Global Economy and Markets

My few cents

America is the center of the world economy. America boasts itself as the largest and the wealthiest consumer of goods and services. America’s domestic consumption drives global growth whether its manufacturing in China, Veitnam etc. and services in India directly or indirectly.

Hence, a lot of businesses based out of developing or other developed economies are feeding the American needs (whether directly to consumers or other businesses based in America). Indirectly, a lot of jobs in such economies including India are dependent on rising and prospering American economy.

America and its consumers are not in a good shape right now. The last 40 years of global growth fueled by extremely loose monetary policy has created an overwhelming debt fueled economy. The prosperity enjoyed globally due to rising spending in the US economy over many decades may not continue. Infact, the extreme high levels of US Debt increase the odds of a debt fuelled economy reversing. Already, more than half of the US population is in recession (one can easily fathom that from the decreasing retail spending focussed on lower to middle income groups) . The rising value of assets in the US primarily of equities and real estate that led to the consumption boom in the US over the past decades may be coming to an end.

The world hasn’t seen a serious recession since 2008 (when I was an undergraduate) , thanks to the global money printing and liquidity flush primarily led by developed economies and supported by developing countries. The further the spring of debt laden economic prosperity is elongated, the higher is the force of regression is at some point. I am wondering whether we are quite close to that regression. While miracles are always possible that the world escapes it, but we play in probabilities, and they seem higher than ever before.

In the equity markets, the data of almost last 15 years suggest buying dips has been the right strategy in moments of equity markets distress. It is very easy to convince ourselves by seeing the history we have seen in our limited lifetimes and preparing for the recurrance of the same while ignoring the tail events that could occur.

Emerging markets like India are no doubt better positioned than US in the next decade given better fiscal health and growth opportunities, but in case of global recession, none of the economies will be spared at least in the short to medium term. The fund managers, who manage AUM and hardly have their own money invested in their funds, will always want to pacify investors to keep buying more, as their bonuses are dependent on the AUMs. However, such times call for taking few chips off the table and have significant dry powder ready if the things turn to the south. While you sit in the cash, the world may throw a lot of fake rallies in between for months which could lead to regrets or otherwise, but in case of extreme event of global recession, major redistribution of wealth occurs and those who have significant dry powders come very far ahead while the ones who are fully invested have to sit through this period of 3-4 years to recover their losses . While everything can workout in the long run, I am sure journey is also important for a lot of us and keeping a lot of cash (as Warren Buffett currently holds) will not only give you peaceful nights, but you will be excited to pounce if such dreary times come ahead, rather than being gloomy and stuck.

The choice is ours.

Akhil D.