Thursday, January 30, 2014

Banking and the Post Office

Double whammy of withdrawal of funds from emerging markets

In the past few trading sessions, there has been a considerable withdrawal of funds from the emerging markets. We can attribute this to two basic reasons.

Firstly, we have seen reduction of QE from $85 billion to $65 billion in the last four months. Secondly, we have seen an upward pressure on interest rates in the developed world. These two factors have combined to create A double whammy. At the time when funds are scarce, we have a reverse potential difference that is pulling money towards developed markets. This perverse situation will lead to substantial abatement of money flows from emerging markets to the developed markets.

In addition, there is already in place, an incentive to emerging markets sovereigns to invest in developed market treasuries for mercantilistic reasons.

I believe, these three forces will lead to substantial correction in equity markets in developing countries. Hence, we will see drastic correction in Indian equity markets. I also think, the same logic will hold for other developing countries.

I will be trying to close my open positions as soon as I can. Let us hope that we are able to ride out this turbulent phase. However, I do not think that this turbulence will last more than three months. Therefore, it is essential to get into the market say around end-April.




Friday, January 17, 2014

Money Supply and GDP growth

Here is a chart I made showing money supply v/s GDP growth of top 4 developed economies. Tell me what do you think about this.





Saturday, January 04, 2014

The globalization puzzle

Dani Rodrick has an interesting post about globalization here : http://blogs.lse.ac.uk/politicsandpolicy/archives/38743

The essential argument is institutional in nature. The institutional development Prof. Roddick argues depends on democratic choice expressed by various countries. He therefore concludes that full globalisation is almost impossible. I beg to differ slightly. 

I agree at this point in time it is difficult to achieve full globalization. However, it is neither impossible nor unlikely in the future. Prof. Roddick allows for such situation in extreme long term so I may have gotten it wrong. 

I think two main forces are working towards that goal. 

First internet and technology is making us realize how similar we are as peoples of the world. In older times we were skeptical of other people - they spoke different language, worshipped different gods, had different skin colour, ate different things, etc. There has been even starker change in people's perception of other counties from pre-1960s where non-western was exotic and a global traveller was a privileged person. Well, no longer is that true. We now have people interacting globally with each other across time zones and across cultures. This is a potent unifying force. We see often than this urge to communicate, trade, intermingle often crashes with the political borders and norms developed to keep peoples separate. No longer are we threatened by those of other culture. 

Second the world human and environmental rights movement is creating a template for global legal alignment. The UN human rights movement is creating a lowest common denominator set of rights that countries and their people are eagerly adopting. This methodology gives us a template that can be used for developing set of common rights which can expand gradually. 

Of course there needs to be a certain convergence between economic development of various countries to make it easier. But this convergence is not as strict a requirement as it was before the internet era. Today the world is  truly and rightly coming closer into a global village. And I sure hope this happens in my lifetime.