2018: Images from the crystal ball

As 2017 draws to a close, it is time to peep into the crystal ball for 2018. But before that let me just quickly give a brief prelude.

What a year!

2017 was supposed to be a dramatic year. Back in 2011, from the extent and nature of QE, I expected around 2017 to be the year when the shit hits the fan. How wrong was I! In the intervening period I was caught off guard by a smallish slowdown, a central bank response that far outweighed anything we have seen and an unprecedented surge in valuations.

Asset prices have increased over this period since 2013. In 2017, they have reached their all times highs. The valuations of all the asset classes increased almost linearly. Many are more expensive than 2007. The art market has gone up substantially. Bitcoins are the new game in town creating large price changes on an almost daily basis.

Inflation, on the other hand, has been relatively benign. Not much is happening in food prices. Oil and Gold, the two special 

The dichotomy between these two is quite important. In Subverting Capitalism and thereafter on this blog I have maintained that when you pump money while watching the inflation basket, it leads to non-inflation basket asset price inflation. This relative price discrepancy gets corrected as prices can flow through two central asset classes - oil and homes. Oil is on its way to becoming irrelevant. But not homes.

In 2018

Some of the important events that are likely in 2018 seem as follows:

Home prices, however, continue to rise till they break inflation.
Home prices across the world rallied between 2003-04 till the peak in 2007-08. The rise of the home prices was at an unprecedented rate. There was a lull in 2008-2010 period. While prices crashed, the house price to median income ratio was high. Since 2010, the housing prices have started rising. The rise has been documented by IMF here and by Economist here.

So how higher can these go? Well, they will go till they break inflation on the upside. There is a condition. The prices may not go up if artificially cooled. Singapore has done it, Canada is considering it and others are monitoring the house prices. In effect, house prices are almost included in the inflation basket. When that is the case, the excess money has to move somewhere before Fed and other central banks can suck it out. Commodities - gold and oil offer such bets.

Oil touching $100 then retracing back to $40-$45. 

Not many are pricing oil beyond $70 at present. Apart from one call from Goldman, there seems to calls for high Oil prices. Oil is also becoming irrelevant. It has now been established that "peak oil" is more peak oil demand rather than peak oil supply. The decision of Saudi Aramco to go for IPO is an acknowledgement of this reality. These days, IPOs are an exit for promoters not call for investment with promoters.

Oil is surprisingly inflexible in the short term and almost surely irrelevant in the very long term. It is possible for short-term geopolitics to drive a supply squeeze to push prices up. At present geopolitics is in a stalemate. As much as Saudi Arabia likes higher oil prices, those will help Qatar and Iran too. Further, the real target of low oil prices - US Shale producers have turned out to be more resilient than anticipated. Thus quagmire will solve itself gradually. With Russia entering the picture in the Middle East, you can be sure Oil price will rise in short term. The higher oil price beneficiary group is bigger than the low Oil price beneficiary group. Higher oil price will also ease pressure on Venezuela.

At the same time, I do not foresee Oil sustain at $100/bbl. After the $100 rendezvous, oil may recede back to $40-$45 range. So at present, I would like to be long oil right all the way till $100 and then short oil right till $55.

Bitcoin
The story of 2017 is the breakout of bitcoin. Where will bitcoin go in 2018? More important than that question, what effect will bitcoin have on the main economy?

Return of Japan
2018 should be the year when Japan makes a comeback. There are a bunch of quality companies that have been stuck because of Japan's economic stalemate. I think Japanese companies will see some traction this year. Japans social re-engineering is going to be the thing to watch for. If Japanese women truly join the workforce and are allowed to operate at their potential then we could see something remarkable. It is possible that whole new segments of the economy may be created to support the working women. It will be stimulus twice over.

Europe - See-Saw?
Eurozone is basking in a bit of sunshine this winter - good news flowing all around. The French are putting their house in order with labour reforms. There is a decent amount of growth and banks are more healthy than ever before. There are some weird signs though. The Greek and Portuguese bonds seem to be too cheap. With these indicators what can go wrong?

