These days I get a lot of queries
\non whether the stock market is overheated and is going to have a crash. I think
\npeople are expecting a crash since Sep-2020 but we have been investing
\nregularly and never stopped. This strong journey has taken many by surprise as
\nmarket is not seemed to be in any sort of negative mood. Every fall witnesses
\nstrong buying afterwards. I see reports about the linking of USD, Bonds, Oil,
\nGold, Interest rates\/yield curve, FED policy, inflation etc. with the stock
\nmarket and all try to conclude the coming crash (sometimes jump) of the market. In this
\ncrowd of variables; one can conclude anything and these days they are
\nforecasting a crash. Many times, I ask these people what drives the base
\ninterest rate and there is no confident answer except some murmurs about
\ninflation rate but I see them shouting on the top of their voice about yield
\ncurve and coming market crash.<\/p>\n
But Stocks, Dollar, Oil, Gold,
\nBonds etc. don\u2019t derive majority of their valuations from their inter-relationships.
\nMost of the time and most of their valuation is impacted by their individual
\ndemand supply dynamics not the demand supply dynamics of other counterparts.
\nLike, most of the valuation of the Bonds is impacted by its own demand supply
\ndynamics rather than money from stock market entering bond market. Most of the
\nmoney circulating in Bond market is meant for Bond market only and same is true
\nfor the stock market. Overlapping part is very less and shifting takes place
\nmainly for short time. Like for example, the prices of Onions are settled based
\non its own supply demand dynamics. I call this price as Base price which is
\nbased on its own supply demand dynamics. Now suppose there is a big shortage of
\nTomatoes so people will shift some demand from tomatoes to onions and this will
\nraise the price of onions over and above the base price. But the individual
\nbase price of the onion will still comprise the majority of the total price and
\nfor the purpose of long term decision making (like fresh cropping) the price
\nimpact due to tomatoes is not relevant and should not be considered.<\/p>\n
Like So Once one analyst told me that So every commodity or asset class Here I remember one interesting Their main point was Earth being But I feel their model has one So technology is transformative And right now, we are witnessing After clean technologies, there So we are now at a very critical India in particular has done some So the time is to be optimistic ( Reach me at oscillationss@yahoo.in)<\/p>\n <\/span> <\/p>\n","protected":false},"excerpt":{"rendered":" These days I get a lot of queries on whether the stock market is overheated and is going to have a crash. I think people are expecting a crash since Sep-2020 but we have been investing regularly and never stopped. This strong journey has taken many by surprise as market is not seemed to be in any sort of negative mood. Every fall witnesses strong buying afterwards. I see reports about the linking of USD, Bonds, Oil, Gold, Interest rates\/yield curve, FED policy, inflation etc. with the stock market and all try to conclude the coming crash (sometimes jump) of…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1057","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1057","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1057"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1057\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1057"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1057"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1057"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nfor Interest rates, I always say that above everything, money is first a
\ncommodity…a commodity for enabling trade and exchange. Unlike other
\ncommodities like Onions money is not capable of satisfying any needs\/desires
\ndirectly by direct consumption as its primary function is to enable exchange.
\nSo in case I don\u2019t need any commodity or service in exchange of my money I
\nwould keep the spare money with me. But other people needing money for the
\nexchange of goods\/services they don\u2019t have create the demand for this spare
\nmoney available within the economy and this demand of money as debt creates a
\nprice for the money in the form of interest rates. In case there is no demand
\nfor money as debt then we would in fact be required to pay some charges for
\nkeeping the money safe in banks etc. (regardless of whether inflation rate is
\nhigh or low). So Interest rate is not the “cost of money” as is always said but a
\n\u201cprice\u201d which is a function of demand supply dynamics of money. So just like an onion, every asset has its own very individual base price upon which further layer (or layers) of price comes due to overlapping part (temporary shifting of money from one asset class to another).<\/span><\/p>\n
\nmost important factor for interest rate is demand supply dynamics of money
\nitself. Inflation is not the primary motivation behind interest rate. Inflation
\ndoes impact the interest rate but it is not responsible for the establishment
\nof base interest rate. Inflation can impact the portion of interest rate over and
\nabove the base rate. In my view, base rate is a function of opportunity cost of
\nthe money but base rate just takes the clue for the “Price” from the opportunity cost. Opportunity cost is not the reason for the emergence of the price (int rate) because price emerges due to its own demand supply dynamics. So Gold or real estate can play that role (opportunity cost). Somehow <\/span>I feel that the corporate earnings and stock market returns are more relevant opportunity cost for interest rates for a fairly stable and strong economy. <\/span>But inflation is not the opportunity cost of the money. There may be
\na situation where inflation is high but there may not be much demand for money
\nfrom businesses or individuals as they mayn\u2019t want to take risks for new
\ninvestments etc. Hence even with higher inflation the rate of interest will
\nstill be low. Just consider the current issue of short supply of semiconductors
\nwhich has raised the prices of cars worldwide (second hand cars also). So is it
\npossible to reduce the resultant inflation by rising rate of interest? No, not
\nat all. In fact, I think the solution is quite the opposite- Governments need
\nto give low interest loans to corporates to build new capacities for
\nsemiconductor manufacturing. So in real life, economics principles are very
\ndifferent.<\/span> <\/p>\n
\nmarket would fall as interest rate was rising (money would shift from stocks to
\nbonds). But I asked him why Interest rate was rising at first. Interest rate
\nrise is not some isolated individual act of God like heavy rain which can cause
\nfloods and loss of crop. But the rise is a reaction to a number of events.
