Ultra low interest rates in certain regions may cause global imbalance

To avoid present financial crisis developed countries like US, Japan, UK and European Countries are keeping ultra low interest rates [0.1% of Japan, 0.25% of US, 0.5% of UK and 0.25% of ECB (deposit) ] and more over governments & central banks of these countries flooding the their respective economies with lot of Quantitative Easing (QE) by printing more money as that is the last resort in monetary policy to boost the economy.

Countries opt for QE which are facing the problem of low inflation or threat of deflation and they might have already substantially lowered the interest rate nearer to Zero. So to boost the money supply in the economy central banks are compelled to print more money and purchase government bonds from different financial institutes like banks and NBFC (Non Banking Financial Services), in turn flooding these financial institutes with lot of cheap money.

Most of the economist and policy makers provide Keynes theory of "General Theory of Employment, Interest and Money" basis for their move towards monetary easing and QE.

But Sir John Maynard Keynes proposed this theory in 1930s then world was not so globalized as it is today and world was facing double dip recession or popularly known as The Great Depression mainly due to some bad moves like liquidity tightening by FED and protectionism by global leaders.

Where as now world is more globalized than ever and we are era of "BUTTERFLY EFFECT" of Chaos theory. No country is no longer 100 percent closed economy, so no country can say it is totally delinked from rest of the world. Ultra low interest rates in these countries and QE is flooding their banks with cheap money. And this cheap money is leaking to emerging markets. This "HOT MONEY" is creating its ripple effects in commodity market, emerging country's stock markets and their macro economy.

Commodities like Copper, Silver are trading at their peaks in last 2-3 decades and Gold is trading at all time high.

And hot money from these countries is flowing to emerging markets like there is no tomorrow. For example Indian markets witnessed highest ever inflow of FIIs in September month in last 17 years, from the day FIIs allowed. More than 5 billion dollar hot money flooded in Indian markets boosting Indian markets 13% rise in September. Srilankan stock exchange "Colombo Stock Exchange" has given more than 100% return in one year from sub 7000 levels to 16000 odd levels.

Brazilian currency "Real" is appreciated a whopping 30% from March 2009. Indian currency appreciated almost 7% in last 6 months and currency appreciation is common problem to all emerging markets. Already US-China currency war is on and Brazil is shouting at its full strength.

Due to this their respective central banks will (or would have already started) intervene in forex markets by selling their own currencies leaving their local banks with lot of liquidity. This liquidity is in turn creating a pressure on inflation which is already high in certain countries like China and India.

Ultimately its a "ZERO SUM GAME". In past also lower interest rates in initial parts of 2000 (to avoid ill effects of dot com bubble burst) lead to asset bubble in US which caused present crisis.

Nifty correction may take it to 5875/5820/5670

Is there a threat of liquidity trap and "W" shape recovery part 2

Continuing from last week's my posting of liquidity trap and W shape recovery, I am of the opinion that every region, state or country undergoes a broad macroeconomic cycle of different time frame depending on their structural issues in terms of age, gender, income/saving/spending nature, export/import oriented, regulations in financial systems and etc.

Here I would like to give comparison between US and Japan because they are World's largest economies (except China overtaking Japan recently) and almost they are in same position now.

Japan experienced rapid growth from 1960s to 1990s, helped by post 2nd world war massive US investment, high savings led to high investment in their own country due to currency appreciation, low interest rates & etc. Japan witnessed an average GDP growth of 10% in 1960s, 5% in 1970s & 4% in 1980 indicating a slowdown in real growth after 1980s. It experienced asset price bubble in late 1980s followed by Bank of Japan's sudden increase in interest rate & crash of Nikkie in 1989 when it was around 39000.

Many economists feel, after crisis Japan didn't act quickly, it took 5 years to boost money supply in real economy, which was definitely very late reaction. Out of ten years from 1990 to 2000 Japan witnessed 9 times deflation measured by WPI, Nikkie has given 4 times negative annual return, 4 times less than 10% and just 2 times positive.

Now coming to US, it witnessed the Great Depression in 1930s which produced great economists like Sir John Maynard Keynes and in turn the great Keynesianism theory. From 1945 to 1970s US witnessed higher growth helped household income increased 55% or 1.6% annually but since 1973 household income growth rate fell to 10% or 0.3% annually due to various reasons like fall of Bretton Woods System(Nixon Shock) in 1971, followed by Oil shock or crisis in 1973, Recessions in 1981-1982 and after that several economical cycles of recessions in successive intervals.

In 1980, the US Debt was equal to 33.3% of America's GDP, by 1990 it became 56% of GDP. Debt levels rose quickly in the following decade and based on the 2010 US Budget, total national debt will grow to nearly 100% of GDP, versus a level of approximately 80% in early 2009.

Present financial crisis caused by sub prime mortgage, securitization structures and financial engineering along with FED's low interest rate policy to avoid the 2001 dot com bubble effects. Between 1997 and 2006, the price of the typical American house increased by 124% and at same time household debt v/s annual disposal income was 127% at the end of 2007, versus 77% in 1990.

