Friday, 18 September 2015

Quantitative Easing: FED Keeps the policy rates unchanged

As expected in my earlier post on QE(Click here), today FED has kept policy rates unchanged. I was really expecting this as USA growth rate is still far away from any stability, Global economic turmoil especially China pose a serious risk to the growth stability in USA. Falling oil prices can seriously take the gas out of huge USA shale investments. Inflation rate is also very low; so there is no fear of high inflation due to easy money. Although I have explained earlier also that 80% of this easy money has not left FED (it is with FED as Bank reserves), much of the balance has left USA in search of better investment options not only in stock markets but also as FDI in countries like India and China. I am having no data with me at present, but I would like to see gross investments made in USA during this period. I think these may not be very high relative to QE money released except for Shale Gas investments.

Most importantly as detailed earlier I have serious doubts on the impact of QE on USA growth. QE was meant to encourage the demand and investment equation in USA but now they are watching global scenario to revisit it. If USA has corrected their local equation then why they need to look out of USA for symptoms? Because now global lower demand can hit their exports.

Actually problem of USA is not their investments and consumption level, but cleaning the mess of Real estate Bubble and looking for growth avenues beyond consumption. There is a continuous fight among economists regarding limits to growth. As our earth is a “Finite” sphere with Finite sources (like oil, iron etc) so humanity can not  grow forever. Finite sources will make them stand still one day and after that they will fall out of their own weight. So there are talks of sustainability. Although I agree to it but only partially. New technical innovations can open new avenues of growth. Like Aeroplanes opened the new revenue source by making intercontinental travel very fast. Now in future, high tech Rockets can make space travel very easy and so a new growth avenue will emerge. Same thing happened with the emergence of faster internet and smartphones.

But it is always a bad idea to drag “Future Consumption” into present that too with debt. So USA is going through a phase of Finite source growth limitation. Here sources are people and consumption articles. Instead of promoting people to over consume, USA can supply this excess to third world countries where animals and humans eat and drink from the same source. USA can do this by developing infrastructure, mining and agriculture in these countries by giving employment to locals. This will benefit both. Shale gas investments are an example for new technological innovation promoting new growth variable. Most of the World has entered into the 2nd generation of innovation. 1st stage was about bringing the speed and ease to our work life. But this 2nd generation is about changing the world and universe as per our requirements. USA as always is the leader in this transition and we can see new openings soon.

Although I wanted the FED to raise the rates and stop this prolonged guess work and volatility in global markets. I also think that most of the markets are already ready for any hike. A recovered and growing USA is a darling for the world. Growing USA can provide relief to exporting countries like China and India which can spur growth in these countries. Fed rate hike is only a testimony to the growing USA. Stocks markets can fall due to the plight of FII’s but with growth coming back or faster growth will ultimately force local investor or genuine FII’s to invest the money back.

So markets may enjoy the ride again. There are so many ifs and buts in this post because I am not a big supporter of current practice of consumption led economic growth. Our problem is only of misallocation of resources and we need to absorb the pain of realignment of this misallocation; because pain is not always bad. You can ask a Mother about pain; she will only smile while looking at her baby.


  1. Thanks for sharing nice article

  2. Hello sir.....ur views abt JM financial plz......if u r tracking it.. Thanks

    1. Dear Sir, I am having it from 46-47. posted a small study at this blog but could not post the full study. it is one of the best NBFC in india having the reputation of strong image in M&A space. Great high quality management. worthy of investments.

  3. Dear Gurpreet, what do you think of real estate stocks and any pick from solar industry.

    1. Dear Sir,

      Forces and variables of real estate sector are under quantum shift. it requires a revisit to the sector again. Sector is under pressure but justified. I wanted to buy a property in 2012 but i am waiting on the sidelines since then as i expected high prices to settle down. It may happen now.

      But fall in prices of flats is very different from land prices. I have always advised people to put more value on the land not on flats. So forces will change gear here with better reputed branded players with strong balance sheet with low debt and high cash are in a position to buy out the stressed properties of over leveraged players at low prices. land prices may also see a correction and it may also benefit these players as they can lap up land at low prices.

      and so these player can still earn huge money even at low prices because of low Raw material costs (Land mainly). Oberoi realty , Godrej properties, Sobha developer, Sunteck reality are some of better players. I am having Oberoi and sunteck and looking to invest in Godrej. I am a huge fan of Vikas Oberoi, the owner of Oberoi realty, he has terrific understanding of realty market and was one of only few who did not bought lands at high prices around 2007 like DLF and Unitech. He was holding cash of around 2000 cr at that time which he used later to buy land at low prices.

      I have learnt so much from him about waiting for value to emerge before buying something so expensive.

      But i am still to study these again as i bought these long time back.

      About solar, you can pick Tata Power as contra pick. it is also in Defence business apart from thermal power. It is having its own solar manufacturing faciltiy....can be a surprise gainer in the future because there will be only about 3-4 major players in power sector. Smaller inefficient opportunist will vanish. NTPC and Tata will be biggest.