Winter Update

Macro Matters - Part 1

Yesterday I published a chart of the BSE Industrials index with an ending pattern. Clearly some twitter followers wanted me to fall down. But I did not make the chart pattern, the market did as it did the Cap Gollds and Auto indices with similar patterns that I have published earlier under the ''Inter Market Analysis segment of the website''. So that brings me to the long term wave count chart on the Home page of Nifty. In my initial work on the Kondratieff cycle in 2010 I marked that high as wave 5. Now in hindsight it was wave 5 except that it was only wave A of 5. That wave 5's end in ending patterns is one thing, but to take that call and expect new highs is another. So it happened in real time. My only argument is that I find all the rallies from the 2009 low more certainly of corrective nature than impulsive on the Nifty and that single consideration was behind marking 2008-2013 as a triangle and now 2010-2018 as a wedge. It is the charts that are telling me so. 


If there was any bias in it probably you can blame the economic cycle studies. They were lead indicators that we were entering an economic winter. Now stock markets and economics do not always correlate as liquidity comes in between. So it does not matter till it does, and that can be a long period of time like 8 years even. But now with ending patterns across stocks and indices we are late in this trend and the time to think about the end of a trend is now more than ever IMHO [In my humble Opinion]. There is then just one logic that get pushed at me from the other side.

This chart sent by a friend asking about the markets. In other words Liquidity remains the main argument of the market against all odds. The people have come to believe that financial savings will ensure that markets never go down irrespective of the underlying fundamentals. Index management by changing index components at a record pace has helped create this illusion and keep valuations elevated at a new level.


The trend above is not new it has been India's bull market argument since 1987 when the UTI-64 scheme became famous. The many other MFs followed and we still had many bull and bear markets in between. The trend above is a generational trend and is not the main determinant of market price. Prices are more often than not driven by sentiment and are behavioural. Today's extreme behaviour comes on the back of extreme sentiment that came on the back of a new change wave that the public voted in with the election of our PM Shri N.Modi. That wave was the social mood, and remains even as economic data and earnings growth [at a market level] have languished. It has taken multiple rounds of economic stimulus in the form of OMOs, Pay commission, MSPs, and a currency devaluation in between. Most of this liquidity has reflected in consumption spending making the related sectors best performing. Some of that additional savings found itself into SIPs up until now.

As noted by Ritesh Jain, former CIO of Bnp Asset Mgmt, and Author notes on his blog - ''

Google trends show Mutual fund search at 18 months low and the result is stoppage of SIP’s

SIP are the support structure of indian equity markets and with most portfolio managers not beating their benchmarks , investors are getting disillusioned and stopping SIP’s
For April to June,2018; 30 lac fresh sip registrations and 12 lac have ceased. That’s 37%.
More alarming is in Direct option,5 lac fresh sips registered, 2.35 lac sip ceased. That’s almost 50%!!""

Screenshot 20180725-221716  01

The following interview on Real Vision catches the above Sentiment among Research Heads. The comparison being made is with the 1980s when US was forced to raise interest rates to fend off double digit Inflation. India does not face that scenario today. Based on the Kf cycle that moment was in the 1994-1996, when India had to raise rates many times and the ruling party lost the elections on it. Overnight Call money rates spiked to 100% many times. Our 1980s moment was in 2001-2003 when low interest rates and inflation combined kicked off the bull market that we are in late stages of. This bull market is akin to the one from 1980 in the US and both are called the Kondratieff Economic Autumn bull market. They end in consumption booms that has driven buying of Assets because of low rates and inflation. They end in Asset bubbles.  

