Prakash Kumar

US expect to borrow in excess of $1.5 trillion this year inspite of its current debt excesses. Generally, deficit is considered good during recessionary time but these numbers are too huge for comfort. Similar trend of huge deficits plagues growing economies like India which is looking for avenues to mop up cash to fund the deficits. Overpriced unplanned FPO’s and projected disinvestments in current and next fiscal seems to be the path Indian Govt. has chosen something which market rebuked in its latest FPO-NTPC. Ultimately, to be fair to the government also, in a listed company it is unconceivable to offer a large discount to one class of investors otherwise you will end up slashing the prices. New paper in form of disinvestment in companies like Coal India or Air India have to get listed where government will have a room to offer that discount and get in retail investors. Otherwise if LIC, UTI and SBI continue to buy old government papers – then it all tantamount to moving money from one pocket to the other.

US has an effective bond market and thus Obama administration is likely to issue paper money in form of bond issuance to pay for its deficits. In an unlikely scenario administration can print – greenback. However, both are inflationary and risks tapping growth as interest rates will need to rise to cut inflation. Inspite of growing concerns on deficits – Bond market has not shown any panic sign as evident from a low volatility on the yields count of bond since a fortnight now when equity are getting a real pasting worldwide. Trend in bond market is surprising but a reversal of trend is seen coming.

US Federal deficits have been traditionally financed through liquidity from the emerging markets, especially, China which is tightening its liquidity and thus less cash from China will be made available in near future. Additionally, America has to soon confront huge interest on debt and will be forced to hike taxes esp. because 2/3rd of its budget spending is in social sectors related to Social security, Medicare and defense which will remain untouched. Coupled with the new healthcare reform bill – there is no room left from the federal budget to get even a dime of cash otherwise.

Home loan rates are at acceptable level now and as fears of interest rate going up looms esp. with inflation gyrating – many countries will tighten liquidity. China already has and India has as well increased the CRR. Markets will continue to correct on these news esp. when we are really not out of woods as far as recession is concerned.  When these secular interest rate hikes step in by majority of EM players– US will be forced to increase interest rate to continue attracting the liquidity from abroad. For someone buying home in recent future – time to buy is now and lock in a fixed interest rate but well it will only result in distorting of Bank numbers in the next few quarters as they will take the brunt of the credit tightening with these fixed mortgaged home owners.

For fund managers in America it make more sense then ever before to be diversified in terms of geography and currency. Chance of USD losing value is for real and it is thus imperative to be not be over dependent on a weak currency. Commodity, san volatility is a nice haven for hiding but in case growth story takes a second tumble the demand can quickly evaporate making Commodity space a very dangerous field to be in.

Global Stock markets are not unreasonably expensive but they are not cheap either – A P/E valuation of 15x-20x is acceptable for EM but this definition is laden with caveats. May be its time to be cash rich at home then pledging the hard earned cash in assets which per economic sense are not risky but current macroeconomic environment have made it look riskier.

From a macro sense, people are not going to be getting excited and if at all the woes of recent Spain,  Portugal or Greece are tips then some icebergs are waiting. Investors will be closely watching the fiscal deficit number stated by all economies. Fat deficit numbers will be taken seriously or positively by the international investors in deciding where they are parking the money next. Deficits and action taken on to control them alone has the potential to decide which markets going forward will be better valued or is overpriced. Sovereign crisis might appear big if looked within the individual country balance sheet, but if they are looked in aggregate over global economy they are just few decimal points and can be exposed in a matter of minutes of debt redemption pressure.