On the global sell off

In 2008 we had world wide competitive devaluation by lowering of interest rates.

By 2011, India, China, Brazil, Greece, Spain and Italy have been forced to hike their rates - either because of inflation (BRIC countries) or because of poor economic performance forcing debt default fears (southern Europe).

That leaves just Japan, USA and North Europe in the race for competitive devaluation. The only real way for a devaluation to work (in increasing local manufacturing and exports - which is what central bankers hope) is to devalue own currency in the face of other currencies maintaining or increasing value/interest rates. If everyone devalues at the same time, there is no effect - which is why QE-1 and 2 failed.

So will QE3 suceed in stimulating the US economy? Devaluation did not work in Japan for last 20 years. They finally seem to be losing their competitive advantage - look at Sony and Toyota. Augurs bad. Their per capita GDP actually seems in a decline in dollar terms in the last 20 years - and I havent even tajken dollar depreciation into account.

Currently US short term rates are actually negative (not in inflation adjusted levels, but in actuality - one bank on Wall Street is actually charging for keeping people's cash!!!!) while long term rates (10year) are at 2.5%. Even more bizarre - 30 year bonds are at 3.5%!!!! Surely this cant last?

After US jobs data came out strong, 10 year rates are heading back up, so maybe the bond market will actually decide the fate of QE-3. I think it would be foolish of the fed to go for QE-3: it wont do any better than QE2.

Only time will tell, too difficult to call the current roiled markets

To me, it seems that the fed is trying to stimulate a dead body - at great expense to those who had been prudent and had actually saved - and at taxpayer's expense. Playing with US savings in this way is really unfair and will definitely get Barack Obama defeated next year. (If US were my household budget, I would have cut loose the junk debt papers and bancrupted the useless banks.)

Ultimately, all the cash generated from stock and oil sell off has to go somewhere. Looks like Sanjana might be right and it will all head back into gold.

OR-oil might drop sufficiently and economy might respond to the adrenaline injections - and the liquidity sloshing around might head back into equity. I have a feeling this is what will happen.

In this flood of liquidity, the only easily visible high ground is gold. Not Indian equity, not BRIC, not European equity, not bonds at such ruinous rates, not indistrial commodities when economies are floundering.

Only gold is left. Or perhaps US/North Europe equities if they fall enough to look attractive.

Gold is also very dicey - at the first sign of a bond sell off, gold will collapse.

If you are a global investor, bite your nails. Not much more you can really do.

If an Indian investor, have a diversified portfolio and exclude nothing - my good old 30-30-30-10 distribution continues to feel right.

PS: I bought a lot of equities in small quantities from my buy list today. I plan to buy at every dip. With this much global turmoil, RBI is likely to pause rate hikes. India inflation is structural and due to supply constraints and govt bottle necks/poor governance. It will not respond to RBI rate hikes - which will only convert inflation into a stagflation.

RBI is fairly sensible and is likely to (finally) pause rate hikes. Given that our short term rates are like 8% and long term bond yields are like 8.5%, it would be just plain silly of RBI to keep hiking.