Easy Money

Too much debt, too little growth and too low interest rates

 

 
Vivek Kaul

The financial crisis that started in September 2008, after the Wall Street investment bank Lehman Brothers, went bust, led to the economic growth stagnating in large parts of the world.

The central banks around the world tackled this by cutting interest rates to very low levels. The hope was that at low interest rates people would borrow and spend. At the same time, corporates would use this opportunity to borrow and expand. And this would lead to economic growth coming back. QED.
But that is not how things panned out. Instead of prospective consumers borrowing and spending money, large institutional speculators borrowed money at low interest rates in large parts of the Western world and invested it in financial markets all over the world. This excessive inflow of “easy money” has led to bubbles in financial markets in large parts of the world.

This point is made in the latest annual report of the Bank of International Settlements (BIS) based out of Basel in Switzerland. The BIS is often referred to as the central banks of central banks. As the BIS annual report for the financial year ending March 31, 2015 points out: “very low interest rates that have prevailed for so long may not be “equilibrium” ones, which would be conducive to sustainable and balanced global expansion. Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.”

This is a very interesting point. What BIS is saying is that low interest rates have led to very little economic growth. At the same time the total amount of global debt has gone up (as can be seen from the accompanying chart). In order, to tackle this low economic growth rate, the central banks have either cut interest rates further or maintained them at their low levels. In fact, several central banks in Europe have also taken their interest rates into negative territory i.e. you have to pay money in order to deposit money with them. Hence, lower interest rates have led to further lower interest rates without creating much economic growth.

As can be seen from the accompanying table, the total global debt has touched around 260% of the global gross domestic product (GDP). In 2008, it was around 230% of the global GDP. It’s a weird economic world that we live in. While the low interest rates did not lead to economic growth as was expected, they did lead to financial market booms.

Interest rates sink as debt soars

As Gary Dorsch of Global Money Trends newsletter puts it in his latest column: “Cheap money encourages more debt and creates financial booms and busts that leave lasting scars on the economy. They underpin both the potentially harmful high risk-taking in financial markets, while subduing risk-taking in the real economy, where investment is badly needed. And while increases in interest rates could cause stock prices to fall, – the likelihood of turmoil is only increased by waiting.”

Long story short—the longer the era of easy money continues, the worse the crash will be, as and when it comes. This is a point that the BIS makes it in its report as well, where it says: “Risk-taking in financial markets has gone on for too long. And the illusion that markets will remain liquid under stress has been too pervasive. But the likelihood of turbulence will increase further if current extraordinary conditions are spun out. The more one stretches an elastic band, the more violently it snaps back.”

This basic elastic-band analogy should tell us very clearly how delicately poised the global economy is with all the excessive debt that has been built up over the last few years, in the hope getting economic growth going again.

The BIS feels that the era of easy money and very low interest rates needs to be reversed as soon as possible. “Restoring more normal conditions will also be essential for facing the next recession, which will no doubt materialise at some point. Of what use is a gun with no bullets left? Therefore, while having regard for country-specific conditions, monetary policy normalisation should be pursued with a firm and steady hand,” the BIS annual report points out.

The question is will the central banks take the risk of raising interest rates in the days to come. The economic recovery (whatever little of it has happened) continues to remain very fragile. And will any central bank governor (or Chairman) take the risk of killing even that by raising interest rates? As John Maynard Keynes once said: “’Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

It is also worth asking here if central banks will sacrifice the short-term for the long-term? As the BIS report points out: “Shifting the focus from the short to the longer term is more important than ever. Over the past decades, it is as if the emergence of slow-moving financial booms and busts has slowed down economic time relative to calendar time: the economic developments that really matter now take much longer to unfold. Meanwhile, the decision horizons of policymakers and market participants have shortened. Financial markets have compressed reaction times and policymakers have chased financial markets more and more closely in what has become an ever tighter, self-referential, relationship.”

The Federal Open Market Committee (FOMC) of the Federal Reserve of the United States is meeting over July 28-29, 2015. Many experts have said time and again that the Federal Reserve will raise interest rates this year. The Fed chairperson Janet Yellen has hinted at the same as well. Let’s see if FOMC comes around to doing that.

