United States taught the world wrong principle of the relationship between "Inflation and Stock Market" (Dow & S&P 500 in USA and imitated in India for SENSEX and NIFTY)

Americans used to say that " Non-inflationary growth is best for the stock or bond market" and this saying is widely adopted the world over.

This is really astonishing in that so called experts from Nobel Laureate, great mathematicians, analysts, brokers, investment banks, banks, IMF and World Bank etc. never ever questioned this widely held theory or belief, and on the contrary go on using it as "Standard" which is the basic cause of today's problems - credit crisis, hyper inflation, etc

There is nothing like "non-inflationary growth". It is more like "non malignant growth gland called Cancer".

When the country prospers or does not prosper, there is greater need for "money" which is printed by the Central Bank (RBI in India) at the instance of the controlling government. When the money supply is disproportionate to the supply of goods, the inflation results inevitably. More growth means more consumption, more demand less supply so the consequent rise in prices.

The stock market is the ultimate reflection of "inflation". If there is no inflation, the stock market can not simply rise. The basic principle of stock market rise is the "rise in earnings called EPS".

Earnings or profits do not rise if the prices do not rise, and if prices do not rise, the stock market can not rise. Apply this concept in reverse gear - If the stock market rises, there should be greater profit, higher prices for end products, so there is "Inflation"

Having non-inflationary growth is like having "condom se-x" . In that case, there are no more babies, no more growth in a family, no more inflation.

In other words, the growth invariably result in inflation. There is nothing like "non-inflationary growth" America propounded this principle to contain inflation numbers low, so that interest rates do not rise, so their debt-ridden economy can thrive permanently due to lower incidence of interest cost. If American public debt is 13000 billions (13 Trillions), even 1% savings can save its interest expenditure by US$ 130 Billions. Imagine how much did they save by reducing interest rates from high of 6% to low of 2% (spread of 4%) which can save at least US$ 420 Billions?

To me it is amazing that only few "con men" in the FED and Treasury could brainwash the whole world population with dictated belief, by teaching the upcoming graduates at Harvard and other prominent universities the wrong principles of finance.

When something does not work with reference to some standard, one has to assume that the "standard" itself is wrong. The solution lies in abandoning that so called "standard" which by no means is the "gospel of God".

When the people will learn or that I have to learn to conform to the world opinion which does not have even single solution to the present world crisis in Currency, commodity, food prices, property, health care and practically everything that can be translated into money?

A simple example is - Indians are told by experts in RBI that weaker rupee helps Indian economy to help exports and earn FOREX. What about imports? Are we not overpaying due to wrongly engineered depreciation of rupee?

Ever since the independence, for over 60 years, India followed the concept "weak rupee" and allowed it to depreciate from Rs 4/$ to Rs 43/$ today or by 900%. Even when the Oil prices dived to less than $ 10/brl. Indians never saw the petrol or kerosene prices dipping to less than Rs 10/ litre in the market.

III or India's Intelligent Idiots sitting in FM/RBI/SEBI/NSE?BSE, are still adopting this policy in spite of the fact that it does not work. They treat it like a "dictate of Lord Krishna in Geeta". They never changed their basic view that is the basic cause of 11.05% inflation today.

Kalidas, Hong Kong
21-06-2008 (Ref: 09/059)

Dear Kalidas,

A wonderful message. Thanks a ton.

with regards

nadhi

Once again, an excellent post. If such out-of-the-box thinking (as explained by you) is there even in one economist/bureaucrat, pity is that the majority 'III' sideline him. Nicely driven home the point - Even when the Oil prices dived to less than $ 10/brl. Indians never saw the petrol or kerosene prices dipping to less than Rs 10/ litre in the market - to the people at large and the powers that be.

An excellent post purely from the financial point, but to run a country , esp. a poor country like india in the 60s and 70s , the govt. had to take into account that we needed a lot of imports like defence weaponry, engineering machinery,power plants, ships, airplanes etc.etc., even wheat [remember pl-480 , or something like this in the 60s].

