Just one of those days where we think day traders should not trade purely looking at the trends. But what we are debating now is no longer inflation. We are not talking about the degree of recession. Everybody is pricing in a slowdown but how much of that slowdown would be real and how much would be temporary?
My sense is markets are not pricing in a recession otherwise you would see rate falling. They are pricing in a slowdown and I think they are correct to do that. The US economy has been incredibly resilient given the speed of the rate hike cycle that we have had since March and there are several reasons for that.
Labour for the first time in generations has wage bargaining power. This is a function of millions of largely older people having dropped out of the workforce during Covid and they did not come back, So the wage price increase has been able to shield the consumer from the worst of inflation. But going forward, we are firmly of the view that inflation will come down and that is the most important thing because we believe it will allow the Fed to stop this rate hike cycle and that messaging will come out in the December meeting.
They say you should never fight the Fed. Do you think the Fed, in a sense, has just been stubborn? First they denied that inflation was coming and now they are not accepting that inflation will peak out. It is like saying that I scoring self-goals one after another?
I think they are worried that if they signal victory now, the assets will all whip back up and that in turn will drive inflation up. So they do not want to do it now even though there are signs that even the stickier items like healthcare and rent are coming down.
They just simply think it is premature to do that and they are probably right. But on the other hand, when we do get increasingly more data showing us that is the case and as I said, I think by December, we would not have just evidence, we will have real proof the inflation is down then they can up their rhetoric. I think doing it on the November 4 meeting would be premature because the dot plot was just revised up in September but the December 14 meeting will be an important one for signalling that the rate hike cycle is ending.
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How are you reacting to all the commentary coming in from Biden saying that he does not think there is going to be a recession? If it is, it will be a very slight one – that is the US economy is going to move down slightly. If the US economy with its mammoth size moves down slightly, it also means a lot of ripple effects for the rest of the world.
Well there is a degree of recession – the magnitude of the decline in GDP and also the duration. I would like to say that I agree with him. I do not think there will be a recession and if there is, it will be a very small one. The one in our recent experience that would be most appropriate to compare would possibly be 1990 where we had a recession that lasted just a few months.
I do not particularly remember how many but it was certainly less than 12 months and it was a function of the oil price shock following the savings and loans crisis in Texas and some of those other states. Anyway what I want to say is that it was shallow. It was short and at that time, one kind of felt it. I remember, because I was trying to find a job back then and that is how I ended up in Asia. But it ended quite soon and I think this will be the same in the sense that we have had a commodity price spike. But that is coming off now and at the same time, as I said, the labour market in the US is simply so strong. It will be highly unusual to get a severe recession when employment is still this strong.
Where does India stand in all of this? We have been banking on China plus one factor and the crisis in Europe with respect to gas. Now that we are seeing an opening up of China, does that leave India in a bit of a vulnerable position?
We were not seeing an opening up of China. There were two editorials in the last two days in the People’s Daily which is the communist party’s official mouthpiece and another one in Xinhua which is the government’s official media. All three were supportive of the dynamic zero Covid policy and there are very strong signals that it will not be removed after the party congress kicks off on Sunday.
It is not opening up and I just read this morning that they have just hired 950 people in the Shanghai Municipal Government on a two-year contract to enforce dynamic zero Covid policy.
Let me be a compulsive critic or a naysayer. The war is not resolved. Winter has just about kicked in, so what should we expect in terms of inflation dynamics, demand dynamics because it could get ugly, it could get messy, and it really could get dark in Europe?
I must confess that you are right to say there are so many moving parts that are extremely complicated. What we are going to get over the next couple of months is a softening in the sticky price items that are represented in the core inflation. I just mentioned rent and healthcare earlier.
I think we are going to get a significant drop in the healthcare insurance contribution per CPI in particular which is a bit of an accounting anomaly that I cannot go into now. It is going to happen and the rents are coming down. You will see softening in some of those ones. They were the ones that Fed was more concerned about and perhaps not so much of a softening in the more flexible items that had been coming down like commodities because OPEC plus has announced this supply cut.
Now let me just say that 2 million barrels per day includes the oil that Europe already said they would not have bought from Russia anyway and a lot of the Opec countries will have trouble meeting the quota as it is. We think it is probably more like a million to 1.2 million barrels per day that OPEC plus will be reducing, which is still material but it is not as much as 2 million barrels a day.
Adding it all up, we could be looking at about $80 a barrel which is lower than it is per day but not dramatically lower. I would also say that oil is not as important as it was 120 years ago for the economy due to technology we have to a degree, including India, weaning ourselves off of it as being such an incredibly important component for making everything work. Just look at what we are doing right now. We are having a conversation. I do not think we are using oil and in the old days, I had to take all sorts of transport to go over there to see you and come back.
In India, does the fact that we are seeing that gap widen between the DII buying and the FII selling, emerge as a worrying trend as we are seeing that picking up?
Mark Matthews: I have always felt that in every country including India, it is much better to have locals liking the market than the foreigners because the foreigners mean hot money. They will run away in a crisis. It is the home (local) buyers that every single country has to depend on.
I would rather see the locals liking their market because there is that risk of the foreign money departing when times get tough but also because the locals know their market best and so for me the fact that locals are buying is a vote of confidence from the people who really know what is going on,
For example, you might have seen Tatas are going to be investing a lot of money in India, I was so happy to see that because that is the kind of news you want to see locals putting their own money in the market.