We live in strange times. For crimes committed by one person (or by a Government) the punishment is borne by others. There are several examples.
One saw the arm twisting by the powerful troika (the IMF, ECB and EU) of the hands of the Cypriot Government, which asked the troika for funds. The Government had to agree to large depositors of its banks being compelled to lose 40%, maybe more, of their deposits. Overnight. Some of these large deposits were ostensibly from Russian oligarchs evading taxes, for whom there was scant sympathy, but there were also genuine deposits of Cypriots who had worked hard to save money for their retirement and their families. The crime was committed by the Government and its banks, who borrowed large sums from the troika, basically to finance a lifestyle they could not afford, but the punishment for the crime was borne by the depositors.
Its the same in Greece, where the lives of citizens is going to get harder, after the Government has been forced by the troika, to go in for more fauxterity (a new term combining faux, or fake, and austerity). See the article in www.zerohedge.com
Having tested the proposition in Cyprus that it is easy to trample on the rights of depositors, in order to safeguard those of creditors (a reversal of beliefs held hitherto), the ECB has now put in place plans to go one step further. Mario Dragił its head, says that he is okay with negative deposit rates . What this means is that banks will ask depositors to pay the banks for holding their money!
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This is bizarre!
One can understand Swiss banks asking for a fee to hold clandestine money; the fee is not for banking service but for keeping its mouth shut. But to extend that to legitimate deposits of money on which taxes have been paid, and which is deposited with official banks, is simply insane. And for the head of ECB, Europe's Central Bank, to accept this, is inexplicable!
Do they really believe that depositors would, like meek lambs, accept it and start paying banks to hold their money? Do they not envisage the immediate runs on banks such a step would cause, and a collapse of the banking system? This is another example of someone committing the crime (banks, lending foolishly) and someone else being asked to pay the price (stupid citizens).
Our politicians are worse. This Lok Sabha has worked the least compared to all previous ones, and has only worked 1,221 hours, whilst losing 585 hours in Parliamentary logjams, walkouts and protests .
Why should the people of India need to pay taxes to pay the salary and perks of our legislators if they do not work? The punishment for this crime is borne by the nation, in terms of low economic growth because laws are not passed which leads to higher unemployment than need be.
The ultimate response to the misery heaped by policy makers on their people is, sadly, but expectedly, violence. As proved last week by the assassination attempt on the newly elected Italian Prime Minister. Remember, it was a similar successful attempt that triggered off WW I.
The losses caused to those who invested in Saradha are being partially borne by smokers, with the State Chief Minister exhorting her citizens to smoke more in what can only be termed as an abdication of responsibility.
So investors are living in a world where their money deposited in a bank could face an overnight haircut for no fault of theirs. Or where they may be asked to pay the bank an interest on their current accounts.
If they invest in stocks, they face the nightmare of a meltdown caused by high frequency electronic trading. A hacker hacked into the account of Associated Press and posted a false tweet about President Obama being injured in an attack on the White House. This caused the market to crash instantly. The scary part is that the sale orders were done electronically, without any human interaction! .
Trading is now algorithmic. Computers are programmed to 'read' news and to react. Thus the words 'bomb attack', 'White House' and 'Obama injured' were enough to trigger massive sale orders in the blink of an eye. The loss in market cap. was $ 134b. in a few seconds. Individual investors, of course, cannot react as fast.
There was evidence of this when, last October, a trader in stock broking firm Emkay Global, wrongly punched in a higher sales quantity, causing the Nifty to lose some 900 points in a short time, and the firm to lose Rs 51 crores, wiping out its net worth. Emkay's appeal to have the trades annulled has been rejected.
Most Governments have spent beyond their means for decades, borrowing in order to do so. The borrowings are untenable. The Governments are struggling to reduce debt, but cannot do so without impairing prospects for growth. The US is clamping down on US citizen funds lying overseas, by squeezing the Governments of tax havens like Switzerland.
Sometimes, however, the tax laws create strange consequences. Apple Corporation has large amounts of cash lying with its overseas subsidiaries. This cash is taxable if it is repatriated to the US, not otherwise. Now, mindful of criticism from shareholders to either utilise the cash or to return it to shareholders, Apple is opting for the latter, in an aggressive buy back scheme. But it is using the proceeds of a $ 17 b. bond issue in order to do so, instead of bringing back the money lying in its overseas subsidiaries. By doing this it saves $ 9 b. in taxes (free registration required).
The hacking of the AP account and posting a fake tweet is actually a form of terrorism called financial warfare. So investors have to contend with such random events that can cause a swift erosion in asset values.
Investors would need to be long term investors, and become nonchalant to the vicissitudes of markets. For these are signs of things to come.
In interesting corporate news, Bharti Airtel has sold a 5% stake to Qatar Foundation Endowment, for Rs 6,796 crores, at a small premium to prevailing market price. The proceeds would help it pare its debt, which is too high, at Rs 64,000 crores.
Unilever wishes to buy stock in Hindustan Unilever, to raise its stake to 75%, as permitted at a cost of $5.4 b. This indicates its faith in the continuation of the consumer story in India. With a growing economy providing jobs, which will give the income to consume, it has been the consumption story that has fuelled economic growth in the past decade.
It is now time for investments to provide a kicker to GDP growth. For a variety of reasons companies have not been investing. These include policy paralysis and, not forgetting, the low productivity of the Lok Sabha, our law makers.
The Petroleum Secretary has harangued the officers of his ministry to clear pending files asap, for fear of action. It is time others also crack the whip.
The market had hoped, last week, of an aggressive cut in interest rate by the RBI. Ultimately a cautious RBI cut the repo rate by 0.25%, and did not cut CRR to infuse funds in the banking system. He also warned the market not to expect many more cuts. Kudos to him!
The market, which had risen sharply the day before, fell in disappointment, though did not crash. It is strangely steady, now that there is no good news in the offing. Normal monsoons have been factored in, and interest rate cuts cannot be expected. Newsflow would be largely negativeł including more scandals from a Government suffering from moral diarrhoea.
It is propped up mainly by foreign inflows. After the pump priming by the US, Japan is now doing it. Money being money, sloshes around all over the world, in search of assets which promise better returns. Money being money, one can expect the tide to reverse, too, at the smallest hint of uncertainty. So it would be sensible to be cautious.
The BSE-Sensex gained 188 points last week to end at 19,575, and the NSE-Nifty added 39 to close at 5,944.
Invest for the long term and expect volatility, caused by a variety of factors. Not a market for those with a weak stomach.
J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.
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