Year 2015 – End of an Era – The fading away of
giants
Year 2015
will mark the end of an era in the chapters of History of World Economics. Two
mighty giants – the USA and the PRC (People’s Republic of China) who grew too
big for the world economy in their quest for their economic might with combined
GDP in the region of USD 25 trillion will be gradually overshadowed by the
trailing economies, viz., the Eurozone, BRIC nations minus China, due to
slowdown in these two economies.
Well,
well, well……..
That is a
bold statement to make and who would live that long to make an assessment of
the foregoing statement. Yet let me make an attempt to support my statement.
Mistakes of the past
Sometimes
the mistakes of the past haunt you so much that they don’t let you go far.
I am
referring to the mistakes made by the US and Chinese policy makers. I shall now
be taking the specific case of the US economy.
Two
wrongs never make a right and US has just done that. Within the last ten years
the US has made two wrongs which will be severely punished by the laws of the
economics and it will take decades for the US economy to recover from the
aftershocks of the financial tsunamis that it has brought to the world. The
first one was financial crisis caused by the subprime borrowing.
The second one was to hike interest rates at an inappropriate time (it should
have done it long back) when the stock markets are in a highly speculative
zone. The second financial tsunami is underway and has just begun. The complete
wave of the US stock markets correction will determine the extent of the
aftermath of the stock markets correction.
The manipulated USD and its consequent impact
on the world economy
The USD
has been a strong yet manipulated currency since decades which has always
benefitted the US economy. A strong economy feeds the currency and vice versa.
Both feed each other so much that sometimes the cause and effect relationship is
lost. The trend finds its way to glory till the underlying weaknesses emerge
publicly.
Why has
the US economy grown while the other economies are still struggling to survive
or grow at a decent rate?
A strong
USD has hurt the growth of the world economy by causing deflation the world
over in the commodities market, whereas it has helped consumerism in the US by
way of cheaper imports.
The
policies of the Fed during the last eight year, led to channelizing of funds of the US economy to a super inflated stock market and a rigged
and manipulated currency not having adequate underlying strength. Both, the
stock markets and the currency have outlived their real strength. We have
already witnessed the bearishness of the US stock markets starting Jan 2016 and
the economic data pouring in is also not too healthy.
Turbulent US economy and the USD in times to
come
A
manipulated strong USD and the flawed policies of the Fed have led to forced consumerism in the US economy by not
giving adequate options to the US citizens to save – save for the rainy day.
The trend
of the US stock markets and the USD – supported by the flawed policies of the
Fed – have forced the world to believe in the paradigm that we have entered
into an era of negative or zero interest rates. Perhaps new laws of economics
will emerge over a period of time which I, in my personal capacity, cannot
imagine at this stage. But I do believe in the fact that the laws of cost of
capital will remain intact.
A project
cannot be made viable by lowering the cost of capital. A project remains viable
by its sheer inherent strength, strong natural demand and its economic NPV or
IRR. The stress tests on the variables of a project determine the viability and
strength of the project in times of stress and not the variability of the cost
of capital.
With a
strong and steep correction of the stock markets underway in the US, the US
economy and the USD will remain weak until cows come home, because at this
juncture the Fed and Uncle Sam are not left with much economic ammunition and
options to revive the economy.
A weak
dollar coupled with emergence of other stronger economies and currencies will
lead to the limited powers of spending of and by the US citizens and Uncle Sam,
leading to a decline in the financial might and prowess and consequent lesser
strength in the arena of world economics and other geopolitical platforms.
Consequently the USD will remain a turbulent
and unmanageable currency in times to come.
Charts of US stock market and USD
Contact:
The
author can be contacted at riskadvisory@outlook.com.
Disclaimer:
The
extracts from my trading books are for educational purposes only. No attempt is
being made to give any kind of advice to anyone. The contents are for the general
information of readers and does not have regard to any particular person's
investment objectives, financial situations or needs. Consequently the contents
must not be construed as an advice to make investments, sell, hold or
otherwise deal in any or a set of currencies, commodities or any other kind of
assets. Accordingly, no reader should act on the basis of any information
contained therein without first having consulted a suitably qualified financial
advisor.