So both the countries experienced rapid growth for 2-3 decades and after that they are feeling the heat of slowdown in their respective economies due to different reasons, which is nothing but natural economical cycle.

Prof. Raghuram Rajan, economic adviser to Prime Minister Mr. Manmohan Singh, in an interview about Currency conflicts mentioned same structural issues in US which I pointed above. Click here to read the full interview. I read an article in mint on similar note (about Japan & US similarities & differences of crisis, advise of Mr. Bernanke to Japan in late 1990s and he being at top job at present crisis!) its good article, click here to read. The paper presented in late 1990s from present FED chairman Ben Bernanke to Japan about its crisis. It contains lot of important data & structural issues with good explanation, click here to read that.

Black Monday in Karnataka's politics

Monday was worst day in Indian politics history. In fact its not only Monday, but from last 10-15 days the things happened here in Karnataka, never happened in Indian history I think. Here one thing I want to clear that I am not taking anybody's side even though I am from a political background family. From the day BJP government came to power, the crisis started within the BJP party and outside also. Three times government came under threat due to these crises within 2.5 years.

But this present one is worst in the history Indian politics in terms of

1. HORSE TRADING...
2. CHANGING OPINIONS OF MLA...
3. KIND OF MONEY SPENT ON RESORTS/TRAVELING...
4. NON-PARLIAMENTARY LANGUAGE USED ON MONDAY/OTHER DAYS...
5. THINGS HAPPENED IN VIDHANA SOUDHA...
6. BEHAVIOR OF OPPOSITION LEADERS WITH POLICE COMMISSIONER MR. SHANKAR BIDARI.

In Indian politics, I have never seen/heard of horse trading of MLAs for 35 crores - 50 crores even more (to each MLAs) according to some unbelievable source.

And coming to changing their opinions, most of the present MLAs, I think they don't have moral ground on which they fight election or their party fights. They are changing colors faster than chameleon, for the sake of power. They are behaving like, there no tomorrow and want to die in power!

Now talking about the money spent on resorts/their traveling & etc who is paying for all these. How can a SEEDHA SADHA politician/party can afford this kind lavish spending for group of horses(MLAs).

Monday morning when I was getting ready to office I was watching the final day drama. The way MLAs were behaving/using slangs to their colleagues and poor Marshals, I never felt they are representing Karnataka people & elected by people like me. Now I am ashamed that I voted for one of them. I think because of this kind behavior only makes most of us not to vote. One MLA went ahead of all this tore his shirt & was standing on the table in VIDHANA SOUDHA. What an example they are setting, at least they should think of their children in their home will be watching TV!

Bottom line:

Couple of the senior MLAs who spent their more than half of their life in politics were seen KICKING ONE OF VIDHANA SOUDHA'S DOORS, where as it is written as GOVERNMENT WORK IS GOD'S WORK! on front portion of VIDHANA SOUDHA.

Is there a threat of liquidity trap and "W" shape recovery

If you look at the recent developments in the world, I feel there is threat of liquidity trap. (Liquidity trap is a condition where in country or state's economy is unable to stimulus by monetary policy easing.) On 5th of this month, Japan decreased its interest rates from 0.1% to 0 or in other words Japan's interest rate is between 0 to 0.1%. And its not over, Bank of Japan is planning to infuse 35 trillion yen to its economy by means purchasing sovereign assets. For brief details click here.

This is not the only case, United states is also thinking of quantitative monetary easing to improve its struggling economy. US is facing problem of unemployment which is almost 10%. The Fed rate is already 0.25% so considering this, Fed may think of fiscal measures by purchasing of some sovereign funds from government.

These are two major countries (except China recently over-passing Japan) which are struggling to improve their economy happened due to recent financial crisis. Apart from these there are issues going on with European countries & recent currency war between US, China (Pegging Yuan), Japan & Euro currencies to protect

Now the biggest question is whether monetary and fiscal policies will influence the economy EVERY TIME & EVERY PART OF THE WORLD, IRRESPECTIVE STRUCTURAL ISSUES!!!

Because in this recent financial crisis, it originated in US because of its social structure & policies influencing that structure. After 3 years of crisis; and after all the possible steps taken by US & FED, but still its economy is struggling.

Same is the case with Japan, it is in the stagnation from last two decades and had been doing all possible steps (like keeping interest rates "0" from 2001 to 2005 and again keeping it "0" now & jumping into currency war) still its index Nikkie is not able to touch its all time high 40000 plus in 1989.

Whereas India, China, Brazil & other developing countries witnessed slowdown in this crisis but giving signals for achieving new highs in their respective economies as time passed.

Will continue in next post...

Biggest inflow of September rallies market to 13% in a month

September month, Indian markets witnesses highest ever inflow from Foreign Institutional Investor (FII)s in one month ever since they are allowed in India from1992-93.

Till now in this India witnessed 18 billion dollar inflow and out of that 5 billion came in this September month alone, giving 13% gain in this month out of 17%-18% gain in this year.

From last 3-4 month market was trading in the narrow range of 5350-5450, but this September inflow helps the Nifty to break the range & surge.