June IREF POSTS

25th June 2012-06-25
The only "real" asset is human effort. US maintains its premier position because there are 300 million of them with 45000$ per annum productivity.

gold - RE - paper - bonds - shares - all are not as as real as work and productivity.

The day Indians become as productive as Americans, our currency will be backed by our work and will be strongest.

The Yen, Sterling, Swiss Kroner, Deutsch mark, Franks, Yuan - each is backed by its people. Not by gold but by productivity.

When there is recession and productivity falls - currency has to fall.

Right now, there is massive recession globally and every currency is backed by much less productivity = all currencies are weak.

Until productivity increases again, currencies are all going to be weak. You cannot hide from it in any asset class - except to have skills and earn well.

Main problem in developed world is that productivity levels have remained static at 45000 levels for over a decade. Every time one person has become more productive, two more have fallen in productivity or others in other countries are doing the same work for less. So productivity per capita in developed countries remains same while production is shifting around in the globe.

This is inevitable and will remain so until the playing field is even.

India and China will continue to benefit from this multi decade phenomenon and so will shrug off the depression and get back to growth path after a year or two to adjust to new realities

21st June:

currencies are all going to be too choppy to call for a while.

Long term trend for dollar is for strength from 2012 to 2016 or so - since US cannot increase QE but can definitely raise rates - there is massive margin for raising rates (100% margins!)

So Rupee likely to stay weak and sway with inflows and outflows. As I said before - within my prediction of long term weakness in Rupee, I hadnt factored in the effect of flows - now it appears that flows are very significant - much more than I had thought earlier. 

In fact it transpires that even the 1991 devaluation was because of a sudden drying up of inflows.

Long term flow will be into India and this will lift up Rupee. So a steady state somewhere around 55 with a +/- 5 Rs due to short term effects seems to be the direction for the next 10 years. 

RBI has effectively devalued Indian currency from 45 to 55 by its actions. It seems to have been a pre-determined effort on the part of RBI. It purposely did not defend Rupee. Even today it did not defend.

HAs to be a purposeful thing. Industry and equity markets should respond within a few months to this devaluation.

because at some point the FED will have to start raising rates.
this is the crux of the problem.

A fall of the Rupee to the tune of maybe 50-60% has to happen when US starts raising rates. Fortunately this is now postposed till 2014 mid at least.

Issue is this - would the Rupee harden before weakening further - or will it keep on weakening from here?

With US keeping twist going, dollar carry trade is inevitable uptil mid 2014 at least. At some point the smart money will see that a big move into and then out of India would be highly rewarding. At that point, there will be influx of dollars into India. At that point Rupee will harden and stocks will rise. I think I see this happening within 6 months - and a jump in stocks and Rupee will happen.

Then it will be a game of chicken to see which FII pulls out the earliest to book profit and cause a stampede out of India - at which point equities and Rupee will both fall. The first one to time entry into India and the first to time exit out of India will both make a killing. 

The last to enter India will lose - the last to leave India - after the Rupee has been thrashed - will also lose.

Its a carry trade waiting to happen. Most likely, it will happen within the month - as those who were sitting on US bonds book profits after the recent bond yield collapse start looking for the next sure thing. With Europe, China and Japan being poor destinations, with commodities collapsing Brasil and Russia are also poor targets.

All we need is one round of reforms/announcements from Govt - even if they dont deliver - and the race will begin.

Most bond fund investors within India (like me) are also wrong sided by the RBI refusing to soften and will be looking to shift to another asset soon.

Not gold because already high. Not dollar because already high. Not bonds - not moving. That leaves just equity.