Posted by: Shiv Muttoo | November 26, 2009

Enjoy This Trip (once you see it coming, that is)


The term Ponzi gained prominence when the intricate US$ 65 billion web of deceit woven by Bernard Madoff was exposed a few months back. The Madoff affair was not the first such incident, nor, sadly, is it likely to be the last. Greed, in many forms and incarnations, has tended to shroud reason since times immemorial. It is human tendency to hope against hope, to blindly follow the pied piper, indeed to believe that the oasis in the distance is not a mirage. Till it is too late, that is.

In the Madoff case, window dressing the numbers became an addiction that was not unraveled till the snowball went out of control. The Satyam case bears some similarity in this respect. It was apparently deeper scrutiny from investors over a botched acquisition that prompted Satyam’s chairman Raju to own up, resulting in the proverbial shit hitting the fan.

There are several other such instances of Ponzi schemes being operated at various levels of magnitude. Here, the US 64 scam deserves special mention. What was once perceived as an ultra-safe, almost gilt-edged investment by the country’s masses came crashing down in a heap denting many lifetimes of thrift. The Government, however, chose to go easy on the perpetrators – maybe because the institution was “too big to fail”. The chit fund industry, however, went kaput a few years back, not having reached TBTF stature. Those whose savings tanked with it were not as fortunate.

But these and other such Ponzi initiatives worldwide pretty much pale in comparison to the one being pulled off by Messrs. Obama, Bernanke and associates. And, going by the fairly strong numbers thrown up by the US economy over the last few months, its working. The baton has seamlessly passed from consumer credit based liquidity to an active fiscal stimulus. The growth philosophy has transitioned from ‘looking the other way’ to ‘really pushing it’.

But beneath the hope of deliverance lie weak consumer spending and a floundering housing market. Consumers remain spooked by sagging income growth trends and growing unemployment. The real estate market remains lethargic despite the federal subsidy support and the Government’s virtual takeover of the entire mortgage market. Only corporate profitability has sustained, supported up by widespread deferment of spending and aggressive accounting initiatives. Despite these artificial props, the consensus view is that long-term growth could at best be anemic.

Meanwhile China, the other harbinger of global growth, has also pushed through its own stimulus package by flooding liquidity into the corporate market. The high command obviously believes that what has been working for America will work for China too. And, given China’s prowess at contorting everything to align with its ambitions, we should soon expect a spurt in the trajectory of growth there.

Smart money seems to have already read the writing on the wall, given the significant foreign inflows into such emerging markets as India. Foreign investors getting a larger foothold in India have allowed the markets to tide over the impact of even a floundering monsoon, till recently considered a make-or-break annual event. As the world continues to realize the futility of remaining invested in the western world, money inflows could further increase and increase significantly. India presents a great platform for global investors – stable government, fairly strong legal system, a very wide range of investment options and hardly any restrictions – and needs to sell its case of a stable 6-8% growth economy over the foreseeable future.

However, valuations in India seem to be stretching the optimism a bit. In the near term, the tide of global (including Indian) valuations could recede in tandem with any significant (and to-be-expected) reaction in the US markets, still by far the biggest gorilla amongst markets globally. And that, if it really needs to be timed, may be the most opportune time to get in with a longish term perspective. To gain from corporate earnings growth in India’s domestic sectors that is a multiplier on the country’s growth rate. For western investors, there is of course the additional advantage of locking into a more ‘finite’ currency that should gain longer-term when benchmarked against the flood of dollars sloshing around everywhere.

So, what’s the key take away from this long discourse? The writing is clearly on the wall for all to read. Buy your tickets, get in, hold tight and enjoy this trip.

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