Overvaluation: Bulls call it Good Liquidity

Overvaluation: Bulls call it good liquidity

Having a conversation with someone who is too bullish towards the markets always interests me. Sentiments, especially in the Indian Markets, where stocks are still purchased based on stars and zodiac play a vital role. Reading the investor sentiments these days just amuses me. Gold is trading at a level where retail investors will not try venture as they think it is too late, BSE is treading at highest levels, Interest rates are being increased by the RBI to maintain equilibrium and avoid any “Bubbly” situations. Amid all this, OECD and World Bank have issued warnings that there “might” be a possible bubble emanating in East Asia. The Austerity by Sovereigns is nothing but a farce, there is nothing being done to increase the interest rates by the west, just in the name of Fiscal Stimulus. This might be a god econometric tool to uplift and economy in the interim, however, one should also foresee that are there enough opportunities or capacity to sustain this level of expenditure or is it again finally falling in the same hands and leading to further concentration of income.

I cannot but compare this situation to World War One, when US entered the war in the end and funded all the nations’ viz. England, Germany, etc. While being heavy indebted, England was forced to reduce their interest rates and flush stimulus in the economy. As only US was supposedly performing at that particular point in time, with all the major European nations either going through Hyper Inflation or acute measures of Austerity (In France), it led to nothing but a bubble in US. With Auto industry booming and Real Estate to Stock markets zooming past anyone’s imagination. A well known persona then said - if everyone talks about or knows about the stock markets, its time to get out of it. The Banking system collapsed and almost half the bank in their systems went out business siphoning off savings of public at large.

Let’s compare this situation with what is happening today. Though there has been no war off late, however, the biggest economic crisis has overturned many an economy in Financial Turmoil. However, money has exchanged hands and has gone in the pockets of a few. We are talking about intelligent spending when Louis Vitton and Chanel do not have enough bags and shoes to sell in Paris (So much for Austerity)

Interest Rates in the US are on all time low just to encourage lending and spending. However, I fail to understand that when the jobs data is showing weak signs of improvement and no one is ready to lend the lower rated companies, then isn’t the money going in fewer pockets of Highly Rated companies (who in-turn are global conglomerates) and who are channeling their energies towards emerging markets, hence, in India and China so as to boost their earnings and impress their shareholders. Aren’t these countries providing too much of Free lunches in their economy and setting wrong examples. In my view these countries are being plagued by low retention of money in their economies. This is turn is causing too much capital inflow in emerging markets like India, who again are having trouble controlling their currency appreciation which again is hampering its Balance of trade (due to lower exports) and is funneling Stock Market, Real Estate and Gold prices boom.

What happened in the US in the past post World War One era can and shall repeat again if not enough measures are taken (though the level of extremity of such a situation is impossible as there are more sophisticated economic tools and methodologies practiced now). It’s the FII’s in India which are taking long positions in Stocks and Gold, and now Indian and Chinese banks have also taken positions to Hedge against Dollar. However, my question is that it’s a double edged sword now, as the Chinese on one hand do not want Dollar to appreciate further, however, rest of the World is Denouncing the Green Back and Euro and switching to Gold. If USD appreciates from its current levels, won’t the Sovereign and Bank’s Exposure at such levels in Gold cause another painful turmoil?

As investment in these assets is a Zero Sum game. If I sell it at a particular level it will be someone else’s loss and because its non retail investors who are majorly invested in these assets, there sure will be some distress to some investors. Either they stay at where they are or we move towards medieval era when only Kings had access to Gold (which is highly unlikely) or these levels should be and will be corrected.