Thinkpad: Coming Back To Life
Thinkpad: A return to normalcy on the streets; something closer to euphoria on Dalal Street.
Happy Sunday.
If you have been out and about lately, there is normalcy in the air. More people are returning to office, shops and restaurants are no longer empty and roads are...well it doesn’t take much for our roads to get jammed.
In the stock markets, of course, we surpassed normalcy months ago. We are somewhere closer to euphoria now. That was the big story of the week — the 30-share Sensex crossing 50,000. The index has now doubled after the plunge in March. BQ’s Hormaz Fatakia has a good charts story on what’s led the benchmark indices higher over the years. You can read that here.
Much ink [typing time may be a more appropriate phrase now] has been spent on the supposed disconnect between the markets and the economy. Not everyone agrees there is a disconnect in any case. The question being asked now is what could prick this rally or bubble, as you may see it.
The Bank of America fund manager survey suggests that ‘greed’ has taken over. Cash levels fell to 3.9% in January — the lowest since March 2013. The most crowded trades right now are: long Bitcoin, long Tech and short U.S. dollar. The two biggest risks to the rally include the vaccine rollout and a taper tantrum in the bond markets. Inflation fears are also rising and the expectation of a Goldilocks economy is petering out.
The possibility of higher yields in the U.S. markets is beginning to make more than a few people nervous. Mahesh Nandurkar of Jefferies pointed out in a note this week that over the last decade, there have been three episodes of sharp rises in U.S. 10-year yields (~100 basis point increase in less than 12 months). “These were in 2013 (taper), 2017 (Trump election) and 2018 (Fed tightening). Indian markets saw sharp corrections during the same period.”
These global risks seem a bit more pronounced right now than local risks. The economy, to the extent that it matters to the markets, is continuing a slow rebound. Coincident indicators for January are ranging between 93-94% of the pre-Covid levels, BQ’s Pallavi Nahata pointed out in this report.
A paper included in the Reserve Bank of India’s monthly bulletin struck a rather cheerful and poetic note too. Pointing to the pick-up in trade activity, the paper said the number of e-way bills issued in December 2020 was the highest, “suggesting that the recovery is no longer aloft on the fleeting tailwinds of festival spending but is rising Phoenix-like on the wings of an intrinsic momentum.”
Before you get carried by with that ‘Phoenix’, recall that it was just a week ago that RBI governor Shaktikanta Das warned that “stretched valuations of financial assets can pose risks to financial stability.”
Besides the Big Budget looms. With expectations running high, the probability of disappointment is large. In our continuing coverage, this week we focused on the need to design policies to tackle the widening inequality which resulted from the Covid crisis. You can listen to a conversation with researchers at the Azim Premji University here and read suggested policy prescriptions here.
Things are looking good in some corners of the world. Not so much in others.
But taking a cue from the central bank poeticism, we’ll permit ourselves to get a little cheesy and invoke Pink Floyd in the hope that normalcy is around the corner.
♫ I took a heavenly ride
Through our silence
I knew the moment had arrived
For killing the past and coming back to life. ♫
We said it was cheesy! Have a good weekend.