Our history books taught us that Colonialism and Imperialism ended sometime in the mid 20th century. Seems like, historians were wrong all along, and it continued for much longer after that. In fact, that continues even today – most of the US and European companies now no longer produce anything, and are just a brand name that exists on people’s mind. All their goods is being manufactured by someone in Asia/Africa, exported back to them for stamping, and then sent back with 3x-10x their price tag to be sold in Asia/Africa. This is no different from the definition of colonialism as defined in the history books – except may be the difference between overt and covert. Nokia is now just a brand name which is owned by Finland, and rest everything, from manufacturing to end consumption happens in emerging nations. And the parent company just earns a royalty for owning the name.
Well, one might argue that this is the crux of outsourcing, and this makes a company much more efficient. But then, it might become even more efficient if it was registered in India/China, instead of Finland – which is neither the biggest producer, nor the biggest consumer. The reason for this is plain and simple – those guys are really smart. For US, once you own the world’s reserve country (and the nukes), this ensures you directly or indirectly control the world (just make sure everyone signs CTBT). And European nations feared that since they didn’t have any pricing power in the world economy, they decided to form Euro. The only purpose Euro serves is, it gives more clout to all the Tom-Dick-&-Harry European nations, which otherwise have much worse economies than their Asian peers. And this makes me believe that we are about to enter the stage two of the credit crisis.
There are two standard tricks of financial alchemy for a listed firm – merger or demerger. Neither of these changes anything on the ground, but it does create an interest in the stock, and there are always either synergies or value being unlocked. As long as you can show that something can create money out of thin air, you are on track. This was the exact same thing done in the two different versions/stages of the credit crisis - (a) The US version, and (b) The European version. In the US version, or the first part, people were made to believe that slicing and dicing of tranches can create magic – and give AAA/AA rating to a large chunk of sh*t-pile (equivalent of demerger). There was value being un-locked by cutting the cake, and the sum of parts were more than the whole. This went on for a few years, and then it went bust (nice to outline and prophet-ize in hindsight). The problem was not the fact that pieces were cut and sold separately, but somehow the sum of the parts created were supposed to be more than the initial pie.
The European version, or the 2nd leg which is unfolding at the moment (it appears) is the exact opposite of this. There the core belief here is that if you combine a good thing and a bad thing, somehow you get something which is almost as good as the good thing. This was actually true in the initial stages when there were only 10 countries in the bloc, and all 10 were strong ones with good GDP and fiscal situations. Then Euro went on an expansion mode, and tried to include more and more countries – all the while maintaining its ‘good’ thing image. Here, somehow the whole was greater than the sum of parts, and it was assumed that addition of a country into Euro was net net a value-accretion exercise. This let the new country reduce its own risk (and cost of borrowing), and had no impact on the existing members. Its high time market call this bluff, I hope to see this bubble burst soon.
Markets globally traded a little weaker this week, and some of the Asian indices are below their 200 DMA. Usually, this is a strong bear-ish indicator, and I’m assuming that unless they prove its a false breakout (by closing above the level in the next week), markets are in for a ‘W’. I have been quite bullish for the past 5-6 months, but some how think that now we have reached the top of where ‘freedom to print’ can take us. Quite a few IPOs have bombed in US (as well as cancelled), and very few have made money in India as well. Most of the companies are now scared to market the issue, and NTPC might turn out to be the final nail in the coffin (unless Reliance Infratel is coming soon, which I haven’t heard). Another reason for the ‘top-has-been-made’ view is the fact that we are exiting the stimulus period, and most of the recovery was seen in those sectors only. China finds itself in a mess, and so does Europe. Germany is doing exactly what AIG did for Freddie and Fannie – writing blank cheques against tonnes of crap, and hoping no one notices it. ‘United we stand, divided we fall’ is quite true, but people are forgetting ‘one rotten apple spoils the whole basket’.
On Nifty, expect the market to re-test 4650 levels, and it might be broken by the budget. There is huge selling pressure from the FIIs, and once the tax-backed buying ends, the domestic institutions would also stop supporting the markets. By then, unless the FII trend reverses, we are in for the big ride.
Food for Thought: The big news out of India is that Hang Seng Index ETF is being launched from monday, and it would be traded after a couple of weeks of NFO period. I hope this provides some push towards more investor interest towards ETFs in general. Hang Seng might not be the most important market from an Indian investor’s perspective, but it is one of the very few non-restricted market which trades during our market hours. Once this one picks up, I guess S&P or FTSE might be next.