Not much this year it appears. Europe should perform well in first half and the worries may appear only in late 2018. The ECB and SNB have bought substantial amounts of corporate bonds. This is not a great sign if you ask me. In a recent podcast, Felix Zulauf highlighted this. I was struck by his assessment impact on future of bond markets such moves are making. 

Impact on Politics
The response to the financial crisis of 2008 has left many befuddled. Mark Yusko, in his letter points to the very same issue - the actual behaviour of markets is at odds with the fundamentals. It is indeed. But aside from those issues, we must assess the other slow-moving forces this has unleashed - particularly in politics. Politics has become increasingly expensive because of this central bank policy.

That means we do not get the reform that is necessary. Thus, we have an enormous tax compliance process that is weighing the growth down. Yet, Democrats won't acknowledge that. Conversely, the Republican tax proposal does not simplify or ease that burden but complicates it even more.

What we also get are politicians who are increasingly out of touch with the citizens.

Coming War?
The combination of out-of-touch politicians, economic interests at loggerheads, economic and policy stagnation, distrust and fake news is a potent powder keg searching for a spark. My scenario for war now looks likely.

China's policy with One Belt One Road and lending-driven quasi-colonisation is also bound to create dissidence. The US and developed world will put pressure back on China by reducing demand for its factories which can service almost entire world's demand (maybe twice over) using robotics and automation. Automation, it is my belief, is the result of the prolonged low cost of capital. In that sense, China's communists will get a taste of Marx - Capital V Labour.

Add the uncoordinated US strategies in the Middle East, the fundamentalist strain of Islam and we have making of a world war. This Middle East angle de-escalated a bit after Iraqi victories against IS in Iraq and Syria. Yet, the threats continue. Iran may not be the problem area it appears now. The wildcard could come from Af-Pak area.


In Sum
We may be looking at an interesting year in 2018. 

2015: Images from the Crystal Ball!

We are at the threshold of 2015 with US posting one of the record quarterly earnings, FED talking of tightening, Russia and China on the brink of their own respective crises and some rather tricky security flashpoints - information security breaches and physical security breaches by ISIS, Boko Haram and the usual Al Qaeda and Taliban.

From the markets perspective, we have rather exhilarating ride. Oil prices have hit $60 from $100+ just a year back. Gold prices have softened, US markets are touching all time highs. EU is on the thresholds of a QE for itself. Japan has voted Abe back. Seems like good times are here!

Well they are! The recovery is thanks to the US Fed and so long as Fed does not tighten or initiates another form of QE, we can enjoy the benefits. It is time to make money and build up a solid rainy-day reserve. 

The cycles and volatility are our friends

The year promises to be as cyclical and volatile as previous if not more. This year though I am expecting at least 3 full equity market cycles - as compared to 2.5 (3 peak-2trough or vice versa) I expected last year. Unlike last year though, there will not be a secular up-trend. Thus last year if we missed a peak it was easy to recoup the lost gains by simply waiting. This time we may see some losses in such scenario.

US and developed markets
In general I agree with the Jeremy Grantham's forecast that US markets may move till 2300 -2500 before any correction. His analysis is worth a read. Secondly there is nothing that can shake up the US markets in present circumstances. The shock, if it must come, must be substantial. I think the Fed must continue to be on a pause till the employment outlook improves. This will allow for the growth to get traction. In the early '30s US withdrew the stimulus too soon with disasterous effects. Therefore I presume they will err on side of caution this time around.

The EU on the other hand still sustains itself on internal trade and consumption. EU stimulus, when it comes will be of great benefit. Let us hope to get the mechanics of this stimulus right as EU is more vulnerable to a currency run than USD. 

Indian Markets
In general, emerging markets will follow US markets. India should be special, and in general flight to quality to US should affect Indian markets to a lesser degree. Indian markets should have similar pattern like that of US - about 3 cycles over a secular uptrend. It seems 35K on Sensex does not seem out of reach. Within the broad Indian market uptrend we should see some sector rotation. Infra stocks should be back in favour along with asset intensive industries. Expect to see higher volatility in the markets thereby allowing for higher gains than the 27K-35K interval suggests. However, buy and hold will be a risky bet given sector rotation and global risks.

