John Maynard Keynes warned us as far back as 1936 that “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”. Eighty-five years later and thirty-five years after Susan Strange wrote her seminal work ‘Casino Capitalism’, few people are bothered about the real economy. Instead, the way to improve the real economy, so goes the received wisdom, is through the financial one. What is good for the casino is good for the economy. At least, that is what the high priests of finance tell us.
But the masses seem to have had enough of such self-serving cant. This month, they used social media to band together to challenge the hedge funds, those lords of finance. Astonishingly, they succeeded in bruising and battering some of them.
The GameStop and associated short squeezes have been portrayed as a David versus Goliath battle, with the small investor beating the big shots at their own game. Some demented souls have compared it to the storming of the Bastille. Presumably ‘Traders of the world, unite’, would be their slogan. If these comparisons seem overblown, it’s important to realise that hype is part of the strategy, which is nothing but the time-worn one of pump and dump.
The GameStop episode tells us several things. One, such retail frenzy is usually seen at the peak of a bubble. The flash trading mob is moving faster and faster, hopping from one target to the other. The divergence between stock prices and fundamentals is being taken to extremes. And it’s not just stocks—Bitcoin, the blank cheque companies known as SPACs are all signs of these effervescent times.
It is also possible that the blow-up of hedge funds could cascade into wider across-the-board selling, which could be an opportunity, but which may also lead to panic.
But, perhaps most importantly, the episode has shone the spotlight on the casino economy, long aided and abetted by governments and central banks. What is needed to stop the frenzy is a shock, a jolt to the almost religious faith that the central banks will bail out the bulls, but the authorities are scared stiff to deliver it. Instead, Fed chair Jerome Powell told reporters this week, “there’s clearly more that we can do with asset purchases, for example. That’s a tool we can do more”. The Powell put is alive and kicking.
Back home, the jitters abroad and the proximity of the Union Budget led to a bout of selling. The open interest position of traders shows they expect the market to fall rather than rise after the Budget.
That said, the economic rebound continues, as our recovery tracker shows. The December quarter results have for the most part been upbeat. Marico saw growth across categories. Maruti recorded double-digit volume and revenue growth compared to the previous year. Gland Pharma in its first quarterly result after its IPO posted a strong set of numbers. Jindal Steel and Power’s steel EBIDTA (Earnings before interest, depreciation, taxes and amortisation) was the highest ever reported. JSW Steel’s results for the March quarter are all set to be a blockbuster. Colgate Palmolive handily beat Street expectations. Volume growth at Hindustan Unilever was ahead of the Street and a change of strategy might be just what the doctor ordered.
Among banks, Axis Bank has made provisions for COVID-related pain while Kotak Mahindra Bank’s December quarter was all about good execution, prudent provision and signs of a growth pick-up. With retail trading taking off during the pandemic, ICICI Securities’ results have obviously been excellent, with a 95 percent rise in year-on-year profits. Anant Goenka, CEAT MD, spoke to us about the pick-up in demand for tyres. Why, even Indigo posted a decent set of numbers, despite being badly hit by the pandemic.
The Economic Survey chimed in with its talk of a V-shaped recovery, while the RBI did its bit to ensure that NBFCs were put on a firmer footing.
Despite the strong recovery, a bit of support from the government is always welcome. We said this is no time for fiscal conservatism, a view echoed by Amish Shah, MD India Equity Strategist and Co-head India Research, BofA Securities, in this interview. Worried about whether high retail fuel prices could be a headwind to growth, we asked the government not to increase excise duties on fuel in the Budget. We said the government must prioritise spending in sectors with strong and quick multiplier effects such as MSMEs, affordable housing, rural economy and infrastructure.
We weighed in on the Economic Survey’s rather misguided recommendations for the health sector, its prescriptions for banking and its belief that growth is the panacea for all ills.
And finally, we pointed out the V-shaped recovery merely brings back GDP slightly higher than what it was a year ago. That may be the reason why the Prime Minister was at pains to tell us the Budget should be seen as part of the series of mini-budgets presented last year—a reference to the reform and stimulus measures announced periodically by the finance minister. If that is an attempt to manage expectations about the Budget, it may be unnecessary -- the market has fallen for the sixth consecutive session and expectations about the Budget are at a low ebb. We will know on Monday whether the finance minister beats that low bar.