By J Mulraj
Nov 13-19, 2022

The coming recession

The announcement, last week, of lower CPI inflation in USA cheered the market, on hopes that the Federal Reserve would lift its foot off the pedal, and raise interest by less than the past four hikes of 0.75% at its next meeting. Hope, as the saying goes, springs eternal in the human breast.

The drop in CPI numbers were as a result of lower commodity prices, thanks to reduced Chinese demand due to its lockdown policy, and reflected in lower consumer prices. However, some of these, especially diesel prices, are slated to rise. There is a huge shortage of diesel, without which the trucking industry can’t deliver goods, and EU countries are paying high prices for it. That will make diesel unaffordable to poorer countries. Just like wheat. So inflation hasn’t been vanquished.

In the week gone by, at the G20 summit in Bali, Biden and Xi danced a peace waltz, professing cooperation rather than confrontation. Now if The Second Waltz is danced soon, not by Andre Rieu, but by Putin and Zelensky, and negotiations were to begin to bring an end to a war that ought never to have begun, stock markets would rejoice.

If not, they would remain static.

The immediate bull case is dependent on geopolitics. After a Russian withdrawal from Kherson, Zelensky may be less willing to negotiate, in the belief he need not concede any territory now that he is seemingly winning. Unless external voices pressure both sides, the war will continue with senseless loss of lives. The countries egging the protagonists on aren’t feeling the pain.

The tragedy is that both countries, prodded by their mutual friend, Erdogan of Turkey, had almost reached an agreement in March ‘22, which was scuttled by Boris Johnson, former British PM, who visited Ukraine in April and apparently told Zelensky that the West was not prepared for an end to the war! . Just think of the amount of lives that could have been saved, and of the environmental harm that could’ve been prevented, had Boris not been so callously myopic!

If it weren’t so sad, the situation is farcical. US/NATO aren’t fighting the war, but are funding it, both financially (depriving pressing domestic needs) and militarily (thereby depleting their own stockpiles to an alarming extent). So depleted that USA would be hard pressed to defend Taiwan, if needed, and NATO will have neither the troops, nor the equipment, to fight Russia f the need arose. It almost did, when a missile, accidentally fired, killed two people in Poland. Despite losses and deaths all around, all sides are pursuing a jingoistic path of self destruction! Ukraine is using ammunition at a rate faster than the West can produce it.

Military analysts feel the Kherson withdrawal is a lull before the storm. Putin has gathered some 300,000 troops, and is waiting for winter to set in, and the ground to freeze, before moving in, perhaps with a preemptive use of EMP (electro magnetic pulse) weapons, which destroy electronic communications, but not infrastructure. Shorn of electronic capability Ukraine would find it impossible to stop incoming cruise missiles, which would seek to destroy its power grid. Ukrainians would freeze, and in the dark. So, there is pressure on Zelensky to go to the negotiation table now; that option will close when the winter attack is launched.

Another pressure point on Zelensky is the possible cessation of funding from the US now that the Democrats no longer control the House of Representatives.

The world is feeling the pain. In China, Xi Jinping continues to obdurately pursue his zero-tolerance to Covid lockdown policy, which is as ineffective as its vaccine. The closure of Chinese factories has resulted in a significant fall in commodity prices, which were guzzled by China, the #2 economy. And to a supply side disruption of goods, produced cheaply, that had helped curb inflation.

The zero tolerance policy towards Covid, plus its use of ineffective Chinese vaccine, has prevented its citizens from acquiring herd immunity. But Xi is obdurate in its continuance, albeit signing a deal with Germany that allows BioNTech to produce its vaccine in China. If Xi swallows the bitter pill (his ego, not Sinovac) and allows usage of the BioNTech vaccine, normalcy can return sooner.

But if this is not done, the world is heading towards a global recession. Some countries may already have entered one.

The tech industry has started to lay off workers, which is a sign of recession. After Twitter, Meta laid off 11000 employees, followed by Amazon, which laid off 10,000. China’s biggest aluminium extrusions company, China Zhongwang, has been admitted into bankruptcy. In America, crypto exchange, FTX, has declared bankruptcy. It’s newly appointed CEO, appointed to oversee the bankruptcy process, states in the bankruptcy filing that in his 40 years of legal and restructuring experience, he has never seen such a failure of corporate controls and such an absence of financial record as in FTX! No board meetings were held! Corporate funds were used to buy personal properties. And yet FTX was rated higher than Exxon in governance! Rating companies had, in the 2008 global financial crisis, been completely wrong in giving high ratings, sometimes triple A, to securitised sub prime mortgages. They continue being callous.

Indian companies, though, are faring better. And it’s stock market is steady. The holding of corporate equity by FIIs (foreign institutional investors) is, at 19.03%, the lowest in a decade. The market, however, is at a high, because DII (domestic) have stepped in. Due to low interest rate on bank deposits, a tectonic shift is taking place in investment of household savings. Earlier, some 80% of household savings went into bank deposits. Now, on maturity of these deposits, they are being ploughed into mutual funds, and thence into equity investment.

Last week the BSE Sensex was flat, closing the week at 61663, down 123.

Investors are watching the developments in Ukraine and at the Federal Reserve. In the former, if talks for a negotiated settlement begin, makers would rally. There is a huge amount of war fatigue, and Ukraine cannot continue to depend on Western support, both financial and military. A settlement would be a victory of common sense over ego.

The Fed, though, would, I believe, keep its foot on the pedal, and raise interest rates. This is going to lead to a credit crunch, as it is simultaneously doing Quantitative Tightening. Stocks of diesel are low, and should the trucking industry be unable to transport food, i Latino will soar, as will interest rates. So it may be necessary to prepare for a roller coaster downturn. After which, Indian equity would become a very desirable asset class, as India is growing while others are slowing.


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