The nature of risks from shocks

The year while positive is fraught with risks:

1. End of ZIRP?: Yellen's comments in the last Fed meeting have prompted analysts to pencil in a Fed rate hike in calendar 2015. I find that hard to believe. In the very least we should see a prolonged ZIRP pause. We should expect a shock only around June if at all Fed decides to hike.
2. Draghi - Will he won't he?: What Draghi does and when he does it will naturally have a lot of bearing on the nature of cycles. I suspect EU will ease before US tightens. The qantum of QE is likely to be lesser and more directed than US.
3. Japan - Abe it is!: Japan has done quite a bit quite quickly. I think they will have to continue with it and make the stimulus, QE more directed using policy interventions. Japan will be more aggressive on investments across the world.
4. Chinese growth: Analyst expect the Chinese growth to surprise on the downside. I am not sure about China but most likely the numbers may be better than analyst estimation. Lower Chinese growth implies easier commodity prices - sort of a QE by itself.  

My Strategy for 2015
The buy-and-hold era ended in 2008. These days the best buy-and-hold stocks never reach the broader markets when there is still money to be made. They sit tight with PE or angel investments. The stock markets are being used by promoters as a sort of exit option. So indeed we must sort and sift through the stocks and keep churning as soon as they fall out of our valuation metrics.

Infra stocks: Infra stocks seem well set to make a comeback. I have been investing in them since 2011 hoping for Indian infra turnaround. The situation is more conducive than 2011 but I have been wrong before.

Commodity stocks: The China crisis seems to have sent some commodities in a tail-spin. Therefore I am not inclined to interfere with metals and non-perishable commodities. Other commodities - like sugar are weathering the oil price shock resulting in lower alcohol demand coupled with excess supply. Sugar should turn around soon. I have been investing in sugar since early part of this year. I will continue to add to my positions.

Banks and Commercial Vehicles: These stocks are leading indicator stocks and I have liquidated my positions in banks and will soon do so in Commercial Vehicles space as well. These two sectors are in for period of good growth and repairing of their balance-sheets. In that sense if there is any correction I will take substantial positions in these. They should turn around pretty quickly once the shock wears off.

Gold: Gold is the only buy and hold thing I can think of currently. Only if you are in a currency that has potential for appreciation vs the USD then you can ignore gold for short term. The current USD strength is good for buying gold. The currencies of economies where the private sector and consumer is not leveraged and public sector is reasonably benign will ultimately appreciate in relation to USD.


In Sum
The year promises to be exciting year, a rare patch in a lifetime where we can ride multiple cycles within a year itself. The experience of recent past tells us to be nimble with a healthy respect for cash. Let us see how we can capitalize on this coming year.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

2014: Images from the Crystal Ball

It is that time of the year again when I take my crystal ball and peer into the future. So lets get going.

The hand that Yellen plays

I think overall theme of 2014 will be determined by the hand that the US Fed plays over the first two quarters. There are two reasons why I say that. Firstly, Janet Yellen is clearly from the Bernanke School and people expect the QE -based easy monetary policy will continue. Secondly, contra the above Yellen is talking about modifying the nature of QE to be more directed and precise. I think that is full of risks which market has not fully understood as yet.

QE till eternity? Almost!

One thing is clear you cannot have QE taper till you have sustainable employment with a visibility over say a 10-15 year period AND reasonably deleveraged US household. Once that is achieved then you can consider a talk of taper and the resulting volatility will be allayed by stronger household balance sheets and things can progress from thereon. So in effect the following things must happen:

1. Employment must reach about 95% of the workforce. It should be reasonably certain employment.
2. Ideally, US need to see emergence of a new industry which has three characteristics - first it fits with the US competitive character; second, it is a mass employer employing relatively lower skilled people and third it has second order, third order effects. Most likely that industry could be in renewable energy or water conservation space.
3. There must be a reasonable clearing of Household debts and households must be reasonable deleveraged with margin to take on more debt if required.

