{"id":1103,"date":"2020-06-11T18:49:00","date_gmt":"2020-06-11T18:49:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1103"},"modified":"2020-06-11T18:49:00","modified_gmt":"2020-06-11T18:49:00","slug":"whether-current-stock-market-rally-is-fundamental-or-liquidity-driven","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1103","title":{"rendered":"Whether current Stock Market rally is fundamental or Liquidity driven?"},"content":{"rendered":"
\n<\/p>\n
\nIn past few days, got many messages that current stock market rally is
\nliquidity driven…so much noise. I see many analysts crying
\n“liquidity” and claiming that a big market crash is coming. But every asset rise is always about liquidity first. Further,
\nCan anybody say that stock market fundamentals are destroyed forever (say for
\n5-10 years)? No, not at all!! Liquidity is definitely there, but it could go
\nto other asset class also. But it has come to stocks because investors know
\nthat they are cheaper as compared to their fundamentals. These talks of
\nliquidity driven market rally may be coming from those who have missed the
\ncurrent rally and now they are trying to prove that “grapes are
\nsour”. <\/span><\/div>\n
\n<\/div>\n
\nFirst of all, now the understanding of covid crisis is vastly
\nimproved and now we know that it is not that deadly except for old and
\nvulnerable people and if you ask me this is very important. Market
\n“fundamentals” were hit badly in March because nobody was sure about
\nthe covid crisis and how we would tackle this. So now, as our understanding is
\nbetter hence “fundamentals” have been restored to some extent and
\nthat’s the reason money has come to stocks otherwise the same would have gone
\nto bonds or gold. Nobody wants to touch corporate bonds now and fall in Gold
\nprice itself means that money is flowing to riskier asset as investor are
\nhoping for early economic revival as lock downs are gradually being lifted.<\/span><\/div>\n
\n<\/div>\n
\nToday, US markets are hit badly but they are already recovered
\nvery fast from the covid lows of Feb-march while we are still way down from the
\nFeb top. Also, in US they have distributed free cash of some $ 600 per week and
\nthis will keep the things and economy in control although job data may be weak.
\nFed is ensuring the liquidity by buying bonds. They are buying corporate bonds,
\nincluding the riskiest investment-grade debt, for the first time in its
\nhistory. Here, let me clear one thing. Many people say that this bond buying by
\nFed creates excess money supply. But it is not, it is just supplying or
\ncreating liquidity in \u201cexchange\u201d of an already existing asset (bond). Because
\ndue to covid, people are not willing to buy Bonds etc. so this may create big
\nproblems for the bond owners who may need money for crisis situation or for
\nbusiness purposes. So Fed is coming forward to manage this temporary gap in
\nliquidity and Fed is buying real assets for money supplied. Fed will sell these
\nbonds in the future when things will return to normal and it will sell these
\nbonds back to market and will take out this temporary liquidity.<\/span><\/div>\n
\n<\/div>\n
\nSimilar steps I was also expecting either from RBI (direct Corp Bond purchase) or from our
\nGovernment because Banks were not lending money as they were not ready to take
\nrisk in spite of big liquidity infused by RBI in banks. Hence, in order to create
\nliquidity our Government has done a great job by announcing full loan guarantee
\nscheme as this will push banks to lend to NBFC\u2019s etc. Due to this scheme, banks
\ndo not have to make any provision for the loans in case they become NPA.<\/span><\/div>\n
\n<\/div>\n
\nAlso, the current demand slump is not due to structural deterioration
\nof the economy. The current demand slump is due to the imposed\/forced lockdown and
\ndemand for jobs will be back when they are re-opened. The images we are
\nseeing now are that farmers in Punjab are doing everything on
\ntheir own in their farms in the absence of laborers and in fact they are
\narranging transport etc. for the laborers to return back. So this is not a
\nrecession. I have pointed out in many blog posts that recession is much
\nmore fundamental than fall in GDP rates alone. Recession is about significant
\nmisallocation of productive resources whose course correction is not possible
\nin the short term and this will destroy the misallocated resources and so the
\njobs. So in a recession, an economy has to go through the labor pain to reverse
\nthe misallocation of resources. Same is not the case now.<\/span><\/div>\n
\n<\/div>\n
\nBut I was always worried about our migrant situation and this
\nmay still turn very bad. So this is the biggest risk for India and this may
\nalso hit jobs. But as we know interpretations are very easy in hindsight. When
\nlaborers started migrating in March then at that time there was very little
\nclarity about the covid crisis and how it will hit the humanity and how hard
\nwill be the hit. So everyone has taken the decision keeping the worst in his
\nmind. So laborers were allowed to move by their employers as they were also not
\nsure about the situation and so were the laborers. So now the real challenge is
\nto normalize this unexpected damage. In India, covid cases are rising fast but
\nstill recovery rate is almost 50% and tests have also gone up…death rate is
\nstill manageable. So i hope we will be in much better position by the end of
\nthis month. For stock market, i think we may see a mild correction now not
\na traumatic bear phase again. Let\u2019s hope for the best.<\/span><\/div>\n
\n<\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

In past few days, got many messages that current stock market rally is liquidity driven…so much noise. I see many analysts crying “liquidity” and claiming that a big market crash is coming. But every asset rise is always about liquidity first. Further, Can anybody say that stock market fundamentals are destroyed forever (say for 5-10 years)? No, not at all!! Liquidity is definitely there, but it could go to other asset class also. But it has come to stocks because investors know that they are cheaper as compared to their fundamentals. These talks of liquidity driven market rally may be…<\/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-1103","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1103","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=1103"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1103\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1103"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1103"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1103"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}