On the other hand here is the take directly from the head of CMIE after the most recent IIP data

So the stock market and the Economy may have been on their own path for years and can continue to be for long however the time when Macroeconomic trends start to matter maybe closer than what most people think. Let me end the Note today with one more video from Real Visions that puts it in simple words


Gold Mining A History

Does gold do well in Inflation or Deflation and what is the role of Gold Mining Stocks. The Inflation case is well known and publicized but the case for an Economic Winter is not clear to all. EWI says gold will crash in the coming winter becauses we are not on a gold standard and maintains a bearish target long term for it. They said so even in 2002. The reason that gold plays a role is that it is often a monetary anchor. And sooner or later even after a deflationary event government spending and weak money policies have to come in to support growth. So during the last documented depression in the US even as gold was on a standard people took to express this opinion on Gold miners and the case of Homestake Mining is often quoted. AFter 1932 this was was confirmed as the US confiscated gold holdings and then revalued gold to a higher level against the dollar.

This chart of the time period of the depression of the Dow and Homestake Mining makes the pattern pretty apparent. At a time that stocks lost 90% the miners were a great asset allocation.


What after that. From 1939-1959 Gold Mining stocks went through a long term consolidation phase, many ups and downs. The next bull run then started from then and went on to 1980 as seen below from the Barron's Gold Mining Index below.


Since then the progress has been limited by the 2011-2015 bear market in gold. So while there was a big take off in prices after 2001 most of the gains were given back even though gold prices are at a much higher and elevated level. This has to do with more issuance of equity and share dilutions during the period. But the real thing is that this sector when on its own bull run beats stocks or the broader equity indices by a big margin. So the next chart shows the HUI/S&P ratio. The HUI is the Gold Bugs index divided by the S&P 500. It shows the gains made from 2001-2011  that it was beating the S&P, then a huge dip in performance followed into the 2015 lows. As shown since then we are in wave 2 of the next advance. The real thing would be if we get another repeat of a bull market in the Gold Mining sector in the current Economic winter. With currency markets getting volatile this is where that volatility often gets reflected.


But What about Silver. It is well known that when gold goes up in price Silver goes up even more. Just look gold stocks. Both move up, up to 3 times the rate of gold prices. So they provide higher Beta. I am showing a dated chart of the Gold/Silver ratio. Earlier I have discussed the 1995-2018 period but let us go back to 1975. What this shows you is the extremes we saw in the ratio in the previous cycles. During the last Gold bull market the ratio went down to 16. however in the subsequent period going below 40 has been difficult except in 2011. We were above 80 for the second time in 2 years in April, and the 4th time since 2003. In the last month the ratio has fallen to 75 and the trend down for the ratio appears to have started. This is why I wrote The Silver Report highlighting the bullish case for Silver as well. The severe bear market in the PMs did take the ratio to over 100 in 1991.


Similarly as gold prices rise and the USDINR turn higher the Sensex/Gold ratio should progress down  below the base line that it has held for 2 decades to complete the winter cycle for the Indian Economy.


Economic Growth will Come Later

While building your case for economic cycles and its conjunction with Elliott Wave analysis you have to go back and forth with data and published works of many to come up with the best possible observations to your case. Among the works of Robert Prechter is his book "Conquer the Crash" Published in 2002. The timing of the book may not appear appropriate to many as it came years ahead of the Housing crash and at the end of the Nasdaq bottom. But what you should use this book for is its insights into symptoms of economic cycles in the wave counts and the behavior of financial markets and its participants during a deflation. Since these observations are based on the study of previous sypercycles they are ideal for mapping what India is going through today. Many of the observations are already true here as India has only started to enter an Economic winter after 2010. For example the collapse in borrowing and lending during a deflation as debtors and creditors stop transacting new loans causing credit growth to collapse discussed in the later chapters. This is what India has been witnessing for the last few years as credit growth in India has collapsed and borrowers are holding back even as interest rates are declining. This is what you expect in a deflation.

