Stick to the basics and do not lose sight of the fundamentals of the assets into which you are investing...
Emerging economies may become less coupled to the US over time but it will never be good for them if the US is doing badly.
The absurdity to which the game of short-term global stock punting has descended was made amply clear by the recent rally-and as of November 11-the sudden drop. Indian investors are understandably euphoric at the way the markets moved up decisively, and there's nothing wrong with that.
Nonetheless, I'd like readers to pause, step back and take an objective look at the reasoning behind what has happened in the world's stock markets over this short period. The centrepiece of this entire cycle of events is the announcement by the US central bank that the recovery in that country is now unacceptably weak and that they will unleash a huge flow of dollars to try and boost the US economy. The reason why the Fed is taking this route instead of the normal one of lowering interest rates is that there is no room for lower rates. US rates have been effectively been zero for a long time now. However, the global stock markets shot up as a result of this action by the Fed. In fact, the rally began days before the actual announcement because the step was widely anticipated.
The markets shot up because it was thought that with so much extra money flooding into the global economy, a good chunk of it was bound to find its way into assets like stocks, commodities, gold and other types of assets. Therefore, punters around the world bought heavily into practically everything.
Now, think carefully about what this whole chain of logic amounts to, if it can be called logic. Starting point: The US economy's recovery is very weak. Final effect: There was a heavy inflow of money into stocks and other asset classes, leading to a string upsurge in prices.
I don't know about you, but I detect something fundamentally wrong here. To buy into stocks because the Fed's excess liquidity will flow into assets basically amounts to relying on a side effect of a side effect of bad news in order to create a little temporary good news, a great 'story', to use the favourite word of today's investment analysts. Far from pointing to any underlying good news, it shows the complete dominance of what I'd call story-oriented investing. Make no mistake; the only people who make money in these short-term cycles are those who don't actually believe in the stories. They see a potential story, help develop it by buying early and then get out before the larger mass of investors realise that the story is just a story.
The US economy is the largest and the most important in the world and will remain so for a very long time indeed. Emerging economies may become less coupled to the US over time but it will never be good for them if the US is doing badly. There is no way that its poor prospects can be good news for anyone but the storytellers of this world.
To see what serious people think of the Fed's dollar deluge, you only have to read the news from the G20 meeting in Seoul where every other country, including India, has expressed worries about this liquidity causing problems for them. Investors should be cautious about these stories, stick to the basics and not lose sight of the fundamentals of the assets into which they are investing.
-- Dhirendra Kumar
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Emerging economies may become less coupled to the US over time but it will never be good for them if the US is doing badly.
The absurdity to which the game of short-term global stock punting has descended was made amply clear by the recent rally-and as of November 11-the sudden drop. Indian investors are understandably euphoric at the way the markets moved up decisively, and there's nothing wrong with that.
Nonetheless, I'd like readers to pause, step back and take an objective look at the reasoning behind what has happened in the world's stock markets over this short period. The centrepiece of this entire cycle of events is the announcement by the US central bank that the recovery in that country is now unacceptably weak and that they will unleash a huge flow of dollars to try and boost the US economy. The reason why the Fed is taking this route instead of the normal one of lowering interest rates is that there is no room for lower rates. US rates have been effectively been zero for a long time now. However, the global stock markets shot up as a result of this action by the Fed. In fact, the rally began days before the actual announcement because the step was widely anticipated.
The markets shot up because it was thought that with so much extra money flooding into the global economy, a good chunk of it was bound to find its way into assets like stocks, commodities, gold and other types of assets. Therefore, punters around the world bought heavily into practically everything.
Now, think carefully about what this whole chain of logic amounts to, if it can be called logic. Starting point: The US economy's recovery is very weak. Final effect: There was a heavy inflow of money into stocks and other asset classes, leading to a string upsurge in prices.
I don't know about you, but I detect something fundamentally wrong here. To buy into stocks because the Fed's excess liquidity will flow into assets basically amounts to relying on a side effect of a side effect of bad news in order to create a little temporary good news, a great 'story', to use the favourite word of today's investment analysts. Far from pointing to any underlying good news, it shows the complete dominance of what I'd call story-oriented investing. Make no mistake; the only people who make money in these short-term cycles are those who don't actually believe in the stories. They see a potential story, help develop it by buying early and then get out before the larger mass of investors realise that the story is just a story.
The US economy is the largest and the most important in the world and will remain so for a very long time indeed. Emerging economies may become less coupled to the US over time but it will never be good for them if the US is doing badly. There is no way that its poor prospects can be good news for anyone but the storytellers of this world.
To see what serious people think of the Fed's dollar deluge, you only have to read the news from the G20 meeting in Seoul where every other country, including India, has expressed worries about this liquidity causing problems for them. Investors should be cautious about these stories, stick to the basics and not lose sight of the fundamentals of the assets into which they are investing.
-- Dhirendra Kumar
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