The column originally appeared on The Daily Reckoning on July 29, 2015

Janet Yellen’s excuses for not raising interest rates will keep coming

yellen_janet_040512_8x10
The Federal Open Market Committee(FOMC) of the Federal Reserve of the United States, which is mandated to decide on the federal funds rate, met on March 17-18, 2015.
The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.
In the meeting the FOMC decided to keep the federal funds rate in the range of 0-0.25%, as has been in the case in the aftermath of the financial crisis which broke out in September 2008. Janet Yellen, the chairperson of the Federal Reserve also clarified that “an increase in the target range for the federal funds rate remains unlikely at our next meeting in April.” The next meeting of the FOMC is scheduled on April 27-28, 2015.
The question is when will the Federal Reserve start raising the federal funds rate? As the FOMC statement released on March 18 points out: “In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
Other than a clear inflation target of 2%, this is as vague as it can get. The inflation number in January 2015 came in at 1.3%, well below the Fed’s 2% target. The Fed’s forecast for inflation for 2015 is between 0.6% to 0.8%. At such low inflation levels, the interest rates cannot be raised.
But the Federal Reserve wasn’t as vague in the past as it is now. In December 2012, the Federal Reserve decided to follow the Evans rule (named after Charles Evans, who is the President of the Federal Reserve Bank of Chicago and also a part of the FOMC). As per the Evans rule, the Federal Reserve would keep interest rates low till the rate of unemployment fell below 6.5 % or the rate of inflation went above 2.5 %.
As the FOMC statement released on December 12, 2012 said: “ the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 % and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.”
This is how things continued until March 2014, when the Federal Reserve dropped the Evans rule. In a statement released on March 19, 2014, one year back, the FOMC said: “In determining how long to maintain the current 0 to 1/4 % target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 % inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” In fact, this is exactly the wording the FOMC has used in the statement released on March 18, 2015.
What the FOMC meant in the March 2014 statement was that instead of just looking at the rate of unemployment and the rate of inflation, the Federal Reserve would also take into account other factors before deciding to raise the federal funds rate. So what made the Federal Reserve junk the Evans rule?
In February 2014, the rate of unemployment was at 6.7% and was closing in on the Evans rule target of 6.5%. In April 2014, the rate of unemployment had fallen to 6.2%.
If the Fed would have still been following the Evans rule, it would have to start raising the Federal Funds rate. This would have meant jeopardising the stock market rally which has been on in the United States. In the aftermath of the financial crisis, the Federal Reserve had cut the federal funds rate to 0-0.25%, in the hope of encouraging people to borrow and spend more, to get their moribund economies going again.
While people did borrow and spend to some extent, a lot of money was borrowed at low interest rates in the United States and other developed countries where central banks had cut rates, and it found its way into stock markets and other financial markets all over the world. This led to a massive rallies in prices of financial assets. In an era of close to zero interest rates the stock market in the United States has seen the longest bull market after the Second World War.
Any increase in the federal funds rate would jeopardise the stock market rally. And that is something that the American economy can ill-afford to. So, it is in the interest of the Federal Reserve to just let the stock market rally on.
Interestingly, the Federal Reserve has been changing the so-called “forward guidance” on raising the federal funds rate for a while now. In March 2009, it had said that short-term interest rates will stay low for an “extended period.” In August 2011, it said that short-term interest rates would stay low till “mid-2013.” In January 2012, the Fed said that short-term interest rates would remain low till “late 2014.” And by September 2012, this had gone up to “mid-2015.”
In March 2014, it junked the Evans rule. So, what this means is that the Federal Reserve will ensure that interest rates in the United States continue to stay low. Peter Schiff, the Chief Executive of Euro Pacific Capital, summarized the situation best when he said that the Federal Reserve would “keep manufacturing excuses as to why rates cannot be raised” and this was simply because it had “built an economy completely dependent on zero % interest rates.”
Given this, be prepared for Janet Yellen offering more excuses for not raising the federal funds rate in the days to come.

