Satyajit Das, the derivatives and risk management expert and renowned author of blockbuster books on high finance, spoke at the India Investment Conference organised by CFA Institute on Friday. As is his wont, it was time for some serious wit, while describing the scenario in different parts of the world. Edited excerpts:
We are living in a ‘Botox Economy’: The US & Europe have taken the ‘botox’ cure that doesn’t fundamentally cure the disease. It’s only temporary covering up deep-seated problems. Das said the recent global recovery has been driven by government spending and keeping interest rates artificially low. In the process, countries are descending into bigger deficits. The worry is growth will falter as stimuli get withdrawn. To boot, interest rate policy seems ineffective.
Quantitative easing and Acrony-mania: Central banks of major countries have inflated their balance sheets nearly thrice in last 5 years by buying back assets. They seem to be infatuated with ‘acrony-mania’ – they keep coming out with new phrases to justify injection of more and more liquidity. For example, in Europe, they came out with bailout funds under EFSF (European Financial Stability Facility) and then later ESM (European Stability Mechanism). Similarly, European Central Bank has been using different mechanisms ELA (Emergency Liquidity Assistance), LTRO (long-term refinancing operation), SMP (securities market program) and OMT (outright monetary transactions). QED!
Clone & double!: The US is spending $10.5 billion a day, while borrowing $4.5 billion a day. The spending on goods and services in order to generate $1 of revenue has inched up from historical levels of $1.2 to $1.6. Only 3% of the country’s taxpayers contribute 52% to the tax revenues, while 45% of the households don’t pay tax (as they don’t fall under the taxable category). So the best way to fix the problem would be to clone these 3% of taxpayers so tax revenues double.....
Chinese growth, ghost cities & ghost malls: Recovery in China has been driven by government spending financed by bank debt and there seems to be a bubble in the making. The country seems to be investing much more in infrastructure and real estate than required. The excess capacity in cement in China is more than the total consumption in the US, Japan and India.
Similarly, idle production in steel is more than total production of Japan and South Korea. There are currently nearly 60 million empty apartments that constitute to 15% of dwellings in the country.
Even if the growth there slows down, Chinese department of economic statistics may find the way out by probably manufacturing data!
La Belle Epoque: There seems to be 5% chance of La belle epoque – French for beautiful era -- where some extra-terrestrial will come in a spacecraft and distribute all sorts of currencies – dollars, euros, yen.....
20% chance of collapse, 75% of stagnation: The debate has shifted from debt crisis to whether it’s the end of growth. The endgame results could be financial repression, end of trust, de-financialisation, massive social unrest, autarky or end of economics...
India’s cricket economy: The Indian cricket team and its economy seem to be highly correlated. Take the case of the Indian team - their performance and success has been based on few people’s achievements. Their performance last year has been bad with losses in Australia and England and yet they continued to be in denial mode with players, selectors and board all blaming each other. In both, there have been cases of bad decision making, bad selection and corruption.
The outlook for 2013, now seriously speaking: There seems to be real disjunction between financial economy and the real one. The real economic performance should not be assessed with financial stock market performance. There would be realisation that economic growth won’t be as fast as forecasted and there are likely to be downgrades. There could be rise in social and political tensions with people questioning whether policies have been effective. The equity markets would continue to remain very volatile and may prove to be trading market where people may be well off taking short-term positions rather than a buy and hold market.