\nInterest rate may rise- Due to rising demand for loans by corporates as they
\nare investing big or due to risk of loan defaults by most of the corporates due
\nto economy shuffle or earlier mis-allocation of credit (like happened in India
\nin Infrastructure few years back). Stocks will fall in the later situation
\nwhile in the former more money will come both to stock as well as Bond market.
\nThis more money will either come from other assets class or new money will be
\ncreated by banks.<\/p>\n
\nhas its own demand supply dynamics. Similarly, stock market also has its own
\ndemand supply dynamics and it is the earnings growth\/future earnings growth
\n(GDP growth) potential that drives the demand (base) for equities. And the
\nissue is- how growth happens? And the bigger issue is that current GDP
\ncalculations are not more than a crude proxy for the real growth. Growth is much
\nmore comprehensive and multi-dimensional and much bigger phenomenon than
\nsummation of total income produced in a given period (GDP).<\/p>\n
\nbook \u201cThe Limits to Growth\u201d which was published in 1972 by a group of thinkers
\ncalled \u201cThe club of Rome\u201d. The book was an attempt to forecast the outcome of
\nmassive scale consumption of earth\u2019s resources by humanity and the capacity of
\nEarth to withstand such consumption as our Earth is a \u201cFinite sphere\u201d with a
\nlimited supply of resources like minerals. The club worked out a model based on
\nfive basic variables affecting the resources of Mother Earth industrialization,
\npopulation, food, use of resources, and pollution. They modeled data up to
\n1970, and then developed a range of scenarios out to 2100, depending on whether
\nhumanity could took serious action on environmental and resource issues. If
\nthat didn\u2019t happen, the model predicted \u201covershoot and collapse\u201d \u2013 in the
\neconomy, environment and population \u2013 before 2070.<\/p>\n
\nFinite has limited capacity to provide resources for the huge growing
\npopulation. Hence our quest for unlimited growth by over-production and
\nover-consumption of resources will eventually lead to a crash. But we never grow
\nonly by over-consumption and it is the emergence of new innovative technologies
\nwhich bring more growth. As we can see much of our growth in the last century
\nwas mainly related to \u201cInvention of New and Substitute technologies\u201d like the
\ninvention of Aircrafts and transportation technology which made possible the
\nexchange of goods\/services across the globe, telephone and then Mobile phones,
\nComputers and then softwares. Their model was not well accepted as Population,
\ncapital and pollution all grew exponentially in all their models, but
\ntechnologies for expanding resources and controlling pollution were permitted
\nto grow very marginally. <\/p>\n
\nvery valid hidden (implied) statement- that unless we create and discover newer, innovative,
\nclean and efficient technologies we can\u2019t afford to grow by consuming the
\nfinite resources of the earth as one day they will be obsolete. And good thing
\nabout technology is that they have INFINITE possibilities and potentials.