In Chapter 1 of the book an interesting observation was made relative to the supercycle degree wave counts. Robert Prechter observes a divergence in economic performance in wave 5. See these charts from the book CTC, 2002. He uses both US and Japan as examples to show this kind of divergence in the book. This chart is of US indicators.

 wave five 1

Let me admit when I first interpreted wave 5 ending in 2010-2012 data in India did not show this clearly in the GPD/IIP data so what I observed was mostly that debt was going to balloon on the corporate side. That allowed me to start writing about the coming economic winter in India. I was early for sure. But now wave 5 has been 7 years in the making. As shown below wave 5 that could have ended much earlier did not and has me on the wrong foot because wave 5 is an ending diagonal. This is also called a wedge or a rising triangle like structure that contracts to the end point. The internal waves are 3-3-3-3-3, up and down to the end point. These observations so far are true. So I do believe that the wave count is a 5th wave.

 wave five 2a

The economic data for wave 5 compared to wave 4 does now provide the eivdence I was looking for even within this final wave. The chart below of GDP quarterly growth shows the slowling growth as we spent these years in wave 5. Chart courtesy 

wave five 3

The chart above combined with the one below shows India was in an Economic Autumn Bull market starting 2003. This involves a boom on the back of low interest rates and low inflation that results in Asset booms in not just equities but Real estate and other financial assets. The low interest rates seen during the Autumn fuel borrowing based consumption and buying of assets. The debt level of the nation [public+private] in total go up as corportes and consumers go in debt. After a point the extended state of balance sheets causes the economy to slow. I did not make up this economic cycle theory, so credit "The Soviet economist Nikolai Kondratiev (also written Kondratieff or Kondratyev) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade.[3][4]In 1939, Joseph Schumpeter suggested naming the cycles "Kondratieff waves" in his honor." For full details read 

The high levels is debt is therefore keeping India from growth taking shape. And it is sad that every time you get a few months of up tick in the data as you see from the blue line rising for the last month below, the entire media and Financial spokespersons come up to inform the world that the cycle has bottomed in India and earnings will grow next year. It is mostly misleading. Economic cycles suggest that without deleveraging you cannot kick off growth. And that can be done either by default, or bailouts and inflation. Neither path has been clearly been chosen in India. We are trying the middle path. Given our markets over optimism with growth, it has lead to over valuation based on a future that is far from near or around the corner. When corrective actions are taken they result in asset sales and write downs of equity. Later a jump in public expenditure to supplement growth. All that is coming. But it comes with rising volatility and not otherwises. 

wave five 4

You may tend to compare India's debt levels with other countries around the world and think that we are at the low end. This is not true. 
There is no definition for ''high end of the range'' except that after you cross 100% the music stops playing at some point and you have to take note. This again is based on numerous studies on the subject by the BIS and other economists. India is at levels that caused similar problems during previous historical Kondratieff cycles in the world in the past. That we have hit the growth wall means that we are already at the end of Autumn and into the Winter phase economically. The stock markets are still extending the Autumn boom as Sentiment at the retail investor level remains high on hope but the hopes are not realistic. An asset price correction, adjusted for inflation and currency effects that could intervene remains overdue in India. This positive sentiment has been aided by Salary increases in the form of Pay Commission reports, MSP for farmers and OMOs for the bond markets among others. These forms of stimulus have aided the soft landing but so far insufficient for the return of a higher growth trajectory because at a Macro level the economy is fully leveraged or overheated. 

All this does not mean that the reforms are not important. They will help us achieve a higher plateau on growth when the business cycle turns around on its own. Economic cycles are a function of public behaviour and will turn when they have to. Stimulants act as short term measures only. Reforms set the stage for the future but not the immediate state of affairs. This distinction is important. 1996-2001 is the best example of this. There were many reforms during that period but the cycle turned when it had to. interest rates dropped on their own in the last two years of the cycle to a new low not see before and finally triggered a new wave.

Many market commentators taking the bull side of the case ignore Macroeconomic possibilities. The best case scenario is kept above all. But the RBI was faire to come out and make this comment if it did. As reported in the ET. This is also what I have been saying. It is easy to make a growth projection on base effects but are we really turning the cycle? It is too early to say. In my view corporate remain over leveraged and the NPAs are a reflection of that. Unless you delevarage the private sector, getting them to invest in capex is off the charts. That puts the burden of investment on the government. One month before the next Union budget, and after the recent Gujarat elections, what we ougth to expect, if growth targets are to be met, is a meaningful expansion in government outlays towards investment to make up for the private sector.