The column originally appeared on The Daily Reckoning on Mar 20, 2015

In the long term, will “easy money” come from China as well?

chinaVivek Kaul

The Chinese economic growth for 2014 was at 7.4%, a tad lower than the official target of 7.5%. This is the slowest rate that the country has grown at in 24 years.
In the aftermath of the financial crisis that started in September 2009, the Chinese government pushed the banks to ramp up lending. In a recent piece for the Wall Street Journal, Ruchir Sharma of Morgan Stanley estimates that “since 2008 the money supply has nearly tripled to $20 trillion” in China. Sharma further writes that China ordered up “new spending” which totalled to “12% of GDP, by far the biggest stimulus of this period.”
This helped the Chinese economy to keep growing at a fast rate in the aftermath of the financial crisis, even though growth in most of the other parts of the world collapsed. The trouble was that a lot of this money went towards creating infrastructure which was not required in the first place. It also led to a huge property bubble.
As Sharma puts it: “This decay is symbolized by the bridges, apartment complexes and half-empty shopping malls rising across China—many of them wasteful projects that were hurriedly seeded in 2009 and will sap growth in the future. The message: When the state spends in haste, it will repent at leisure.”
At the same time the productivity of Chinese capital has been coming down. It now takes more capital and more loans to get the same amount of economic growth going than it did in the past. In a recent study carried out by two economists working with the Chinese National Development and Reform Commission (NDRC), a top economic planning and regulatory agency in China, came up with some interesting results.
The study found that China’s incremental capital output ratio has risen dramatically over the years. It averaged at 2.6 for the period between 1979 and 1996. It has since jumped to 4 between 1997 and 2013. What this means is that before 1997 it took an average investment of $2.6 to get $1 of GDP growth going. Since 1997, it has taken an average investment of $4 to get $1 of GDP growth going.
The economists also found that the delivery rate of completed capital projects has come down dramatically over the years. The number stood at 74-79% in the late 1990s and has since fallen to around 60%, implying that 40% of the Chinese investment projects have either not been completed or did not finish on time.
The negative effects of the spending binge are now starting to be felt. As Wei Yao of Societe Generale wrote in a recent research note titled China: deceleration as usual, easing as routine and dated January 20, 2015: “More strikingly, property investment growth collapsed to -1.9% year on year from +7.6% year on year, the first contraction in 18 years! Construction data further confirmed that developers are struggling. New starts remained in deep contraction, falling 26.1% year on year; growth of floor space under construction fell below 10% year on year for the first time since mid-2000; and completion growth plummeted to 1.2% year on year from 11.4% year on year in the previous month.”
The non performing loans of banks are also rising at a rapid rate. As Yao wrote in another note dated November 20, 2014, and titled China: easing by not easing: “The non performing loan stock has been growing at a 35% clip this year. Smaller banks have seen faster deterioration, with non performing loans rising 50% year on year. The worse is still to come and banks know it.”
All this does not augur well for the Chinese economy and the government is trying to initiate what economists call a “soft landing”. This may also include ensuring that the Chinese economy does not grow as fast as it was in the past.