\nTechnology does not create linear growth opportunities but even a small
\ninnovation can bring massive growth and revolutionize the existence of entire
\nhumanity. Here, I remember one such small innovation-Elevator. It was a very
\nsmall technological breakthrough but just imagine the world without it. Real
\nestate sector\u2019s massive growth has been possible only because of elevators so
\nas of mining sector. Elevators have made it possible to construct massive
\nvertical buildings resulting in the most efficient use of available land. Just
\nimagine the cost of land and houses in the absence of elevators as we could
\nhave only made 3-4 storey buildings not 50 storey now.<\/span><\/p>\n
\nbeyond imagination. Technological innovations can create new products\/services
\nclasses, can result in more efficient use of existing resources, and can create
\nnew resources. Another massive but less talk about transformative impact is on
\nthe even distribution of income and resources. This distribution pattern of
\nproduction and wealth is the biggest limitation of our current GDP calculation
\nmeasures as they don\u2019t (can\u2019t) take into account the decline in the \u201cvalue\u201d of
\nmarginal production when it flows only to a few people (unequal distribution of
\nincome). Right now, we are at that stage of our evolution that only technology
\ncan create next leg of growth and save the humanity from pollution and
\ndestruction. I find it funny to see words like \u201csustainable growth\u201d because
\nunsustainable growth is not growth but short term exploitation of resources and
\nwe count this short term exploitation of resources as production (extracting
\ncoal is production but the resultant destruction of forests and water resources
\nis not \u201cdeducted\u201d from the value of production) is the biggest mistake ever
\ncommitted by humanity (of course after Religion). I call this like having a
\n\u201cProfit & loss account without a Balance sheet\u201d.<\/p>\n
\na period of major technical innovations which will result in the next long leg
\nof growth and luckily it appears that this time the growth will also extend and
\nsave the humanity and this earth also. This growth is going to be led by clean
\ntechnologies in the form of solar, wind and Hydrogen power. These are going to
\ntransform the current energy dynamics across the globe and will also solve the
\nexistential threat in the form of pollution. These clean technologies will
\nresult in the even distribution of resources (energy) because wind and solar
\nare evenly distributed among nations as compared to oil which is concentrated
\nonly to a few countries which has made many countries poor as they are
\ndependent upon costly imports for their energy needs. But this clean energy is
\nmore democratic and this will change the distribution of wealth also. Just
\nimagine the scale of income generation in India if our energy needs are
\nsatisfied in house from wind\/solar\/hydrogen rather than costly imports. It also
\nmeans that India can\u2019t afford to lag behind in this race of clean technologies
\nand we need to up the ante for developing these in house.<\/p>\n
\nis a massive growth in communication technologies in the form of 4G\/5G and
\nspace tech and these new age communication tech is going to create the next industrial
\nrevolution. 5G is going to reduce the latency to just 2 milliseconds which
\nmeans that networks will almost be latency free and information will be
\nexchanged between devices in real time. New age communication technologies will
\nresult in the growth of IOT, factory automation, autonomous vehicles, augmented
\nreality, remote healthcare etc. New age communication technologies, automation
\nand AI are also going to bring next revolution in agriculture which is hampered
\nby the negative impacts of 3rd<\/sup> agriculture revolution in the form of
\nchemical fertilizers. Then we have genetic engineering revolution which is
\ndeveloping higher yielding and disease-resistant crops. Similarly Genomics and
\nGenetic engineering is going to transform our healthcare. <\/p>\n
\njuncture in the journey of humanity and earth and our actions are going to be
\ncritical. Good thing is- Humanity is looking good for most of the part\u2026people
\nare surprisingly more aware and conscious about everything which is negative
\nand inflicting damage. World has taken a good start in the form of huge growth
\nin clean technologies and this is going to be the norm for the coming decade. So
\nwe are going to witness a period of growth which has the capability to bring
\ncomprehensive prosperity across the globe and it appears that market is aware
\nof this high growth phase and this is why we are seeing continuous rise in the
\nstock market and looks like it is not going to witness any major correction. <\/p>\n
\nmajor policy reforms which are going to result in high growth in manufacturing
\nin India which was the major pain point for India. Agriculture as of now is not
\ncapable of transforming India into another leg of high growth as it is hampered
\nby political, technological, economics (small size) and supply chain issues.
\nBut this Void is also an opportunity and recent start of policy reforms is a
\ngood step. India\u2019s focus on policy support in the form of PLI schemes and Make
\nin India for local manufacturing of electronics goods, medical devices and
\nchemicals is going to result in high growth in GDP even at the same consumption
\nlevels because the money will be spent in india not on imports. This will also
\ncreate demand for new investments and incremental job growth. The focus on
\ngrowing Ethanol production is also going to create the same impact of high
\ngrowth in GDP even at the same consumption levels also raising the income
\nlevels of farmers which is the long targeted objective of the Government but
\nwhich has taken a quite a bit of time (of course due to politics).<\/p>\n
\nabout the growth potential and India is also in a very sweet spot. Clean energy
\ntechnologies and new age communications technologies are going to lead the next
\nleg of growth.<\/p>\n