Tuesday, 14 October 2008

Hold your money, its still not time to buy

Markets rallied today but the worst is not yet over. Tomorrow too the markets will rally on the back of good cues from the world markets. This does not in any way mean that the worst is over for the markets and we will see a one way street from tomorrow. This sucker rally will continue for two to three days until the liquid injected banks and financial institutions fritter away the money thrown at them in dabbling the stock markets. This is just patch work. The stronger solution lies in actually cutting out the bad debt and writing them off. the govt of USA will have to take over these bad loans and the so called home assets and then auction them off to the highest bidders. This would ease the crisis easily. Only the govt can do this as only they can create money.
A Student of mine has posed a question: He asks "why is the dollar appreciating when the US govt is busy printing and doling out "helicopter money"?". The answer is simple the supply of dollars is less than the demand for the dollars by those financial institutions who are selling hard in the emerging markets and taking the dollars home in search of great bargains in the ruins of the American Stock Exchanges. But the student has a point. This strengthening of the dollar is a temporary phenomenon. Wait till the chickens come to roost. The unprecedented money supply to create liquidity for worthless paper will boomerang into too much money supply and plunge the dollar to its correct PPP value. (One square meal in India costs $2 in a decent place in the countryside. How much does it cost in the US?)
As far as India is concerned we have a curious 12% inflation meaning a lot of money chasing few goods and the finance minister wanting to ease liquidity situation??? another paradox right? How can there be high inflation and low liquidity? My teachers taught me that high liquidity leads to inflation and to control inflation we either need to control liquidity or increase supply of goods.
So, in conclusion, wait till the wind blows over, This is a speculators world people only want to make a quick buck, nobody is interested in the long term well being of the country. US and India are in the election year the election has to get over, only the new govt will take medium term if not long term measures to stabilise the economy.

1 comment:

Anonymous said...

Hey Prof. Garag,
interesting ideas! nice to read your blog.