While Washington was busy putting the United States in an invidious position by creating rancor in the Middle East, the Federal Reserve was busy cutting interest rates fuelling the cupidity of investors at Wall Street and sowing the seeds of stagflation in the economy. Both the government and the central bank of the United States were accentuating its own interests.

Newspapers and Commentators have not spared the economy with any euphemism while referring to the possibility of a recession in the United States. At this point of the year, the credulously nostradamic tautology of the fate of the economy by the pessimists and the optimists who run the media has become belligerently banal.

Ben Bernanke, the invisible Santa Claus

6 year old kids around the world may not know who Santa Claus is. But investment bankers from New York to Mumbai know for certain that Ben Bernanke isn’t. Though he delivered yet another interest cut to the financial world. This time the market euphoria was evanescent. In fact; the writing is already on the wall. This could very well be the last time the Federal Reserve would cut interest rates. One more interest rate cut and you could see the gulf countries pulling their currency peg with the dollar. The dollar has recently touched the support level of their sentiments. They had been steadfast on removing the peg; even when Washington was fighting a war with their neighbor. The governments resisted local pressure to remove the peg; even when the Fed’s monetary policy was creating inflation in their economies. The removal of the peg would mean the end of petrodollars. The very fiber that is supporting the fabric of the weakening dollar from tearing apart.

The sequence of interest rate cuts have helped to procrastinate an economic calamity by muffling falling house prices. He may not have provided a pillow for Wall Street banks to fall on to. But he has certainly provided them with a trampoline by buying them time and making money cheap. Investment bankers were given time to induce euthanasia on their mortgaged backed securities. Markets wanted double the amount of the Fed cut in order to celebrate Christmas. The macroeconomic focus of the Fed and the profit orientation of the market players may after all have more in dissimilarity than snow and rain. But 25 years from now, the 6 year old kids that I referred to earlier will consider Ben Bernanke as the invisible Santa Claus. Either because he gave a pill of catharsis to the economy or because he gave it a parachute to perdition. 25 years from now this parachute to perdition would have created a new economy that would emerge without the debris of the current mess. The infallible trade cycle would have used the dynamics of a positive sum economy to flip it from recession to prosperity by then. And these 6 year old kids would thank the invisible Santa Claus of 2007 for not prolonging the bout.

Einstein, Robin Hood and the Bank that lost another billion. Money doesn’t just disappear does it? The billion dollar losses that the mighty investment banks have reported may be worth moaning about. But the money wasn’t burnt was it? Crudely speaking, it flowed from the coffers of these wealthy banks to a John Doe who needed money. These investment banks were busy being greedy and careless. Lending money to the sub prime category and creating exotic investment instruments to pass out and leverage the risk. The delinquents were given artificial purchasing power in order to lead a good life. Macroeconomic translation equal to economic consumption. And their consumption must have invariably created revenue for many businesses. And these businesses must be having one of these investment bankers as their merchant bankers. The point is; money doesn’t burn. If these banks are lucky they can expect for a boomerang in the year 2008. Delinquents may pay back, real estate prices may bounce bank with some help of demand dynamics and the aforesaid businesses may save and plough back money into their coffers. Robin Hood visited the financial markets in the year 2007. And he showed everyone; how investment bankers who have made billions of dollars in revenue all this while are finding it hard to swallow losses and abstain from cooking dividends. The same people for whom millions are pennies. Einstein’s theory of relativity at its best.

Money denominated in millions of rupees, dollars and currencies representing the notional wealth of nations have been burnt as the markets waltzed off the cliff of economic utopia. The dynamics causing the divorce of the stock traders rationality and quixotism has been invariably discussed by eminent economists and decision makers. Their commentary have been appearing in various media and a majority of deductions form part of a superset that includes the words recession, unemployment, sub prime lending and the federal reserve. One can imagine a trader sitting down after a day of snit at the exchange and trying to seek solace in the explanation given for the prevailing quandary. Amidst all the chaos at the exchange, and the deductions and predictions published by popular media, there exists an implication never mentioned. An implication that is ineffable for the capitalist who reads the business paper nevertheless narrated in the lines below. Lets hope I am not Cassandra but I make my disclaimer implied so that capitalists don’t tear this sheet after reading my conclusion.

Carcass of greed and the optimism of fear

For the purpose our discussion lets assume that the decoupling theory is true. And that the bad sentiment in the Indian market is solely because of domestic factors.  Factor one being corporate results for this quarter were not as glamorous as the previous quarter. Factor two starring the RBI governor who is walking the tight rope balancing foreign currency inflows, inflation and growth by keeping interest rates unchanged. Investors are disappointed with the balance sheets. To inchoate their disappointment profit margins and growth in net profit in percentage terms is declining. Emotion of fear is hyperbolized in the same way as greed is. And therefore a crash. There’s nobody to buy companies at the current price earnings ratio. Shares of companies fundamentally strong are belching with speculative acidity. Earnings are no longer the fancy of investors. But the premise of their sentiment can be proved baseless. One has to take into account that the previous quarters were periods of dream run for Indian companies. Therefore previous quarter results are on a high base for comparison. Such high levels of growth are hard to sustain. I believe investors will have to learn to live with (no not volatility, that’s cliché) not so handsome balance sheets in the coming quarters. The vindication being this; the Indian BPO industry was able to generate income in large proportions due to the availability of cheap labour in this country and the fad among western corporates to outsource their operations in order to reduce their cost. But now, the cost of talent (labour) has increased. Sadly, Indian companies have not moved higher on the value chain and they still leverage the fact of low cost for getting orders. Therefore, if they are to continue receiving orders, stay competitive and retain talent they will have to cut back on their profit margins. Notably, the first part of globalization was appropriated with the dynamics of capital arbitrage. Capital sourced from destinations where procurement was cheap. And capital was flying to destinations where returns were high. The mantra was that if you had money, you could make even more money. By letting investment banks grow your wealth or by investing in companies and fighting for every rupee lost at an AGM, even though ones capital has appreciated multifold in the stock market. Now, it is the advent of labour arbitrage. Labour will cost more as the cost of living increases because of inflation and talent becomes as rare as a smiling stock trader during these times. Also because of the aspiration bar that has been shifted higher. Corporates are still trying to maintain margins by laying off employees. Such a resort is aimed at pleasing shareholders. Eventually they will realize that compromising on margins was a better option than inhibiting growth. Bottom line: Investors can and should stop dreaming of sky high returns on every unit of their money tagged with the sobriquet of capital.

Crash  catharsis There is a change happening in the tectonics of factors of production in economics. Capital which has occupied the prime position in production since the advent of the industrial revolution is finding it hard to sustain its berth. Arguably, the owners of capital have always reaped more benefits than the other owners of production in the post industrial revolution era. The recent crash in stock markets is the sign of a revolution. Consumption may still drive corporate results once the recession melodrama is over. But net profit margins and other financial indicators may not be able to sustain such high levels any longer. Corporates will no longer leech out higher profit margins at the cost of underpaying employees.  The best an investor can hope for in order to generate the optimism needed to pinch the bull would be a sustained and moderate growth rate in corporate earnings. Suddenly the question of whether the economy will slip into recession sounds like a euphemism. The real question is whether we are about to witness a harbinger for communism or just another subterfuge of capitalism