As Li Baodong, a Vice Foreign Minister, told reporters after the latest economic growth numbers came out: “China has entered a new normal of economic growth…That is to say we are going through structural adjustment and the structural adjustment is progressing steadily.”
This is a clear hint of the fact that the Chinese government is neither looking at spending more nor pushing banks to lend more, in order to push up the falling economic growth. “The chance of aggressive policy easing remains small,” writes Yao.
The trouble is that the Chinese investment forms a major part of the investment happening all over the world. As Sanjiv Sanyal of Deutsche Bank Market Research writes in a recent research note titled The Capital of China is Moving: “China’s domestic investment currently accounts for a disproportionate 26 per cent of world investment, up from a mere 4 per cent in 1995. In contrast, the United States saw its share peak at 35 per cent in 1985 but now accounts for less than a fifth.”
Why is Chinese investment such a dominant part of total global investment? “China’s dominance is driven by the fact that it saves and invests nearly half of its $10.5trillion economy,” writes Sanyal.
But it is becoming more and more difficult to fruitfully deploy $5 trillion (around half of $10.5 trillion). This is primarily because the “country…already has brand new infrastructure, suffers excess manufacturing capacity in many segments and is trying to shift to services, a sector that requires less heavy investment.”
This means that Chinese investment will go down in the coming years. Hence, if the Chinese savings rate continues to remain the same or does not fall at the same rate, it will lead to surpluses.
Chances are that the Chinese savings rate will not decline primarily because China is ageing at a very rapid rate. “The experience of other ageing societies such as Germany and Japan is that investment rates fall faster than savings rates,” writes Sanyal.
In another research note Bretton Woods III and the Global Savings Glut published in October 2013, Sanyal explains this theory in detail. Sanyal basically says that when people are young, their spending needs are greater. Hence, they need to borrow money in order to consume and/or build assets (like homes). But, as they age, their savings rise and they build up a stock of wealth, which they spend in their old age. Countries work along similar lines. Basically, what this means is that as a country ages (with the average age of its population rising), it tends to save more.
By 2030, China would go from being significantly younger to the United States to becoming significantly older to it, with a median age above 40. The excess savings that will be generated need to be absorbed somewhere.
A lot of this money is likely to find its way into the United States, feels Sanyal. And this might help the US government to continue borrowing from foreign countries. It would also keep interest rates low and help Americans keep their excess consumption going by borrowing. “The next round of global economic expansion may require the United States to revert to its role as the ultimate sink of global demand,” wrote Sanyal in the October 2013 note.
In his latest note Sanyal also states that the United States “has the necessary scale to absorb China’s surplus and the poor state of its infrastructure provides many avenues for fruitful deployment of capital.” Nevertheless, he goes on to write that “history suggests that some of this cheap money would inevitably find its way into trophy assets and bubbles.”
As far as theories go, this one sounds pretty logical. Let’s see how it goes. That only time will tell.