But it won't happen in 2014
To gather up that kind of employment we need a Fiscal side action. A national overhaul of US infrastructure will raise my hopes though it does not promise the sustainable employment for at least 15 years. But it is a fair shot to say the least. The current Fiscal policy is far too short of any meaningful contribution in this regard.

Will QE lead to a US Inflation?

The whole idea of stimulus is that money will flow through the channel to the places where it can create value- therefore GDP growth- therefore jobs and this cycle will pull the economy out of the doldrums. Today the situation is different. 

First it is difficult to keep injected money within the territorial borders to create the desired effect. This means two things. First the quantum of stimulus required will be far larger considering the wastage. Second, the problems of world have bearing on the quantum. 

Second the mechanism of money flow or money flow channel is not functional so you cannot get the flow to the lower rungs (i.e. from asset investors to asset owners). That implies that the money is sloshing into restricted space. It is spilling into global asset classes searching for a channel to reach the bottom. (EM equities being one of them).

There are two things that must happen before the money starts getting channelized properly. 

1. You need and investable industry to crop up. And not any industry will do - it must employ relatively lower skilled people in large numbers. When we find such an industry (as a few are being experimented with) we will see money being rapidly absorbed.
2. The current uncertainty of weak institutions collapsing must go away as in early investment stages any industry is quite vulnerable and ours will be no different. When there is adequate certainty that the weaker or failing institutions may be ring fenced into failing safely then it will start growing.

When growth gains traction it will lead to inflation. The trouble is that US FED does not want inflation but that inflation is decades away. But looking at that possibility it is doing nonsense like QE tapering etc. Naturally, if you want the industry to appear quickly then it is easier done through Fiscal policy than through monetary policy (no doubt monetary policy needs to be accommodative).

Therefore even inflation will not happen in 2014 and it is a good outcome.

The EU curve ball

I think the most weird scenario is that of European Countries. Some are following austerity, others are expanding and the effect is a mixed bag. In fact there is good chance that the next problem will arise in Europe rather than from US tapering.

I think there are more things fundamentally flawed in EU than in US. So I would bet on US in a US v EU debate. Further, I would be wary of developments in EU both political and economic because each has impact on the other.

Further, this problems may come to fruition in 2014. It could be the one almost certain headwind of 2014 unless some dramatic political strategies and monetary policies are put in place. The problematic part is that any meaningful resolution requires massive political coordination spanning different regimes that have different outlook to policies.

I think Martin Wolf has it right in his last video presentation here.

About Indian stock Markets

Indian stock markets are likely to move up till say Jan-Feb and then go through a period of extreme volatility related to elections and possibly few other global factors. The presence of strong and short cycles was critical feature of 2013. I believe this will continue in accordance with slosh-money hypothesis I explained in book and previously on this blog.

The flow and quantum of money means it will keep moving between various asset classes sloshing them with out of the world valuations and ridiculously cheap ticket sizes all in span of 4-5 months. 2013 we had 2 cycles in one year (2 peaks-2 troughs). In 2014 we will have at least 2 (2 peaks-2 troughs) and may be 2.5 (2 or 3 peaks and 3 or 2 troughs).

It means we need to be nimble in investment and must be ready to keep the money off the table. This, as I have experienced in 2013 is more difficult than it sounds. One need not be a daily trader, but the investment strategy must be tested more often than what we previously believed. The days of buy and hold are over and in fact buy and hold has become more destructive option today.

What about Gold and Oil?
To me it seems that Gold and Oil will not be as critical as thought previously. Gold will slowly gain traction and it will go past $3500. The nature and quantum of QE, already delivered and expected to be necessary, will have substantial bearing on the projected price of Gold. The forecast for medium term gold prices varies between $2000 to about $7000 primarily because the fact that the other side of the equation i.e. total amount of money in the system has a wide estimate. Once that clears up the Gold forecast will be much more saner. Having said that, the fact that the total amount of money in the system is unknown/varies drastically itself makes a case for Gold. Thus, I would be buying Gold if I was USD /developed economy buyer. In a different currency, the Gold trade may not be as compelling.

