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The View From the Moon

I wondered what the 'Man-On-The-Moon' would have say about the Sensex touching 11,000

Normally, I restrict myself from commenting on current happenings, unless I can find a matter of principle to talk about. News, defined as the-day's-goings-on, does not interest me. I have no TV at home, I don't subscribe to any of the pink papers (as a matter of principle, I feel they corrupt my young children) and of course, VSNL wants to bill me for a broadband connection they have never provided, so I finally refused to pay…hence, no Internet at home either.

Had Dhirendra not made one of those rare calls to me, I would not have known that the Sensex was near 11,000. He would not have (known) either, had it not been for the TV channels he has to appear on, regularly. The channels were all a-flap, wanting to know what he would have to say, once the Sensex tops 11,000. Unable to find anything intelligent to say, he finally called me.

I wondered what the 'Man-On-The-Moon' would have to say about it all…nothing, I thought…he would be completely non-plussed. The earth looked very much the same, except for some further fraying at the edges. All that Carbon that the Kyoto Protocol was worried about was finally beginning to show…Florida looked a bit weary from it all, I guess.

But India? That dusty, gooey mess that the world and HE had given up on, what of it?…Wasn't it finally HAPPENING?!!! Sensex 11,000 said it all…!!!!!!

The Kondratieff Cycle is the longest of the known economic cycles, about 54 years. It is not yet officially part of mainstream economics, which demands 'evidence' of multiple observations and mathematical predictability. Unfortunately, economics itself is not old enough to have had enough observations of this 'cycle', to have got some kind of mathematical equation to predict it, let alone measure the factors impacting it. So it falls in the domain of the 'quacks' (as we behavioral economists are known) to talk about it.

Since nobody knows much about this, I can speculate freely about it. Some link it to the commodity cycles, some to the long monetary cycles. I think there is some merit to the link with demographics. See the series of 'rising tops' that the American Baby Boomers made as they worked their way (like a 'rabbit-through-a-snake') through the American economy, driving its consumption and savings/investment patterns. Until the final decaying of the US economy, as the Boomer generation finally grows old, finds itself at the brink of retirement with no savings, huge debt (funded by the savings of the China/Japan Boomer generation)…the whole thing could be about 54 years, as the US economy hits a tailspin with a 2007 recession, tanking Dollar and historic highs in middle-class bankruptcy.

The business cycle is now considered to be of eight years, and is supposed to anticipate the impact of monetary management (by Central Banks). Of late, it has lengthened somewhat, as central banks learn to thwart recession through monetary expansion ("throw Dollar bills from helicopters", as the current Fed Chairman said once). They have also been known to slow down over-heated economies, as our current Prime Minister did in 1996-97; maybe the RBI is gearing up for similar action just now. Yet, the rule of thumb for a 'natural', bust-to-bust Business Cycle is eight years, with exceptions, of course.

The monetary expansion kicked off by Greenspan on 2000, shortly after the IT Bust, has taken this long to work its way through the world economic system. China, which is ahead of India in every respect, has just started to see the effects of tightening. House prices in Shanghai have recently dropped up to 30-40 per cent in some newly-built condominiums.

First, the US economy bloated with excess cash, which found its way to China/Japan. That created its own structural imbalances, with some spill-over effect on India. The high waves in the Big Sea had their ripple effects on the "little lake" called India. As this excess money sloshes over, it finds its way into India through 'export growth', the IT/ BPO Boom, followed by the FII Boom, finally accentuated by an acceleration of Indian (domestic) money into Equity, Housing and Debt markets.

Meanwhile, the US economy is already in reverse (monetary) gear, tightening from 1 per cent+ levels to 4 per cent+ now. The target is 5, maybe 6 per cent. In percentage terms, that is nearly a 500 per cent increase in interest costs, because risk spreads don't show any signs of shortening. The Indian economy is showing some initial stickiness, with banks (prodded by politicians) assuring everyone that interest rates 'will be kept under control'.

Indian rental yields are at 1 per cent in some markets, so people are buying flats at 7.5 per cent mortgage rates, then giving out these flats on rent at 1 per cent. They expect to make 6.5 per cent appreciation on house prices going to infinity…I saw similar calculations in the IT Boom 2000, in the equity markets, and we know how THAT worked out.

I don't know whether the Shanghai housing bust has any link with the spike in US interest rates. Perhaps no direct link can be established, and many 'economists' will trot out arguments suggesting that if you can't explain it, it isn't happening.

Complexity Theory, also used in climate projections, tells us that the 'fluttering of the wings of a butterfly in Louisiana can start a famine in China'. Except that it cannot explain how. Scientists are learning that 'just because you can't explain it, or draw direct cause-effect relationships with it, does not mean it is not happening'.

Economists, who deal with complex human sub-systems, need to have greater humility. We know that the Greenspan-led monetary expansion in the US was exported to Asia, with different impacts in different economies. In ageing US, it softened the impact of the asset-price bubble created by the IT Boom, and triggered a series of mini-bubbles in housing, bonds, metals, etc.

In deflation-hit and ageing Japan, it revived a devastated economy, which could not generate any domestic demand and was completely dependent on exports. In young and unemployed China, it created a Manufacturing Boom of unprecedented proportions. In younger and even-more-unemployed India, it created a nation of clerks, who are quickly learning to buy every kind of gadget/widget. Somewhere in all this, a little ticker in Jeejebhoy Towers, Mumbai, says 11,000. So?!

All I know is that all these booms followed the expansion of US consumption, led by an explosion of US debt. With tightening interest rates, there should be a slowdown. Soros even expects a 2007 recession.

Well, Chinese and now, Indian rates are tightening too. Chinese housing is bearish. Chinese manufacturing capacity is in surplus, its investment boom is cooling. So what do you think about India?

Yes, Indian demographics is good and your Kondratieff Cycle must be in place. On a relative basis, India should do better, which explains the huge (technical) flows into India. Just when is the economy going to get over-heated?

I wonder what would happen if the government were to allow the oil-price-hikes to flow through. Just when is that politically convenient? I am not a political commentator, so your guess is as good as mine. And how long after that, for interest rate hikes that 'push up interest costs by 500 per cent'?

How many companies in the Sensex have an interest cover (ie, Interest/ EBIDT) less than 5? They will be hit, both by falling operating margins and by rising interest costs.

Sanjeev Pandiya is an auto sector executive who writes, teaches (at XIM-Bhubaneswar), trades and invests. If you have some original thoughts, write to him at [email protected]