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Here is a thought experiment. Take a statement or a popular quote that you have heard before, something famous or made famous after someone famous said it. Then turn it into a question and find the answer. Here is one for starters. Why does money make the world go around?
One answer we thought of was this: Because money cannot sit still at one place, or it would lose its value. Think about it, what is inflation? Too much money chasing too few goods. That means money is travelling, from one wallet to another and it increases its own value through that journey. That increased value is ascribed to the goods or services it is used to exchange for.
There is something happening with money in the initial public offer of shares in India today. Too much money is traveling too fast into IPOs from the wallets of investors which is ascribing excessive value to a company perhaps not worthy of it. Small and medium enterprises' IPOs are particularly notorious for sticking inflated value to their firms. Instances of artificially inflating balance sheet metrics and therefore the value of the firm by investment bankers has come to light. Simply put, they are lying about money’s travel speed, making it look more valuable. The result? An inflated value to a fundamentally dodgy business which eventually results in the share price trading below its issue price for a long time.
If money is the traveller, consider regulators as the embassies that facilitate smooth travel across places. They also make money slow down when it travels too fast, inflating its value more than intended or safe. Central banks also make money go fast (like the People’s Bank of China did this week) so that it travels faster, increasing value.
The capital markets regulator Securities and Exchange Board of India (SEBI) is on a warpath to bring some discipline into the chaotic IPO world. SEBI has even found that bankers to the IPOs are doing side deals to inflate the value artificially. As Ananya Roy explains in her column here, IPOs are not intended for making a quick buck but more towards identifying sound businesses to invest in for a longer term. Slow down that money pouring into IPOs!
As such, India’s equity indices are reaching for the stars in value for more than a year now. Record highs have been broken every other day to reach another high. Too much money is chasing stocks, and a lot of it is coming from across borders, too. Everyone is worried about the rise of the stock market (including the finance minister), but the best pin to prick this balloon is the regulator. SEBI’s warnings on risks and the fact that almost everyone makes trading losses in derivatives should make us investors take a step back. Slow that money pipe into stocks.
If too much money is chasing stocks, there is less money coming into bank deposits. Deposit growth is still lower than credit growth for India’s lenders which is making them chase money elsewhere – the bond market. Our Chart of the Day details an emerging trend of issuance of infrastructure bonds by banks to raise money. This chase is a good one because these bonds have tenures that match the loan duration, making it easier for banks to avoid asset-liability mismatches. Or else, they would again need to chase money in future. After all, banks are instrumental in increasing the speed of money and therefore, its value. They need money to turn it into a loan and hand it out to others.
Besides stocks, money is chasing gold for a very long time now. International gold prices have surged to record highs and on September 26, Shishir Asthana listed the five big reasons why money loves gold today. The simple answer: everybody is buying gold. A lot has to do with the fact that gold itself is money, so it never loses value. For worried investors who believe that the value of some assets (like equities or bonds) is inflated beyond the safety zone, gold offers a good balance. Gold can also spell trouble as Dinesh Unnikrishnan writes here. The jump in gold prices is prompting Indians to borrow more through gold loans as banks can give bigger sized loans with the value of the collateral having increased.
Sometimes it is prudent to make money chase the right goods and for that, we need incentives provided by the central bank through a policy rate cut or by the government through tax breaks or cuts. Is it wise to chase goods that are already at their record high value? Or is it better to look for places that may need money but have been ignored? Money needs a hand in going in the right direction and sometimes a push or pull to make it change its pace. However, since money can be stubborn, it isn’t easy for policymakers to regulate it. As investors, what should we do?
“One area this impacts people is with money, where more damage is caused not by dumb financial plans but by reasonable ones that just aren’t right for you,” says noted investor Morgan Housel, the author of Psychology of Money, in his latest blogpost. The best strategy is to Do it Your Way. We began with the question of what is money chasing today and we leave you with a question: Is your money chasing the right thing today?
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Aparna Iyer
Moneycontrol Pro
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