(The column appeared on www.equitymaster.com as a part of The Daily Reckoning as on Jan 23, 2015)

Sensex @28,500 : Stock Market as a beauty contest

bullfightingVivek Kaul

We never know what we are talking about – Karl Popper

The Sensex closed at 28,499.54 points yesterday (i.e. November 24, 2014). The fund managers are confident that this bull run will last for a while. Or so they said in a round table organised by The Economic Times.
Prashant Jain of HDFC Mutual Fund explained that during the last three bull markets that India had seen, the market had never peaked before reaching a price to earnings ratio of 25 times. The price to earnings ratio currently is 16 times, and hence, we are still at a “reasonable distance” from the peak.
This seems like a fair point. But how many people invest in the stock market on the basis of where the price to earnings ratio is at any point of time? If that were the case most people would have invested in 2008-2009, when the price to earnings ratio of the Sensex through the year stood at 12.68.
By buying stocks at a lower price to earnings ratio, they would have made more money once the stock market started to recover. But stock markets and rationality don’t always go together. Every investor is does not look at fundamentals before investing. “In investing, fundamentals are the underlying realities of business, in terms of sales, costs and profits,” explains John Lanchester in How to Speak Money.
A big bunch of stock market investors like to move with the herd. Let’s call such investors non fundamentals investors.
So when do these investors actually invest in the stock market? In order to understand this we will have to go back to John Maynard Keynes. Keynes equated the stock market to a “beauty contest” which was fairly common during his day.
As Lanchester writes “Keynes gave a famous description of what this kind of non-fundamentals investor does: he is looking at a photo of six girls and trying to pick, not which girl he thinks is the prettiest, and not which he thinks most people will think is the prettiest, but which most people will think most people will think is the prettiest…In other words the non-fundamentals investor isn’t trying to work out what companies he should invest in, or what company most investors will think they should invest in, but which company most investors will think most investors will want to invest in.”
Or as Keynes put it in his magnum opus The General Theory of Employment, Interest and Money“It is not a case of choosing those [faces] that, to the best of one’s judgement, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.”
Hence, a large bunch of investors invest on the basis of whether others round them have been investing. That is the beauty contest of today.
Nilesh Shah, MD and CEO of Axis Capital pointed out in The Economic Times round table that nearly Rs 25,000-Rs 30,000 crore of money will come into the stock market through systematic investment plans (SIPs).
Anyone who understands the basics of how SIPs work knows that they are designed to exploit the volatility of the stock market—buy more mutual fund units when the stock market is falling and buy fewer units while it is going up. This helps in averaging the cost of purchase over a period of time, and ensures reasonable returns.
Investors who are getting into SIPs now are not best placed to exploit the SIP design. Nevertheless, they are still investing simply because others around them have been investing. This also explains why the net inflow into equity mutual funds for the first seven months of the this financial year (between April and October 2014) has been at Rs 39,217 crore. This is when the stock market is regularly touching new highs.
And if things go on as they currently are, the year might see the highest inflow into equity mutual funds ever. The year 2007-2008 had seen Rs 40,782 crore being invested into equity mutual funds. This was the year when the stock market was on fire. In early January 2008, the Sensex almost touched 21,000 points. It had started the financial year at around 12,500 points.
So, now its all about the flow or what Keynes said “what average opinion expects the average opinion to be.” And till people see others around them investing in the stock market they will continue to do so. This will happen till the stock market continues to rise. And stock market will continue to rise till foreign investors keep bringing money into India.
No self respecting fund manager can admit to the fact that these are the reasons behind the stock market rallying continuously all through this year. This is simply because all fund managers charge a certain percentage of the money they manage as a management fee.
And how will they justify that management fee, if the stock market is going up simply because it is going up. Nobel prize winning economist Robert Shiller calls such a situation a naturally occurring Ponzi scheme.
As he writes in the first edition of Irrational Exuberance: “Ponzi schemes do arise from time to time without the contrivance of a fraudulent manager. Even if there is no manipulator fabricating false stories and deliberately deceiving investors in the aggregate stock market, tales about the market are everywhere. When prices go up a number of times, investors are rewarded sequentially by price movements in these markets just as they are in Ponzi schemes. There are still many people (indeed, the stock brokerage and mutual fund industries as a whole) who benefit from telling stories that suggest that the markets will go up further. There is no reason for these stories to be fraudulent; they need to only emphasize the positive news and give less emphasis to the negative.”
And that is precisely what fund managers will do in the time to come. In fact, they have already started to do that.
They will tell us stories. One favourite story that they like to offer is that India’s economy is much better placed than a lot of other emerging markets. This is true, but then what does that really tell us? (For a real picture of the Indian economy check out this piece by Swaminathan Aiyar).
Another favourite line you will hear over and over again is that “markets are never wrong”. This phrase can justify anything.
The trick here is to say things with confidence. And that is something some of these fund managers excel at. Nevertheless it is worth remembering what Nassim Nicholas Taleb writes in The Black Swan: “Humans will believe anything you say provided you do not exhibit the smallest shadow of diffidence; like animals, they can detect the smallest crack in your confidence before you express it. The trick is to be smooth as possible in personal manners…It is not what you are telling people, it how you are saying it.”
And this is something worth thinking about.

