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Cheap Money — A Disastrous Affliction

Wednesday, 20 Jun 2012 08:44 AM

By Ashish Advani

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I am aghast at the extent to which the traders in America will stoop to get what they want or twist every event to what they want to make it become.

I am talking about the Greek drama that had the whole world watching last weekend. The elections in Greece were all that was being talked about for a month. Global analysts, government officials, TV pundits, newspaper columnists, and everyone in between had an opinion on whether the Greeks would stay in the euro or not.

While many advocated the exit of Greece and the beginning of the end of the euro, others warned of dire consequences if this was to happen. The world (and European leaders and global central bankers) had made definite plans of what they will have to unfold if the Greeks choose to leave the euro. Massive amounts of bailouts and liquidity must have been secretly planned and agreed upon to “rescue” the world should that have happened.

Finally, the elections came upon us on Sunday. The Greeks chose to stay in the euro. One would imagine that that is a positive outcome that the world wanted and should have heaved a major sigh of relief. But that was not the case.

The Asian trading on Monday started right and continued to remain positive through the European trading. As America came online, the traders sold off everything since they now wanted to believe that Greece was not the real problem, Spain was.

So they continued to build the wall of worry rather than rejoice that the Greece outcome (which they desperately desired) was as needed. The markets tumbled and the worry clouds gathered again. Once again, despair and fear ruled the markets. As a consequence, Spanish bond yields soared as the bonds were sold.

Tuesday, the markets rallied. This time, traders were beginning to get hopeful that the Federal Reserve will have to now introduce Operation Twist II and maybe lay the foundation of QE III. The markets seek more easy money and excess liquidity. Instead of desiring true reform, they want the easy money-induced cheap hallucination of all being well and stock prices rising.

On the other side of the globe we have India. Yes, granted that the world (me included) are a bit sour on India these days. But what came as a surprise to many is that the Reserve Bank of India, which was to consider lowering interest rates, actually stood up with resolve and did not lower its lending rates and make cheap money available to the stock market traders in India. They did the right thing to combat inflation and enjoy longer-term stability rather than enjoy short-term market rise.

China actually has enjoyed some good outcomes of its stimulus package that it had announced previously. They target the stimulus towards specific industries that will be beneficial to long term growth. Instead of printing money and shuffling paper, they help grow more industries. The latest initiative is to promote the growth of iron and steel industry. China is now assuring the world of 8% GDP growth starting next quarter onwards.

So India will sustain its 6%-7% growth, China will likely grow at 8% and we in America will hold our central bank hostage and demand cheap money so that they can pump up the stock market.

I am getting more aggressive about my allocation to Asia and will restart the selective investing in Asia. In previous missives, I have indicated proxy as well as and selective investments that will work rather well in the near term while we await Indian politicians to clean up their act and invite foreign capital back in.

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