For these imports we needed foreign exchange ie., USD, which were equivalent to gold in those times. Consequently , the rupee had to be devalued from time to time , to avoid going to IMF and other rich countries with a begging bowl in our hands and acquiescing to their arm twisting and ignominous tactics every year.

Those were tough times when we did not even grew enough food to feed our poor population and Tarapur n-plant had to be shut down coz we refused american inspectors at the site.

This is not to glorify the intelligent idiots sitting at various important and powerful positions, but we must also give due credit , wherever due.

Coming back to the theory that without inflation there cant be growth and vice versa, i have to say that these are probably the truest words ever said in the history of mankind.


regards

rahul

Markets are run on sentiment based on himan behaviour. If markets were raelly efficent then they would run on logic propounded by you.
Infaltion inflicts graeter damage on the rich than it does on the poor, although the poor suffer much more due to their limited ability to absorb greater costs. Here the interests of the popularly elected govt & the capitalists truly converge. hence it is not tolerated at all & nor are any solutions ever sought to live with it. There are many who have propounded that an era of high inflation combined with high growth for a limited period of time would benefit an economy if managed properly. But since inflation runs counter to the interest of both the govt & the rich, it is never tolerated.

Welcome back kalidasji,
as usual a very informative post, a total different perspective.
Best regards

Reply to calculus on (22-Jun-08 11:04 )

The markets are always efficient - it is the "market participants or investors" who are inefficient. The markets have "in built" self regulatory mechanism. Whenever the point of tolerance is reached or breached, the market triggers action to reverse the ongoing course.

Compare the market with a human body, which too have self regulatory mechanism. We eat and drink all days long, pumping in desirable and undesirable food into our belly. The body digests what it wants, rejects the waste next day morning. Whenever we took food beyond body tolerance level, the self regulatory mechanism triggers violent reaction and we suffer either from "nausea, vomiting or diarrhea"

Compare this with the stock market. Replace "food" with the stocks, belly with portfolio, desirable and undesirable food with the good or bad stocks, waste with loss, excess intake of food with buying the stocks at any price without thinking , and self regulatory triggered actions with "steep market fall or correction or crash" whatever adjective you may want to use.

No one dictates market. Markets dictates everyone. Human behavior is rational or irrational depending on the control one has over his mind. It is always easy for the analysts and new reporters or even experts to say " Market says this, market says that, market says this stock is undervalued or over valued etc" The stark reality is that market never talks to anybody - it just acts or reacts - in perfect rational manner like our human body.

When we fall sick due to wrong intakes, we recover quickly or slowly depending on the kind of food that we took. Markets also behave in same pattern.

The only difference between the market and human is that market never dies, and the human is always mortal. The players change the scene, the market remain same.

I disagree that "inflation inflicts greater damage on the rich than it does on the poor, although the poor suffer much more due to their limited ability to absorb greater costs"

Inflation is always beneficial so long as it remains within range bound. If there is no inflation, there is no higher price, no incentive to buy or sell any asset. Excessive inflation hurts everybody, less to rich and more to poor, because in inflationary environments, the basic necessities of life goes much dearer, and the poor with limited income source, finds difficult to cope with it. For him, the bread, daal, rice, water and a simple cover, what they call home, is very important. TV, Car, Scooters, Freeze, Computers do not matter much to him.

Most people always engage in "blame game". When they are in trouble, they blame fate and go to the temple to complain or seek solace or help.

It is therefore premature to blame the Government for all price rise you see all around. In a global economy, where India is participant, it can not be immune to rise in oil, commodity, and food prices. Deal with it as it comes. Take whatever it takes to control the situation. Actions are more important to solve or resolve the problems rather than blaming like a bureaucrat who try to find a scapegoat for whatever happened.

Kalidas, Hong Kong
23/06/2008 (Ref: 09/060R)

Hi Kalidas sir,

I have 60% cash and 40% stocks, Can i put remaining 60% now. How much deep it can fall in the near futur sir.

I have posted this query earlyier sir, Please reply.


Thanks & Regards
Gs

Kaliddas sirji please reply as small investors looking to you for guidance.i have invested 30 percent of my money in last few weeks back in the markets but i am in huge loss now as my 30 per has now come down to 15 percent almost halfed.Plz tell me if the markets will go down further to 8000 levels or will bounce back.Please reply.

