Starting today, I am adding another vertical to my blog. In this vertical I will be talking about economies and markets – what is happening today, what is coming next and India.
What is happening?
The economies worldwide are facing inflation because of increased(sky-rocketed) prices of the raw materials and supply-chain issues.
While supply-chain issues which arisen during covid-19 lockdown have subsided to an extent but some industries are still facing the issue where supply-chain is so optimised that a delay in a part supply can pile up for weeks/months. If that wasn’t enough Russia started a war on Ukraine, post which west imposed various sanctions on Russia and its oligarchs which led to increase in prices of metals, oil and other raw materials.
On one hand, the importers of the world(west) are very worried about the inflation and federal/central banks are ready to increase the internal bank rates. In that anticipation stock market fell in late January and early February.
And on the other hand, smaller countries are going through economic and political turbulence, especially the ones which have high debt and are net importers. Sri Lanka, Peru and Pakistan saw worse situation unfold last week.
Even after all this stock markets are rallying up. Why? Too much money.
- Financial numbers of businesses are good despite all the inflation because every cost is being passed on to consumer, but high cost and same margin leads to high profit.
- Institutions and individuals made lot of money post 1st covid lockdown rally. And while foreign investors are moving their money to their country, locals are buying because point 1.
From investment POV, point 2 makes sense. But it is a short term story.
What is coming next?
Inflation, inventory and spending are the indicators of what is coming next.
- Inflation has been persisting as it is waiting on increase in interest rates and perhaps may be taxes. Energy, oil and gas prices have increased and with that everything we consume.
- Inventories are piling up. People are buying less because they already bought what they could during 1st covid lockdown, especially the middle and upper middle class segment. Call it over purchased.
- Spending, it has also changed. In US, people are spending less on everything. In India, spending has moved to rural and majority is being spent on basics because of inflation.
What’s next is that we should see more loans to smaller countries to save them from bankruptcy. Internal bank rates to be increased and with that loan/bond rates too. Taxes on some of the goods will also increase because governments are not cutting on their spending and they are also in huge debt.
But the real question is will this be enough? Answer is no. Here is what I believe will happen in next 6-9 months or 2-3 quarters:
- Companies will start to take the brunt of increased inflation and will absorb some of the cost using their cash reserves. Without that they will lose their market, people will switch to lower cost alternative.
- Companies will show negative growth for at least next 2-3 quarters and when almost every company will show that on their books, stocks will go down slowly at first and then suddenly as more and more companies publish their reports.
This should achieve different things in economy and market. In economy, inflation should come down. In market, stock prices fall. But people still have too much money, my take is by the time people will realise they would have invested majority of their cash in this quarter, April-June, after seeing better business numbers.
Crash of stocks in January was not in line with what was happening in the world but more because of the anticipation(fed rate hike) and then shock(war). Both of which were short lived with cash in hand.
In all this, keep a watch on government’s spending. They should pay back some of their debt with this incoming money. Else we will be in much graver situation.
Situation in India is no different from other economies. But a question we should ask are we on the brink of recession? No, but we are on the brink of stagflation(stagnancy + inflation) which will eat into people’s savings quickly. I believe people will not be able to handle any more increase in taxes and energy and commodity prices.
Stagflation can be easily monitored using government’s GST collection given that no tax changes have been done. And if stagflation stays for a quarter or two, India will go into recession. We should see everything play out in next 6-9 months as I have mentioned earlier.
Update 13th April 2022
Fresh numbers are in for inflation. This marks 3rd consecutive quarter with 6%+ CPI rate. Mind you we do not know how it is being calculated as it’s not transparent but it doesn’t meet daily life inflation. Even if we calculate the average from the items in the tweet, which matters to people, it stands at 11.93%. Rs. 100 last year in March is now worth Rs. 89.07 only.