IMG 20171222 082926

And to blow this horn for the nth time, every trend we witness in our market whether it is a sector performance or NPAs, the rise of corporate debt, EM $ borrowings, are all global trends. This chart then brings it out again, where we stand on banking stress. In my economic update almost 2 years ago I published a chart that was showing the turn around in NPA cycles from down to up.

global NPAs

As we head into the year end banks are busy finding ways to avoid the next crisis. To avoid marking down an increasing number of loans as bad based on the RBI directive.


And while growth rate of the economy has been slowing down, the high leverage has kept the average earnings from growing at an index level. Despte years of double digit projections by the street the outcome has not ben pretty. So while the projections continue this chart from Capitalmind, runs a 5 year annualised average grwoth in EPS for the NIfty 500 and a trend reversal is not exactly clear. There is likely to be an uptick due to the base effect in the coming months but the real question is whether it is sustainable. A lot is being pinned on hopes of a revival even as government spending crowds out borrowers and interest rates are rising. And if you have pinned yourself on global growth then so far exports have not exactly shown any correlation to global growth. something is seriously wrong in our industrial model and I am not sure it has been addressed.


If a weak currency is your only edge in a global trade war then the REER or real effective exchange rate puts the INR far behind the curve. Currency management has been great but at the cost of competitveness. The last currency stimulus was in 2013 before Dr. Rajan stepped in. The fruits of that have been consumed, as have been the fuites of the big gains that came from falling commodities prices especially Oil. This chart from the Guest Article by Shashwat Panda of the INR is clear on where we are. INR is an overvalued currency, becuase volatility management was made the norm by the most awed RBI Governor.


But that might be about to end sooner than later. The biggest macro trends this year and for the year ahead are the exact opposite of those that have shaped the last few years. The onset of higher inflation and higher interest rates have been fostered due to the trend reversal in the US dollar index. A trend that few saw coming. But I have of course gone hoarse shouting about it. And the inablitity to comprehend it has led to missing out on  what was the start of the commodity cycle upwards. The chart below shows how the dollar bull and bear markets have followed each other every 7-9 years. It is a cycle. 2008-2017 was the last dollar bull market that ended near 104 in Jan 2017.


The reason most would have missed the dollar bear market is they would have missed the idea that the last commodity bear market is over. The timing and depth of the last commodity bear market was enough for everyone to throw in the towel. But in EW analysis a bear market of higher degree travels to the 4th wave of lower degree. In that sense after a bubble prices fall back to or slightly below the starting point. This happened to the Sensex in 2001 when after the Y2K bubble the Sensex fell to 2596 below the 2800 low it made in 1998 and then started a 10 year plus bull market. Now the long term chart of the CRB index [this one I found on], It dates backwards significantly. And you can see that the 2008-2016 bear market in the CRB index is an A-B-C decline, 3 waves that complete a downtrend long term. Also the fall took the index back to where it started in 2001 and in fact the final bottom was below the 2001 low. So If 2008 was a commodity bubble that ended and completed in early 2016. So the worst is over for the commodities complex, and there is only upside. The question is only of how much. Can it be an all new bull market in commodities. Technically yes. And if you do not think it is so fundamentally possible, I will double my bets.

crb 2017

I will dicsuss the 100 year CRB index chart as well in the up coming Long Short report. Along with many commodities and some of my recent presentation that I have been making on this segment.

What you ought to know is that all this also means higher prices of Oil and crude and that directly reflects on inflation. Again infation is a global trend. Prices are finally rising many years after what was the spark that should have ignited it much earlier. QE1-QE3 by their very size were supposed to ignifte this much earlier but did not because the free floating dollar was getting stronger in those years. Now that the fire is lit it is a global trend. IT is showing up in Japan and China as well but here are a few DMs

Euro Zone inflation

euozone in


usd cpi

USD PPI [producers]


or Indian WPI. I am not sure looking at the trends underlying the pop in inflation that these trends are ''Transitory'', and in that effect higher interest rates are alomost a given.