The article originally appeared on www.equitymaster.com on Nov 25, 2014

Sensex at 28,000: Will the real Indian stock market investor please stand up?

bubbleVivek Kaul

I have cooked my own food for over 12 years now. Over the years, as boredom from cooking on a daily basis has set in, the quality of what I cook has deteriorated. These days the food I cook is just about edible.
Given this, I like to watch some mindless television while eating. This ensures that I don’t pay attention to what I am eating and as a result, don’t end up cribbing to myself. What works best in this scenario, especially during lunch time, are business news channels.
If you are the kind who still watches them, you would know that a major part of the day on these channels is spent in trying to figure out which way the stock market is headed. The anchors of these channels talk to so called “experts” who give their “gyan” on why they feel the market moved the way it did, and which way they think it’s headed in the future.
More often than not these experts are optimistic and keep telling us that the market is only going to go up from here. Nevertheless, as you and I know that is not how things always turn out. It is especially interesting on days the markets rise, to see these experts thump their chests and tell the viewers “I told you so!”
The reasons for their optimism vary from day to day. It can be low inflation on one day and the hyperactive Modi government on another. On days they run out reasons they like to tell us the “India growth story is still intact”. Come rain or sunshine, these experts always have their reasons ready. And that makes it great fun to watch.
(I have to confess here that I have this recurring dream where I have been invited to a studio of a business channel and am asked “Mr Kaul, which way do you think the stock market is headed?” And I look write into the eyes of the anchor and tell her “Mam, it’s headed only one way and that’s up”.
“Why do you say so?” she asks, with her eyebrows fluttering. And I reply: “The whole country of the system is juxtaposition by the haemoglobin in the atmosphere because you are a sophisticated rhetorician intoxicated by the exuberance of your own verbosity.”)
Jokes apart, these experts especially the Indian ones, never really tell us the real reason behind the Indian stock market going up.
Between April 2007 and October 2014, the foreign institutional investors(FIIs) made a net purchase(gross purchase minus gross sales of stocks) of Rs 2.06 lakh crore in the Indian stock market. During the same period the domestic institutional investors(DIIs) made net sales of Rs 22,715 crore.
Things get more interesting once we look at the numbers between September 2008 (the month the current financial crisis started) and October 2014. During this period, FIIs have made a net purchase of Rs 2.76 lakh crore. In the same period, the DIIs made net sales of Rs 95,219 crore. These data points tell us very clearly who is really driving up the Indian stock market. In the aftermath of the financial crisis breaking out in September 2008, the developed nations of the world led by the United States and United Kingdom carried out quantitative easing or printed money and pumped it into their respective financial systems, to keep interest rates low.
This was done in the hope that at low interest rates people would borrow and spend more, and all the spending would help revive economic growth. What happened instead was that large financial institutions managed to borrow money at low interest rates and invested it in financial markets all over the world. This has driven up stock markets all over the world, including the BSE Sensex.
The inflow of foreign money has been particularly strong this year. As Abhishek Saraf and Abhay Laijawala of Deutsche Bank Market Research point out in a recent report “On a year to date basis too, India has witnessed the highest FII inflows into equities at ~US$14billion.”
This has helped the Sensex rally by more than 33% since the beginning of this year. But the interesting thing is that DIIs have continued to stay away. Since the beginning of this year they have made net sales of Rs 27,241.5 crore.
Nevertheless, October 2014 has been an exception to this, with the DIIs making a net purchase of Rs 4,103 crore. This is for the first time since August 2013, when the net purchase of the DIIs was higher than that of the FIIs. In fact, FIIs made net sales of Rs 1683 crore during the course of the month.
The question to ask here is why have the DIIs not invested anywhere as much as the FIIs have in the years since the financial crisis broke out. The answer lies in the fact that DIIs (primarily insurance companies and mutual funds) ultimately invest money they collect from the retail investors.
The retail investors had bailed out of the stock market lock, stock and barrel, in the aftermath of the financial crisis. They haven’t returned since. A major reason for the same was the fact that insurance companies sold expensive unit linked insurance plans (or Ulips) to retail investors.
Many agents promised investors that their money once invested in the stock market would double in three years. That clearly did not happen, and individuals who had bought Ulips essentially went around footing the bill for the high commissions that insurance companies paid their agents. And this ended up giving the stock market a bad name.
Also, many retail investors started entering the stock market only in late 2007, when the market was already at a very high level and ended up making losses. As Deepak Parekh said in a speech last week in Mumbai “Retail investors tend to enter stock markets on the highs and lose confidence on the lows.”
Further, DIIs represent only the indirect participation of the retail investor in the stock market. What about the direct participation? This is very minuscule. As Parekh pointed out “On the retail side, the picture is grimmer. Direct participation of retail investors in Indian capital markets is 1.4% of the population compared to China at 9.4%, UK at 16% and US at 18%.” Or as maverick investor Shankar Sharma once told me during the course of an interview “The Sensex is just a two square mile phenomenon — Fort to Nariman Point. That is about all that is interested in the Sensex.”
Parekh in his speech estimated that after excluding promoter shareholding and the retail segment, which do not have too much liquidity, FIIs dominate close to 70% of the market. What this clearly tells is that it is the FIIs have used the “easy money” provided by the central banks of Western countries to drive the Indian stock market, and, in turn, have benefited the most from it as well. This has also helped the BSE Sensex cross the level of 28,000 points more than a few times in the recent past.
Given this, the next time you see an Indian expert trying to give you reasons on why the stock market is rallying, try and tell this to yourself: “he knows not what he is talking for he is on television.”
To conclude the question to ask here is whether it is time to allow big provident funds like the employee provident fund, the government provident fund and the coal mines provident fund to invest a part of their corpus in the stock market? This will be one way of ensuring that some regular Indian money also keeps coming into the stock market and foreign investors are not the only ones to benefit. And that is something worth thinking about.

The article originally appeared on www.equitymaster.com on Nov 11, 2014