Anand verma

Dear Kalidas Sir,

I am small time investor following your advise i am on 100 % cash, please kindly give us when can we invest or else still pain left, if yes what would be the approximate fall expected.

thanks n regards
Sree

for gs2007

You have to be specific while investing now. The government is likely to raise Petroleum prices soon - second time in quick succession - which may hurt the market (some bulls may say it is discounted).

I would buy battered stocks which were hurt due to rising oil prices such as Refineries (HPCL, BPCL, IOC, RPL), Airline stocks like Jet Airways, Spicejet (in further correction), media stocks like Dish TV, TV Today, Debt free companies like ITC, Hindustan Lever, MTNL (Buy them only in strong correction in SENSEX, like 500 points fall in a day), Gas stocks like IGL, GSPL, Petronet. Speculative stocks like GV Films (Rs 3.65 or about). Avoid pricey real estate and bank stocks (they lose heavily in their bonds investment due to rise in interest rate) IBRetail is another of my pick. Hotel stocks like Taj GVK is one of the best choice, so also Hotel Leela when shot down to Rs 31 or so. I also like GE shipping which has still not fallen below Rs 360 (today at Rs 394) which was first recommended at Rs 330 level by me) Punjlloyd and some tractor companies (farmers will be prosperous due to higher foodgrain prices, that may encourage them to till more land with tractor)

An IPO like Avon Weighing System (Rs 10 IPO price - 45 times oversubscribed and expected EPS Rs 6.50 as I heard - please check this ) which may open between Rs 12 to 16. This is one which I will buy aggressively. If EPS of about 6.5 is true, this stock may go up 300% to 400% in just under one year.

YOu were too early to invest 40% - nothing wrong if you are able to trade your portfolio - I am not that type, so I am still 100% cash)

If oil prices are raised, incidence of subsidy will be less, that may make state owned refineries best bargains. I had sold out HPCL between Rs 257 to 310 earlier - currently at about Rs 189). Worse days of refineries are over, in my opinion, though further fall by about 5% to 8% is not ruled out, if oil prices are not raised.

Future of world is in Gas - almost all vehicles are destined to be converted into Gas (except heavy vehicles). With abundant gas supply having been found, private listed companies like RIL (at Rs 1600 or below), RPL, RNRL (if it does not hold above Rs 80, level of Rs 60 is written all over it).

The situation is still very fluid. Worse is yet to come. What we have seen today is just 15% of damage - more is still in store.

I will not be in hurry to buy the above stocks, except some state owned Refineries stocks, becuase they yield me more than bank interest in dividends. Use my preference as "Industry preference" and select stocks based on your preference in those industries.

Kalidas, Hong Kong
23-06-2008

for Anand Verma

In a falling market, stay with cash rich Blue Chips like ITC, Hindustan Lever, MTNL etc, because you lose less on them if the market corrections persist.

When the market recovers, the Blue chip recovers first, and after about 2000 points rise, the secondary stocks begin to recover. May be you may miss the bottom prices in those stocks, but important thing is to catch the upward trend.

Please refer to my reply post to gs2007 for more specific comments. I am still 100% cash, but will invest about 15% in next 15 days or so. Worse is still not over yet so far as India is concerned.

Kalidas, Hong Kong
23-06-2008

for sree

If you are 100% cash, begin investing about 15% to 20% into good stocks as mentioned by me in previous reply post to gs2007

Be highly selective, and do not chase. The train is not going to run away because there are number of red signals ahead.

It is difficult for me to advise each boarder's query, Pay attention to what I write generally or specifically. Do not think that I am ignoring any boarder for particular reason - it is just not possible to answer everyone.

Kalidas, Hong Kong
23-06-2008

for all Boarders

Read my new post under : Moneycontrol MMB Market View Market Analysis - Fundamental View

The Article is titled - NUKE deal and India's credit rating

Kalidas, Hong Kong
23-08-2008

Dear Kalidasji, Is this the right time to start accumulating LIC Housing?What sort of level at which u suggest buying this stock?
Regards