In the end all the policy management of central banks has centered around one thing along - ''Volatility management'', they know the consequences of the actions they have taken and the possible side effects. But crisis occur when something moves too fast or faster than you can handle. So volatility management is the game in town. As long as prices go up slowly no one will notice and deleraging over a 10 year time horizon might even work. But to expect all parts to remain constant is what leads to developing safe investment strategies that are often run down by black swans. But who cares till then. If the CBs are managing volatility why not just make the biggest bet ever on short volatility. And so we have it, the highest on record short VIX futures positions.

vix futures

And investors left with no place to invest are all in on equities in India. That trade is based on the idea that inflation is dead and by that meaning that real estate gold and FDs are poor investments. So we are witnessing the highest on record inflows into MFs. And that bet on liquidity may go on till rates rise to the inflection point where risk meets and crosses over rewards. This chart is dated Aug 2017, as the November'17 flows surpassed the Aug flows already.

DII flows

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Out of the Woods and Into the Sea

Out of the Woods and Into the Sea

A lot has happened in market behaviour, and economic events that there appears no need to try and connect the dots. In fact when the markets appear so good and bullish then everything else must not be as important. The worst must be over and discounted. What can go wrong now? In fact having been around this long I must agree that for everything that is going down there is always something that is going up. And it is only apt that I answer the question that comes to me repeatedly again and again and especially twice, in 2013 and now 2017. Is the Kondratieff [Kf] winter over?

Now first I must say that theories about cycles and market behaviour have been abused by global newsletters and advisers to a degree that the cycles are often considered as doomsday forecasting methods or conspiracy. However that is not the case. Economic cycles forecast both expansionary and contraction in cycles. Their application is not in calling market tops but allowing for the right Asset allocation. I too have learnt this with some mistakes. The role of these theories however gains more prominence during contractions because of the pain involved and everyone wants to avoid the pain.

So in 2009 identifying that India was entering an Economic winter, meant that we would have to deal with our debt problems and the right thing to do was simply avoid debt laden corporations. That would have made a huge difference in the performance of anyone's portfolio. That was the most important part of the role of knowing the cycle. It did not forecast a crash but a need for change. So in 2013 when the market took off to a new high I was asked for the first time if the winter was over. And now in 2017 the question must arise again. The answer lies in the troubles of our banking sector. 


Would the NPAs in the banks be addressed by a bailout, write down, haircuts? Will the bad bank cause losses to the corporations involved or prolong their pain. The banks will in any case need fresh funds or a capital restructuring of some kind. Similarly will companies drowning in debt survive be bailed out? Will their respective businesses survive given that they must be capital intensive businesses to start with. And without new capital doing new business would not be possible. So for banks the problem first is getting new capital to lend into the economy. Then they have to find borrowers that are deserving, surviving businesses or new entrepreneurs. Businesses need to find viable projects to invest in to add new capacity. All of this does not come without headwinds.

So the process of restructuring whenever it is done involves some short term pain. Any deleveraging exercise can have a deflationary rub off on the economy. And subsequent to that you need fresh spending that is a stimulus and expansionary. The action of spending and stimulus risks inflation but the deleveraging is meant to balance the two. Without going through this process to expect Macroeconomics to turn around would not be correct. So while Rajan did the Job of getting the NPA skeleton out of the closet. It is still walking around like a Zombie. This is why the 2013 rally did not end the Indian winter in an economic sense. 2016 saw the issue come out but the issues remain unresolved in 2017. 

I may add that while many thought the Demonitisation exercise was meant to help the Public sector banks. I wonder if that was the agenda. Maybe it was to bring down interest rates to allow for the survival of the bad loans longer. Nothing more. It served many other purposes of governance and corruption well and more maybe done in those respects. However it would have been known to those in power that a quarter down the line all the Cash will go back into the system and things will be back to square. This is already happening as Cash withdrawals continue at a record pace daily. So if the banking problem has to be addressed it is going to need another Crisis.

We are the World

So when we discuss Economic cycles I am not sure most get it where we are compared to the rest of the world. In my opinion we are one cycle behind the developed world mostly represented by the US. Let me put it in context at the risk of being a little technical. If you have read my Kondratieff winter article then you understand the four seasons that an economy goes though. So 1970-1980 was an Economic summer for the US. A summer involves an overheated economy which shows up in high rates of inflation and interest rates. 