Oil may be more volatile in accordance with the QE news flow. Oil gaining its position as store of value (a story that had abated after Shale and other quasi-oil alternatives). Though Oil as store of value is likely to end disastrously. Oil is no longer the resource crunch story that it was between 2005-2010 period. We have never heard the real oil story. There is no dearth of oil if you set aside the environmental consideration and cost of drilling. So "Peak Oil" really refers to "Peak $50 Oil". The real constraints are in fact the environmental considerations and we may do well to move away from oil sooner than later.

War is coming
So long as US continues on its Japanese strategy, we are going to see possibility of war increasing. It is possible that China will induct 5-6 Aircraft carriers into its navy in 2014 if not more in preparation for war.

The new Chinese leadership will face tougher challenges converting its economy from a producer-driven economy to a consumer-driven economy. Further, the lack of sustainable global demand will not ease the pressure on Chinese government. When the problems of worker migration will ease the problems of worker wages will begin. It will take a great deal of proactivity on part of the new Chinese Leadership to manage these. Further, this is the first truly non-revolution leadership so we are yet to see their mindset.

All said, I see some notoriety involving Chinese sooner or later.

Finally,
As I head to the beach, let me say this, we seem to be in much saner times than we actually are. Insanity is quite a short jump from us at any time. So in such times let sanity prevail, let talents rise and pseudo-leaders fall and let peace be upon us.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

2013: Images from the crystal ball

Around this time of the year I take out my crystal ball and peer into the future.

The China conundrum

I think a major theme in China will be the post-investment driven economic growth. As I explained in 2010, I think China will find that it is quite difficult to move to a consumer driven model. The new leadership is the first which has no links to Deng's development focus. It is possible, and this I hope, that new leadership is quite pragmatic and that should help the world economy in a big way. I think we need to watch what steps China takes over next few years.

Possibility of War

I think there is a distinct possibility of a war in near horizon say ~2015-2017. I have been seeing a war possibility for some time now since 2009, though now I think we are closer to it than then. It is still too early to say who will be the warring parties.

The other Problem of Japan

Kyle Bass has been vocal about problems in Japan, however I reflected on in 2010 that is the other problem of declining and even reversing Japanese investment in the world. I believe this force will have major repercussions on global equity valuations equally. 

US Dollar, gold etc.

I don't see US dollar equation getting upset in 2013 though I think future will be quite a different story. The overall direction US dollar should take over the long term is down. However, the decline will not be steady decline it will be a sharp fall over a few weeks followed by financial markets turmoil. Conversely, gold will experience new highs in the long term but will be ambivalent this year. While US dollar may not decline steadily, gold can appreciate steadily and we may see this trend in 2013.

US Fiscal cliff
I don't think US Fiscal cliff is a major issue as it is made out to be - it is rather a slope than a cliff as Yves Smith and Bruce Barlett say. There is good sense for Obama to wait till January 1 actually comes to better his own bargaining power. I don't see Fiscal cliff actually materializing into a disaster. Equity markets though may make mountain of a mole-hill.

A question of India

India will continue to see uptrend till around middle of 2013 after which Indian markets will decline secularly. This theme is continuation of my forecast of June 2012 wherein I explained the policy paralysis. I hope to get out of the markets between late May or mid-June.

So quite an eventful year ahead I must say. My best wishes to you all and I will see you next year. Merry Christmas, Happy new Year and happy holidays. Cheers Rahul!

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

2012: Images from the Crystal ball

At the doorstep of 2012, I am here again looking at the crystal ball. There are signs

Reworking the Macro 

1. The Eurozone faces tremendous challenges at the moment. 2012 will see the aftermath of the crisis. I imagine the Euro leaders will be able to patch things back, but substantial political sovereignty will have to be ceded. One hopes the sovereignty will be returned post the resolution of the crisis. In any case, Eurozone will spend the next year in hibernation.
2. As I mentioned in previous post, there are currently two systems - Eurozone system and US-China system. 2012 will see stresses in the US-China system rise dramatically. I think as if rhyming with 2011, we will see stress in US-China system next year same time.
3. We may see Chinese economy under stress. I am not sure how much will happen next year but China is unusually fast. I think we will see slowing of China - about 5-6% growth level.
4. The Arab world will experience post-purchase dissonance with respect to new-found political setup. In worst case it means some new dictators will come up and uprising may start all over again or there may be bigger political discussions.

