Quo Vadis, quantitative easing? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Quo Vadis, quantitative easing? A  A  A


The US has, for years, been living beyond its means, and is hugely indebted. China owns over $ 1 trillion, or 10% of US debt, which has aided the US economy, 70% of which is propelled by consumption, to continue to consume. An article "Slowing China Forex Reserves May Spell Trouble" on the www.financialsense.com website says that more money is leaving China, as opposed to earlier, when hot money was entering China chasing a yuan appreciation. China will print less money, and buy less US Treasury bills.

China's forex reserve growth is slowing, and is near zero now (see chart below)

Source: www.financialsense.com

As can be seen whenever in the past China's forex reserve growth has faltered as in 1999 (just before the dotcom crash), or in 2008 (US financial crisis) there have been meltdowns in the market.

China has lots of billionaires, because of its booming economy, and the nervousness caused by the recent change in leadership is making some money flow out. They would be most comfortable 'parking' their money in Hong Kong; a parking lot for one car recently sold for US $ 387,000! These are signs of asset bubbles being built up, which will ultimately burst.

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    So now we are reaching a fiscal cliff in the US and, from January 2013, the Government will be forced by law to remove some tax exemptions, which would raise the average tax bill by some $ 2,000 per year, and will be forced to cut some expenditure. Given that 70% of its economy is driven by consumption, it means US GDP will slow down. The estimate is perhaps 0.5% of GDP.

    Marc Faber feels that the markets will fall 20% from their peak, not because of the fiscal cliff, but because of disappointing corporate earnings. He says "The market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20 percent, in my view."

    Consumer spending in the US includes spending for education. Kids take on student loans for their higher education (college) and pay off those loans once they graduate and get a job. The problem is that there are no jobs after graduation, at least not the high paying ones that allowed them to quickly pay back their debt. Youth unemployment is now 25% in the US and even worse in Greece and Spain where it is 50%.

    Normally, market forces would ensure that costs, of higher education, come down, when the product (a college degree) becomes unviable. However, thanks to union pressure, college costs are not coming down. As a result, student loans remain unpaid, and now total nearly $1 trillion, higher than credit card loans.

    What the quantitative easing by various countries is achieving is that a part of the liquidity goes into various asset classes driving up their prices. India has received, in calendar 2012, infusion of $ 20b. in its equity markets. There is a risk that if QE slows down, (one can't keep pump priming forever) then the withdrawal of funds from our stock market would cause a sharp fall.

    For now, though, the money is coming in, encouraged by the 'reform' measures taken up, after a long time, by the UPA Government. It had initiated, through executive action, allowing FDI (foreign direct invesetment) in multi brand retail. Opposition parties opposed this and demanded a vote in Parliament, which the UPA Government won last week, through adroit exchange of favours. It got the tacit support of M & M (no, not the candy but of Mayawati and Mulayam) and won in both houses of Parliament.

    The fact is that multi brand retail has existed in India for a long time; visit any mall and you will see it is multi brand. The local grocery stores, or kiranawalas, have survived. There is no reason to fear that if the domestic owner of a multi brand mall is replaced by a foreign owner, the kiranawala would become threatened. These apprehensions are bogeys, and more in the nature of political posturing. They divert attention from the real problems that the Government needs to tackle.

    Coincidentally, the day of the vote, the Government cleared allocation of prime land of Indu Mills for establishing a statue, and the Supreme Court extended by two months the deadline for the Sahara group to repay Rs 17,000 crores, plus interest. Of course, it was a mere coincidence.

    The real issues which India has to tackle are several. Its tax revenues are being used less in building infrastructure, and more in social welfare schemes that are leaky and in subsidies that are wasteful.

    The petro price subsidy is an excellent example of foolishness bordering on insanity. Even though petrol prices are purportedly freed, and diesel prices have been hiked, the Finance Minister has, last week, asked for an additional Rs 32,000 crores, including Rs 30,000 for the oil marketing companies, and Rs 2,000 crores for Air India.

    To guage at how foolish the subsidy is, just consider that it is harming everyone. Car sales for all manufacturers are down, except Maruti Suzuki (because of base effect) and Mahindra & Mahindra Ltd. (M&M) (no, this time its not Mayawati and Mulayam but Mahindra & Mahindra. Gosh, these abbreviations are so darn confusing). The only petro product which is not subsidised is aviation turbine fuel, and various state governments merrily impose sales tax, to squeeze out tax revenues from airline companies. The sales tax varies from state to state and goes up to 30%. As a result, Kingfisher is bankrupt (ultimately the banks will pay for its bankruptcy) and Air India is kept alive on artificial support systems (another Rs 2,000 crores of taxpayer money being wasted on the airline, whose chances of becoming viable are remote).

    In corporate news, the Government is likely to okay the budget of Reliance Industries' KG block, where gas output has fallen. RIL is also likely to introduce, by mid 2013, affordable 4G services using MiFi.

    Desperate to raise resources and keep its fiscal deficit in check, the Government is going in for the second round of auctioning of telecom spectrum, after the first one failed miserably thanks to unaffordably high reserve prices. The EGoM (empowered group of ministers) has, belatedly, lowered the reserve price by 30%; one does not know if that would work in fetching it revenue.

    It is also planning to accelerate the disinvestment process by bringing in offer-for-sale IPOs of National Mineral Development Corporation (NMDC), in December, followed by Oil India, in January. Success of both, of course, would depend on how they are priced and one hopes it would be done in consultation with investment bankers, with a ear to what the market is saying, rather than with EGoM, without that ear.

    The BSE-Sensex ended the week at 19,424, up 84 points, and the NSE-Nifty closed at 5,907, up 29.

    The sensex ought to hit resistance between 20,500-21,000 level. It would be prudent to wait now for a selling opportunity.

    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.

    The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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    1 Responses to "Quo Vadis, quantitative easing?"
    Dec 10, 2012
    Dear Mr Mulraj

    Do you think part of funds sent to HK by Chinese go into American Bonds? or you estiamte most of it will go into real assets there? - vinod

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