India has always been late in the world and so we joined the Globalisation force in the 1990s, and by 1992 started our economic summer. 1994-2001 saw peak inflation and interest rates for this period of economic contraction as is witnessed in a Kf summer. So while the US started its Autumn bull market in 1982 and it went on to 2000. India started its own Autumn bull market in 2001. Did it end in 2009 or will it end in 2017? In an economic sense it ended in 2009 with the economic cycle but not yet in the stock market. But the point is that we are behind the curve with the world on the cycle. So by 2008 the US faced its debt problems face to face and managed it with bailout and QE stimulus. That revived the economy over the coming years. India has still to face up to this. The deflationary rub off of the deleveraging however continued into 2015 with the commodity crash of the period. Now the stimulus in the developed markets is starting to have the expansionary impact that it should have of Inflation rearing its head. 

cpi eurozone

Inflation around the developed world has turned around alarmingly. It should not come as a surprise as the turn comes with a lag to the commodity cycle. The Eurozone inflation is back up not just because of the devaluation of the Euro/Yen but also the QE stimulus of funding the banks.


Similarly the impact of the QE in the US is starting to show up only now. But remember that price deflation came first. US CPI at 2.7% and Core CPI at 2.2% has been rising vertically for a while now. Now we may want to believe that the trends above are temporary and will not last. But that would be based on the belief that the US economy is weak and slow. But that is just what the media has been feeding us along with the conspiracy theorists. Like the belief that the dollar is strong and will keep rising because interest rates are rising. The dollar had a 9 year bull market from 2008-2017 which involved only one interest rate hike in the last year of the move. People will believe anything they are told by the Media I guess. But the media is not alone to blame, many prominent analysts are also singing the same tune. So here is a picture of US Capital Expenditure plans published recently by sourced from Bloomberg. What do you see? Now from where did everyone start panning so much Capex and more important what will be the impact on the economy and mostly inflation?

CoD Capex 3 17 17

The return on price inflation as measured in rising commodity prices at least can often be linked to the dollar and so starting 2016 I took the view that the dollar is topping out. It read 100 in 2016 and did go above it to 103 in 2017 for a while but it could not stay there. What people missed is what happened in between. The basket of EM and other currency pairs including the Yen had already rallied a lot against the dollar driving it down. So the Euro or Pound were just like the last men standing. The Euro and Pound however make up the most of the most watched Dollar index. Similarly the new high in the dollar this year was not accompanied by new lows in Commodity prices anymore. They made higher bottoms. These inter market divergences are glaring and should not have been missed by any Technician. Occurring in the final phases of the rising trend of the dollar they were important contrarian indicators of the coming change in trend. The dollar should have stared what could end up being another 7 year bear market based on historical cycles. The bear market in the dollar will then bring with it the inflationary head wind that has been missing in the face of massive global stimulus. How much Inflation will we actually get? Can we risk Hyperinflation? These are more difficult questions to answer so just be prepared for the trend.


The immediate impact of this is on commodities and the lagged impact is then on inflation. In a world that boasts of survival on the highest levels of debt in the history of mankind high levels of Inflation is the last thing that anyone wants to deal with. Now quietly maybe that is what everyone wants, inflate away the debt by causing Nominal GDP to go up, but central banks cannot admit that. Thus interest rates are likely to be behind the curve and keep Real interest rates negative for a long time to come. All this said. what does it mean for India? The Inflationary storm that is about to hit the global markets is going to rub off on us as well and we should witness rising prices down the line. A strong rupee can try to wear off the effect of higher prices to a degree but not beyond that. The real headwind for us though will be that we will finally get the crisis we need to deal with our debt problems. If the coming Inflation pushes up interest rates again it would be tough corner to work in. Deleveraging and its deflationary effects for India might be, in a way, the ideal thing to use to fight off the global inflationary storm to a degree. Alternately we will just do what the rest are doing and allow the coming Inflation to inflate Nominal GDP in our favour. It is hard to predict precisely the course of action the government will take in the coming storm. But to put it in one line what might be the largest Macro trend of the coming years, it will be 'The Falling Dollar" 

