Mayhem in the Market

Mayhem in the Market

By

Col (Retd) Bhaskar Sarkar VSM

Markets around the world have been jumping up and down, mostly down, since February 2, 2018. The reason for the slide in the Indian Markets could be due to the Indian budget. But what about the markets around the world? I see almost every English Channel around the world every day. I have seen no major upheaval anywhere. It is true that markets have been rising every day for years. At best a correction is due and desirable. At the worst, the bubble is beginning to burst and a collapse is around the corner.

Most analysts will have us believe that the downswing is just a normal correction. There is nothing to worry about market stability. The fundamentals are excellent. Just buy at the dips at the dips is what they advise.

The pessimists like me are not so sure. I believe that if there is smoke, there must be a fire somewhere. What could trigger a collapse of the market like in 2007/08?

Possible Reasons

Collapse of the UD dollar could be one reason for collapse. One of my friends had warned me about this about 3 months back. In my opinion the US dollar is overvalued. The US is the world’s biggest debtor with a debt of over $20 trillion. It printed the Greenback on as required basis since 2000. It has a large trade deficit and astronomical defence expenditure. The Quantitative Easing (QE) at $90 billion per month for about 8 years has created a huge liquidity in the market which has been pushing up share prices as unlimited money supply chases limited number of shares. The US dollar remains strong because most major economies of the world want it to remain high so that their products remain cheap and competitive on the US market. However, as the US tries to restrict imports from China, Japan, Korea, EU and Mexico by imposing import duties, the incentive to keep the dollar strong may be reducing. As China seeks to enhance its super power status, it would like to project the Chinese Yuan as the most stable currency. So it could decide to destabilize the dollar by selling some of its huge holdings of US bonds. Chinese rating agencies do not rate the US dollar very high. US do not have reserves to defend the dollar.

Stock valuations

I read somewhere that the price of a stock should be around 15 to 20 times the earning per share. Today, prices of most shares are above 30 times the earning per share. Thus a major correction becomes a distinct possibility.

War

There are many conflict zones in the world like North Korea, South China Sea, Iran, Syria, and Afghanistan. There is a possibility of a clash between the US and Turkey as Turkey tries to pushback the Kurds from its borders. There is also the possibility of a clash between Israel and Hezbollah over Israeli missile attacks on Hezbollah and Iranian bases in Syria. But these would not destabilize the world. Threat of war is least likely to be spooking the markets.

US Politics

US politics has turned ugly since Trump won the Presidency. There seems to be pathological hatred between the Republicans and the Democrats which is not good for the US and the world. Winning and losing elections is a part of democracy and the will of the people should be accepted gracefully. Unfortunately, that is not happening. Democrats want to discredit Trump. In his State of the Union speech, Trump claimed credit for the rise is US markets over the last year. Some Democrat moneybags may be trying to crash the market to discredit Trump. Republican moneybags could be trying to stabilize the market and hence the rebound. This could be the reason for the recent volatility.

LCGT

The 10% tax proposed on Long Term Capital gains could have spooked the Indian stock market. Most Indians hate paying tax and will go to any length to avoid paying it. The withdrawal of tax on Long Term Capital gains has encouraged all and sundry to invest in mutual funds in the hope of tax free gains. I have never been able to understand why governments of all hues have tried to encourage speculative activity by making it tax free while making manufacturers, traders, service providers, salaried class and consultants pay tax through their noses. This not only totally unfair but diverts funds from productive activities which create employment and real wealth to speculative activity which does not create employment and generates virtual wealth which can disappear in a day. I congratulate Mr. Jaitly on introducing the tax and hope that the next budget will make tax on capital gains from shares at par with any other capital gains. This tax has no effect on the global market.

Conclusion

I am not an investor, financial advisor or fortune teller. I am an humble writer who is not being paid for this piece. So it is not even paid news. I have no idea as to how the markets will behave in the coming days. For all you know, by the time this is published, if at all, the Bulls may be charging up the mountain again. However, I am convinced that if there is danger to economic stability in the world it lies in the value of the US dollar and US politics. If you are an investor using your own money, please go ahead and do what you please. If you are playing the market with someone else’s money or borrowed money, you may like cash your holdings and wait on the sidelines for better times.

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