Moneycontrol Pro Weekender | A warning from William White

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Dear Reader,

The surge in the markets has led to some soul-searching and this month’s Bank of America survey shows that cash levels with global fund managers are low, which means fuel for the rally is running out. BofA feels the market is already at ‘Full Bull’ levels and a top will occur in this quarter or early next year. We pointed out though that there are reasons emerging markets may continue to benefit.

The vaccine rally has led to a rotation into hitherto unloved value stocks. Warren Buffet, however, pulled back from banks to bet on pharma instead. The rally also slammed the brakes on the surge in gold prices, which raised the question whether Bitcoin has taken the place traditionally occupied by the precious metal. But the rally is also expected to keep the US dollar weak next year, which should be good for emerging markets.

The recovery in India continues to unfold, although, as we said in our recovery tracker, the key question is the sustainability of demand once the festive season ends. The rise in the wholesale price index too is an encouraging sign.

We continued to find stocks to bet on the recovery, stocks such as Tata Steel, with its European gambit adding to its charm; Endurance Tech on the two-wheeler recovery; Coal India which has the additional dividend yield attraction; Subros on the passenger vehicle recovery; and IRCTC, an ideal candidate for a genuine vaccine rally. A logical corollary is that banks and companies financing the recovery will benefit, which accounts for the big move up in banks. We recommended MAS Financial Services, Manappuram Finance and LIC Housing Finance.

Not that everything is hunky-dory---the week saw another bank bite the dust, with the RBI stepping in to arrange a shotgun wedding between Lakshmi Vilas Bank and DBS. We analysed what it means for the banking sector.

A note of caution is therefore called for, which we duly noted, pointing to the lack of a respite for Thermax, NBCC’s inability to execute its giant order book, ABB’s valuation pricing in the recovery and the trouble with the government’s makeover of HAM road projects.

Both our interviewees this week—Vibha Padalkar, MD & CEO of HDFC Life Insurance and Apollo Tyres MD Neeraj Kanwar—were cautiously optimistic about the recovery.

But what about the longer term?

A bigger fiscal push could do much to boost confidence. In its absence, Oxford Economics said this week, ‘We project India’s GDP per capita to be 12 percent below our pre-virus baseline even in 2025, implying the largest amount of scarring among major economies globally.’ Of course, the saving grace is that economists keep spinning such tales.

As far as stocks are concerned, according to an NBER research paper, the main reason for the big rise in asset prices in the last few decades is that the share of labour in income is coming down. In fact, we said here that one reason why operating profits did so well in the September 2020 quarter was because wage costs fell.

But are these trends sustainable?

William White, former chief economist at the Bank for International Settlements and one of the rare breed who foresaw the global financial crisis, asks the all-important question about where all this massive stimulus will take us. In an interview to themarket.ch, White said that while central banks have no way out but to keep doing what they are doing, they are only making it worse. Why worse? White said, ‘We’re on a slope where monetary policy has become increasingly ineffective in promoting real economic growth. Every crisis was met with monetary easing that caused debt and other imbalances to accumulate over time, and that caused the next crisis to be bigger than the previous one. The next crisis then needed more punch from central banks. But since interest rates were never raised as much in upturns as they were lowered in downturns, the capacity to deliver that punch was decreasing.’

He says that several false beliefs that have been gained currency since the Reagan-Thatcher days need to be changed. What are these? White lists them: ‘The idea that price stability is sufficient for economic stability? Wrong. That easy money always stimulates demand? Wrong. That the economy is self-adjusting, back to a full employment equilibrium? Wrong. That financial markets are efficient and bad things can’t happen? Wrong. That wealth will trickle down to all levels of society? Wrong.’ The crux of his warning is that unless we get rid of these myths and change our policies, disruptions and crashes, together with their attendant political ills, will become bigger and more frequent.

But there’s no need to be alarmed. Even White said this is not the time for dialling down monetary and fiscal stimulus. As Saint Augustine is reported to have said, ‘Lord, grant me chastity and continence, but not yet.’

Cheers,

Manas Chakravarty