Sublime Consulting

Just a few minutes ago, the Central Bank of U.S.A or Fed cut the Fed Funds rate by 50 basis points. Yes. 5.25 to 4.75. Lo behold! It cut the discount rate too by 50 basis points. From 5.75% to 5.25%.

What does it mean to you and me in India?
Well for starters..the Dow Jones has already rallied by 260 points to 13663.
Tomorrow the Asian markets and India will follow the rally..

While the Fed’s aggressive move of cutting 50 basis points in both fed funds rate and discount rate may stem the recession in the short term, what we need to watch is whether the American consumer is going to be wise enough this time or not..
It is interesting to note that equity markets across the world surge for a very short period and then decline considerably with interest rates climbing up again.

Meanwhile oil climbed above $ 82 per barrel!

All this leads us to Hyman Minsky’s ‘The Financial Instability Hypothesis’
At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they’ve taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. “This is likely to lead to a collapse of asset values,” Mr. Minsky wrote.
When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.
Another famous Bond Fund Manager Paul McCulley’s ‘Plankton theory meets Minsky’ is one of the widely read and appreciated report on the current financial crisis thats roiling the markets.

From an India perspective, we are fairly insulated thanks to our domestic demand and the pro-active RBI being ahead of the curve. The RBI’S focus of reducing inflation and inflationary expectations, bringing price stability and managing the rupee has been very well appreciated by most of the economists in the world. It went ahead with tightening credit through various measures when other central banks were groping in the dark, followed by stricter regulations in specific sectors like the banking sector[in terms of change in accounting system with respect to securitization activities], realty sector[curtailing ECB inflows to $20 million and higher risk weight for banks lending to realty sector] and allowing the rupee to appreciate have till date ensured that we are insular from many of the major global crisis in financial markets.
Thus be it the recent Sub Prime Crisis or Credit market bubble[the contagion though has not reached our shores, thanks to our corporates being lesser leveraged and the debt market in the country is literally non-existent] or Asian Crisis in 1997, we have been fairly insulated from the turmoil that affected other markets.
Further, unlike our wester counter parts our regulations do not allow mutual fund managers to invest junk bonds in money market funds. Neither does the Government’s Sovereign funds invests in risky investments or Private Equity Funds like some of those whose values have gone down significantly post the credit bubble.
India’s resilience has been well documented very recently by Jim Walker of CLSA in his report on Apocalypse Now! But India is a Safe Bet.

On this momentous day will leave you with two quotes that sum the current global crisis in financial markets:
Jeremy Grantham, Chairman of GMO LLC which manages $ 150 billion in assets, once ended one of his notes to clients in early 2006 with, “Guinea pigs of the world unite. We have nothing to lose but our shirts.”

“We are in the midst of a Minsky moment, bordering on a Minsky meltdown,” says Paul McCulley, an economist and fund manager at Pacific Investment Management Co., the world’s biggest Bond Fund Managers.

To sum up..what should you and I as an Investor do now in the next 6 months?
Book Significant Profits, buy Gold, stay in Cash , wait for correction and buy during the lows.