September 14, 2009
- The first is that using liquidity injection and credit expansion as the principal instrument to combat a downturn or recession amounts to creating a new bubble to replace the one that went bust. This is an error which is being made the world over, where the so-called stimulus involves injecting liquidity and cheap credit into the system rather than public spending to revive demand and alleviate distress.
- The second is that so long as the rate of inflation in the prices of goods is in the comfort zone, central bankers stick to an easy money policy even if the evidence indicates that such policy is leading to unsustainable asset price inflation. It was this practice that led to the financial collapse triggered by the sub-prime mortgage crisis in the US.
- Third, that governments in emerging markets like India have not learnt the lesson that when a global expansion in liquidity leads to a capital inflow surge into the country it does more harm than good, warranting controls on the excessive inflow of such capital.
Rather, goaded by financial interests and an interested media, the government treats the boom as a sign of economic good health rather than a sign of morbidity, and plans to liberalise capital controls even more. In the event, we seem to have engineered another speculative surge. The crisis, clearly, has not taught most policy makers any lessons.
Well laid-out analysis presentation. In your analysis this surge is not at all based on fundamentals but through the liquidity injection the world over. You have not mentioned when this bubble could burst e.g. current PE all the way to 25? What would be the criteria, either local event or global event, for this bubble to burst/party to be over?
Posted on: Sep 14, 2009 at 13:25 IST
If there is a bubble in the stock market and it bursts, it will be the speculators and the greedy common investors who will suffer. But while the bubble is being created by foreign investors everyone suffers because too much money gets pumped into the country's monetary system creating inflationary pressures which drive prices through the roof. The government and the opinion makers worry only about a burst but remain unconcerned when the bubble is being created. Bubble or no bubble, a stock market boom is always considered a feather in the cap of the government.
Posted on: Sep 15, 2009 at 01:30 IST
The article has covered most of the facts about the current happenings. But it did not consider a simple fact that Indian equity markets did not crash on their own. We never reduced our stock values because of internal reasons. If it had taken that into the analysis then the whole dimension of this analysis would have been changed. And yes there can be a crash if the PE moves over and above 25 in short term but we may consolidate and our companies will maintain their PE at around 21-23.
Posted on: Sep 15, 2009 at 14:06 IST
The government should keep a close watch on the FIIs who are taking stock markets to dizzying heights and then booking profits, leaving small investors with deep wounds to lick for a long time. By no account the rising stock prices can be taken as an indicator of prosperity of the economy. It may, sure it will, cause more harm than good to the economy. Any government which takes the rising stock market indices as signs of economic growth is bound to witness the people being pushed to the ills of inflation.
Posted on: Sep 15, 2009 at 16:58 IST
The stock market level cant be considered as an indicator of improvement in economy.because agricultural sector is in trouble and it has large share ateleast in indian economy on which FIIs are betting on.
Posted on: Sep 16, 2009 at 10:10 IST
Many companies cleaned up their balance sheets in the last year. This should lead to much higher earnings in the next two years. I feel that is also factored in the current bull run of sensex.
Posted on: Sep 16, 2009 at 19:24 IST
As Deepan pointed out the question of whether the current upward spiral is a bubble or simply a correction depends on how you see the original crash -as a panic reaction not justified by fundamentals or a bubble that went bust. Common sense tell us that the inflated property values, inflated stock markets and a world awash in cash were not normal by any sense of the term, so the earlier crash was a bubble-burst. Part of it could have been a panic effect but most of it was bubble. Which brings us to the current surge, which is yet another bubble this time financed not by greedy investors but by equally greedy govts keen on showing they have slayed the recession dragon.
Whenever there is a recovery in the Indian economy, foreign investors always played this game. They invest in bulk unless the shock market reaches an unbelievable peak, and then they suddenly withdraw. It is the poor investor whose hard earned money is put in the stock market not in billions or millions but in thousands, most often, their life-time savings. Yes, the government should keep a track of FIIs.
Posted on: Sep 17, 2009 at 15:45 IST
A very informative piece indeed. I do agree with the point of impending bubble burst the author has made. We, Indians, in general, have a propensity to get excited with the outside results and seldom ponder over the process that goes into manifesting itself in the way it does. We should focus more on the intricacies of the matter and not just have a superficial perspective on things of such critical importance.
Posted on: Sep 18, 2009 at 21:25 IST
Everybody who watch NDTV Profit would have seen erstwhile Finance Minister saying that " FII money is hot money " But, why he or his successor have not taken any steps to curb its volatile inlows and outflows is a mystery. It is the Indian retail investor who is left to hold the baby after each bubble burst. They lose much more money in the subsequent fall than what they made in the preceding rally
Posted on: Sep 18, 2009 at 21:51 IST
It is good to be proactive! I am a novice and this article makes a good reading.
Posted on: Sep 21, 2009 at 09:38 IST
A very good article about the dynamics of our stock exchange.I am only watching this daily as I have put most of my retirement funds into various Mutual funds.
By the way, is the peak date mentioned not Jan 13 2008 instead of September 2008?
Posted on: Sep 22, 2009 at 17:44 IST
The stock market improvement in India can be considered a short-term swing. The FII investors seem to divert their funds to India since the direction of U.S market is not yet fully known. Till the U.S market recovers, India or BRIC countries for that matter would be considered a safe-haven for the FII's.
Posted on: Oct 5, 2009 at 06:56 IST
You mention the bubble to burst, but I think this process, would take at least 3-4 years, and till then FII's will change their direction of investment to other markets, because by that time recession would have gone. So the bubble which keeps expanding will start contracting. Inflation problem will not occur. The stimulus packages given by the central banks are intended only for a short period. So as our banks stop those packages, the liquidity problem might also get solved.
Posted on: Oct 8, 2009 at 11:41 IST
The virtual economy of which the Stock Markets are an index impacts only a small fraction of India's population. Stock market bubbles worry only the privileged few. What really matters is the real economy and stimulus spending is needed to keep up infrastructure development at a pace that prevents economic depression and loss of human resources. Krugman has pointed out that unthinking withdrawal of stimulus was precisely what led to the Great Depression of the 1930s. The Government must be wary of this possibility notwithstanding the sorrow that it might bring to some of the speculators on the bourses hoping to double their capital overnight.
Posted on: Oct 24, 2009 at 10:58 IST
Germany warns US on market bubbles
By Ralph Atkins in Frankfurt
Published: November 20 2009 19:48 | Last updated: November 20 2009 19:48
Germany’s new finance minister has echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar.
Wolfgang Schäuble’s comments highlight official concern in Europe that the risk of further financial market turbulence has been exacerbated by the exceptional steps taken by central banks and governments to combat the crisis.