Financial markets

1. I see increased synchronization - both globally amongst markets and within markets among stocks. Thus, old places to hide may not actually work. 
2. From the investor standpoint, we will be forced to be more in cash or cash equivalents.  Correspondingly, even when invested, we must look to highly liquid names. I was hoping to see derivative markets in their full splendor at such times, but MF Global and lack of counter-party settlement systems keeps check on the system. 
3. The other fall-out of this is steeper moves - on upside and downside. It means we can make or lose money super-quick. Markets may rise 20% in a month, fall 20% in the next. We should see more talk about Vix.
4. Funds with specific low-cash rules should find it difficult. I think in general, the strict rule-based fund management should take a beating. Fund managers with broader mandate are likely to deploy the capital better. 

All in all an interesting year ahead. My best wishes to you all and I will see you next year. Merry Christmas, Happy new Year and happy holidays. Cheers

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My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

India view: Brace for flood of money

I must be sounding ridiculous but that is exactly what I expect to happen in near future. If the developed world investors are keen to retain their wealth, which they are, they will want to move to economies where conventional growth is still possible.

Conventional and unconventional growth

Conventional growth refers to well understood process of growth. In the emerging economies, we know what needs to be done. We need to build infrastructure, power plants etc. That investment will trigger efficiencies which will push EM economies on to a growth path. The history of development of the western world provides the understanding of this process and there is ample evidence as to what works and strategies for growth. This is the opportunities wealth retaining funds will eventually seek as compared to unconventional growth in developed markets.

I have argued previously that growth in developed markets will depend on two forces. The first is renewal and maintenance of infrastructure that already exists and second refers to the new kind of infrastructure and development that is essential. The new kind is uncharted territory and requires patient capital the likes we deploy in R&D. Possible candidates are Water-related infrastructure and forestation related investments. I call them Green and blue options. These investments are more of the Private equity variety than what normal funds would like.

The coming money flood in EM
The money eventually has to move to EMs before EM economies adjust their currency regimes reacting to resultant imported inflation. That implies funds will compete to reach EM shores, in all probability, creating a sharp uptick in EM equity markets.

My strategy
I am going all in as the markets decline. My focus is domestically driven revenues. It means I am avoiding Indian IT companies for strategic reasons. I find Indian consumer goods firms a bit over-valued, though I own telecom stocks as proxy for consumption story for short term. My focus is on infrastructure stocks (GVK, L&T) and banks. I am not very sure about Indian asset valuation story so I am staying away from real estate (except for occasional  short term high risk investments in Unitech which appears to be below its liquidation value). I expect the sector to start turning around when housing deals start happening on ground. I believe that should take 3-5 years at least. However, I do like Indian Hotels which, I believe to be a well managed company with sensible management. I do expect domestic auto firms (Tata Motors, Ashok Leyland and Maruti) to become big players in the coming decades and their current valuation provides a good entry point. In all above cases I am betting on liquid names and large volume stocks only.

It is possible that I am early and will need to hang on to the strategy for a little while. Let us see how things go from here.

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My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.

2009: Images from the crystal ball!

It is that time of the year - December is here and so are the holidays. Again time to reflect on what is possibly in store for us in the next year. 2008 snapshots from crystal ball panned out pretty well. So here goes!

The monetary system

The monetary system is under terrible duress. With every central bank printing money - there is a great deal of money sloshing around. As of now it is just plugging the holes in the balance-sheets of the big-money operators. Soon this money will spread and it will create problems. However, we still cannot conclusively say if this will lead to inflation. Let me elaborate.

Inflation happens when buyers have too much money and sellers have too few products. It is often referred to as "too much money chasing too few products". 

Lets look at buyers. US, EU and to a certain extent Japan are biggest buyers. All except Japan, are in deep debt hole. Even if money were made available to these buyers, it is unlikely that they will buy. Most likely the excess money will go into debt repayments and savings. Also, I really have my doubts if the buyers will ever get that much money.

