Monday, January 29, 2007

A strong contrarian view on Indian equity markets


What the inflation numbers indicate? by Chadrakant Sampat of capitalideasonline.


I believe that money has now shifted from low velocity to high velocity; velocity is going to decide what inflation will be. Inflation rates are increasing and will continue to increase. Asset inflation across all classes is already rampant.


Peter Drucker wrote in his book “The Frontiers of Management”: “By now we know, as Schumpeter knew fifty years ago, that every one of these Keynesian answers is the wrong answer. At least they are valid only for special cases and within fairly narrow ranges. Take, for instance, Keynes’s key theorem; that monetary events – government deficits, interest rates, credit volume, and volume of money in circulation – determine demand and with it economic conditions. This assumes, as Keynes himself stressed, that the turnover velocity of money is constant and not capable of being changed over the short term by individuals or firms. Schumpeter pointed out fifty years ago that all evidence negates this assumption. And indeed, whenever tried, Keynesian economic policies, whether in the original Keynesian or in the modified Friedman version, have been defeated by the microeconomy of business and individuals, unpredictably and without warning, changing the turnover velocity of money almost overnight.”


As Drucker pointed out, “The home is a durable consumer good, albeit one that has a high resale value or wealth. Investment in the home is not “capital formation.” As he wrote “The more affluent a society becomes, and the more the broad masses become the sole recipients of national income through wages and salaries, the less do personal savings equate with capital formation. The more successful a society is in prolonging the individual lifespan, the lower inevitably is the rate of genuine capital formation by individuals.”


For the last few years the values at real estate are compounding at unbelievable rate and this class of asset can now be securitized and that process enhances liquidity.


Rise in stock market cap does not form capital; productivity and competitiveness of society does. Productivity does not expand in relation to market capitalization in last few years market cap of real estate, & capital markets have compounded at approximately 40%. Has productivity kept pace with it? The answer is no.


Consumer debt flourishes in the liquidity glut. Savings are exhausted by expectations in capital market, real estate, consumerism and financing government deficits. Capital is not forming. Let us think through on going fiscal deficit (10% of GDP including states). It is moving towards 1tr $ in next few years. Let us correct “market expectation” that changes liquidity multiplier.


Take heed to history-societies do not tolerate – corruption, greed, short terminism and no care for commoner. This is what we are exactly doing.


Link to the article.

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