresh dose of cheap money is not likely to stimulate consumer demand in the US, as consumers are still debt-ridden and unemployment remains high. So consumer sentiment is at its lowest. And even cheap money won't be able to stimulate it.
Instead, the Fed's latest attempt at injecting more money is only going to push the US into a deeper financial misery. And if it spawns a bubble in emerging market assets, which it is most likely to do, no one outside the US will be spared either.
Rising stock prices in the short to medium term might seem good, and market experts might make you believe that 'this time it's different'. But you need to be carefully on guard. If history is any teacher, QE-II will first lead us to a big bubble in stock prices, and then to a big burst!