Now lets look at the amount of products available. This is a combination of assets and consumables. As a part of the past few years excesses, we have over supply of assets and substantial supply of consumables. In such a situation, it will be difficult to have inflation. 

The only way we can have inflation is if central bankers across the world collaboratively print whole stacks with gay abandon.

Demotion of US Dollar

Currently most of global wealth is held in USD. The de-leveraging has created an artificial strength for the Dollar. This is a concept a lot of analysts cannot cope with. This will cause as much confusion as "change of origin" causes in introductory trigonometry class. Devaluation of US dollar is a concept where the reference point has changed - and the analyst world will take some time to get its bearing on this. So the default argument is to turn a nelson's eye - ignore it. From the world of measuring the absolute (everything in USD terms) - we will move to world of relativity (everything relative to everything else). 

Emergence of "Wealth measurement anchor" is paramount requirement

What we need is to determine and accept a standard metric of value. Gold used to fit this scale earlier. We need to start using PPP determination as a denominator for value. So like in PPP measurement - we take a basket of goods and measure the currency's potency in terms of price of this basket. Just like Noah's ark carried sample species of all kinds, this basket must be representative across the world. On this basis we can measure wealth and arrive at a saner understanding of gain or loss of wealth. 

If all else fails - plain simple gold will do. But this will create a mega-mad rush for gold and create another scare.

Gold and Oil

If monetary environment isn't already complicated - Oil and Gold are adding to the confusion. These two commodities (and precious metal in a secondary sense) make up a set that is in demand globally. One is value retainer and other is a global necessity for economic growth. The prices of these commodities are denominated in USD. We are likely to see massive price correction in these commodities. Rather it is currency devaluation rather than commodity appreciation. So for investors whose wealth is in other currencies - it will be difficult of estimate the prices. Gold however should regain favour as value retainer and see increase in demand. Here are some links about gold price forecasts.

Corner the consumer - up the trade barriers!

There is going to be a great battle for consumers. At the moment, people are too busy looking for money to make the products. Soon people will be looking for consumers to buy these products. So saver countries (where there are lot of savers) will be expected to consume more to benefit producer countries. But this needs exchange rate management e.g.- China is looking to devalue its currency more than US. So we will see a lot of political hardball on exchange rates and tariff and non-tariff barriers. 

Potential for a global war!

While no-one else believes this and to some extent this often gets me ridicule, I believe a global war probabilities have increased significantly. These are not wars triggered by Mumbai attacks or some terrorist strikes. These are old-school wars based on conflict between creditors and debtors. Lord please give us saner politicians for 2009 and beyond.

Pay scales and organisation structures

Pay scales and organisation structures are going to see drastic changes. Firstly the pay-spread (difference in Cost-to-company salaries between CEO and lowest rung employee) will narrow. This is primarily because current financial crisis has put a focus on top management pay scales.

Further, the current recession will increase the need for special talent in corporations. These people will operate outside the organisations as consultants or temporaries. They will work on project basis and move to next companies. Mostly these people will work on organisation structure, costs and other non-intellectual property issues. Core intellectual property work will require in-house employees in classical organisations.

The main area of disruption will be the organisation structure itself. The structure will go through a radical change in the coming years and some sort of prototype should emerge in 2009. The difference between inventors, technicians, implementors and enablers will become more marked. For more details leave a comment for an e-book I co-authored with Anne McCrossan. 

This means that Private equity and consulting industries will go through a tremendous change. There is going to be a new wave of management jargon and it will be much more difficult to separate the wheat from the chaff. I suggest you look at Seth Godin as a new management guru (I know he writes about marketing - but look at Tribes - thats a management book).

In sum

We are looking at an exciting year ahead to say the least. We are looking at a new year where terrorists will have higher leverage (due to financial vulnerabilities), a possible war scenario and new financial and economic system. Lets hope we have the leaders to understand and guide us through this sensibly. So happy new year to all and make sure you savour every second of the celebrations! May peace be with us!