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Bullish in the Winter

The Kondratieff cycle was a source of some serious discussion last month at the ATMA meet and I think it was relevant. A lot of science has been used to project end of the world scenarios to the public at large. A lot of science ends in intellectual mind breaking and our search for the holy grail. The answer to all answers. To an extent I do use the Kf cycle to present the case for the Indian economy in a clear light. The monetary cycle is to explain the behaviour of the economy and stock market. But remember that I too use this cycle once in my life. And the cycle is a generational cycle, meaning that it lasts an entire lifetime. So you can spend an entire part of your life sitting on the back of a forecast and going no where. There is no way that you can have past experience of the cycle to gauge on.

So is there a role that such studies have in market forecasting?
Yes I think so!

The most important role is that the cycle explains the factors that become relevant at this stage of the economic cycle. In the case of the Economic winter part of the Kondratieff cycle it states that during this phase Debt becomes the most important Macroeconomic factor. So was that not the case since 2010? Yes it was. What was not true was that that market in terms of Nifty is not in crash mode since then. Only debt laden stocks and sectors are. Knowing that this particular sector would crash was important. So it did play a role. Also a forecast for a crash because of too much debt overlooks the fact that debts can also be inflated away. So during an Economic winter you can either have deflation of Debt or inflation of GDP. And the path is a choice of monetary policy. To inflate or to deflate. The government will choose to inflate or deflate and that determines the impact on the economy and markets. Starting 2009 the world has been trying to inflate it's economy. India's fiscal stimulus and currency devaluations between 2009-2013 are the reason that the crash was averted at the Nifty level even as stocks made new lows. Active index management in terms of changing the index components has also helped. To inflate causes the support base for the market to rise. 2013-2015 we witnessed outright deflation in commodity prices  that came as a shock to Commodity producing countries sectors and stocks.

Starting 2016 we have started to witness Reflation. This year most world markets are reporting inflation. In the face of inflation stock market are likely to do well again. Commodity related sectors stocks and countries are outperforming. So I have been saying I am Long inflation. And sounding relatively bullish the stock market after a long time. However that does not solve the problem of debt right away. A large amount of inflation would bring down the debt to GDP ratio for sure. This can happen in one move or small increments over several years. Also at an index level during the winter season the Nifty does not beat inflation. The Nifty adjusted for inflation [NIFTY/CPI below] has been below the 2008 high. The Nifty/Gold chart or the Nifty/USDINR chart i.e. Nifty adjusted for Gold or the dollar has also under performed. So even during a period of outright inflation when stock markets go up it expected that the index as such will under perform relative to inflation/gold/usd.



So an economic winter does not mean the index will go down. During periods of inflation or stimulus the index does go up but it lags inflation. The reason for this lag is only the inability of GDP growth in real terms. Nominal growth takes place as prices rise. The weight/cost of the existing debt on the economy makes it hard to grow at a rate faster than we would otherwise.​​​​​​​



So debt remains the primary reason for the actions of government and the performance of the economy and stock market. Currency devaluations are also a part of the inflation process as seen on this chart.



But the stock market can go up. And it has since 2010 despite commodity deflation. However the deflation was bad enough to keep a bearish market bias. Now that inflation is coming it is good enough to have a bullish market bias. Will it be enough to push the non performance of these relative charts above up far enough to change this picture? Based on the theory of the cycle it should not. Stocks market may rally on a nominal basis but not on a real basis till they do. We are closer to that point but not yet there.  Right now the trade is long inflation. Gold and Real estate do better in a winter bull market than equities though, again this is based on historical performance data under such conditions. If the inflation genie dies along the way take note and change your stance. If it results in hyperinflation have the appropriate hedges in place. I have discussed my preferences in the Value wave stocks and Long Short report for Jan/Dec and the recent Long Short Updates. 

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