The speed and ferocity of global capital flows only increases by the year, and one major drawback of the easy money policies of the West, is the flood of capital seeking higher returns, especially in fixed income. In the larger scope, it is basic supply and demand - too much capital is chasing too few opportunities; after a short term hiatus the global carry trade utilizing easy money is allowing the monied elite to return to their reindeer games. Since there is a lack of credit worthy borrowers in the U.S., much of our capital is chasing into Asia & Brazil, causing headaches for those nations. Unlike the U.S., where food inflation is an afterthought and should be excluded from your memory - or any government measure (after all how important is food to your budget?) it is very closely watched in Asia. It has a nasty habit of toppling governments.
Indian food inflation is nearing 20% per the last report - this is causing consternation about the need for more rate hikes after a campaign of six in 2010. If the description of the problems facing the East v West sounds like two separate worlds it is; the one constant is Uncle Ben pressing his food on the accelerator. He will take care of the mess (that he is creating) when our heads bash through the windshield later. For people in other countries - you are on your own.
Since Indian markets do not have daily POMO injections they are suffering thus far in 2011. The charts below have a 1 day delay, but Indian markets finished down for the 5th session in a row, with the Sensex down nearly 1000 points in 2 sessions, and the Nifty approaching 300. Both are quickly approaching their worst levels since August 2010, & seem headed for a test of their 200 day moving averages.
(1 day delay, Sensex now at 19,224; Nifty 5763)
It is not just India; Indonesian shares were down 4.2% overnight - its worst loss since November 2008 - as inflation concerns ramp. Chinese and Brazilian shares have been in the dumps for months on similar issues. I keep repeating it, but we are in a carbon copy of late 2007 to mid 2008 on the commodity front. Indeed, the first food riots (Algeria) occurred last week. On the plus side some Western investment bankers are taking Ben's gifts and making mad money....maybe the trickle on down effect will help the Indians... err, I am sure it says so in some textbook. Ahem.
As U.S. markets continue to propel higher because once more nothing matters until it does, I've become much more cautious on equities as a Goldilocks-nanke environment is being priced in, while growing dislocations all over the globe are being ignored. Baltic Dry Index anyone? Oops - that chart is only to be waved in the air when it supports the bull case.
- India’s stocks fell for a fifth day, with the benchmark index completing its longest losing streak in eight months, amid concern rising prices will prompt the central bank to tighten monetary policy this month. Persistent price gains may require an interest-rate increase this month, Chakravarthy Rangarajan, the prime minister’s top economic adviser, said in a Jan. 7 interview.
- India is facing the problem of an unstable price regime, Finance Minister Pranab Mukherjee said on Jan. 8. The wholesale- price index probably increased 8.3% from a year earlier, according to the economists surveyed, after gaining 7.48% the previous month.
- Food inflation climbed to 18.32% in the week ended Dec. 25 from a year earlier, according to a commerce ministry statement in New Delhi on Jan. 6. Onion prices soared 80% during the week.
- In the past 15 years, Indians have voted out at least two national governments after inflation eroded the spending power of the poor. The World Bank estimates 828 million Indians live on less than $2 a day.