Moving to new Blog address [http://thenativeopinion.posterous.com/]

To the non-existent visitors, am moving to the new add given below. The reason for moving is the atrocious formatting and word document settings of Blogspot. This is not to say that 'posterous' [the new site] is brilliant, but it allows me to put up my .doc files as is, without being fussy about footnotes and bulleting- and i love my bulleting. Will be putting up new [and old] material on the new site and hope you are more interactive in future.

- Mike.

New address: http://thenativeopinion.posterous.com/

An economic rant [in more ways than one] :)

Assumption: There exists a “disconnect” between the markets and reality with regard to valuation and methods to determine the same. Also assume that we are all rational investors.

A simple and oft repeated maxim for a retail individual is “buy low, sell high”. Investment theory, macro-micro economic policy everything else is white noise for a middle class retail investor. Now reflect how many times you actually followed this maxim. As with everything else in life, practical application is the greatest challenge. It is very difficult to follow the maxim when the neighbours are all either panicking or in euphoria. Going with the herd is as strong an instinct as life-preservation, but a great deal more subtle.

Look at the present situation, the domestic market we see today is on the last legs of the “mispricing” of risk phenomena, that has been the life of the party for more than a decade. Institutions “mispriced” the risk of perverse incentives, macro-economic policy wonks mispriced the importance of achieving a stable inflation rate, loan officers “mispriced” the cost of giving loans to high credit risk clients, bankers “mispriced” the cost of packaging and leveraging risky products and rating agencies “mispriced” the cost of closing their eyes to everything.

Now lets agree that we all got sucked in by the aggressive expansion of the last decade. Truth be told we are still reluctant to give up this story. The present situation is pretty muddled and for a retail individual extremely confusing. Especially so as the present market rally has come on the heels of a sobering shock. Look around, the BSE and NSE are hovering within sniffing distance of their pre-2008 highs along with high growth for gold, silver, oil. Throw in a few scares like the rare earth shortage, fear of sovereign default contagion spreading through EU, political instability throughout the middle-east, food price inflationary shocks, natural disasters and we have got a tinderbox primed and ready- or at least feels like one. The market is currently living out its half-life moment.

The prime market of the world, United State of America is presently involved in papering over its shot up economic engine by monetising its GDP. The ill-effects have been out-sourced to the world, such is the price we pay for the “reserve currency”. Credit expansion with low policy rates and sustained high liquidity has been the default policy and the same is being rolled out on a world wide scale in an attempt to ride out this storm. For the politicians and policy makers such short term strategies make sense especially in a democratic set-up where the costs will be borne by the next government.

The present uncertainty is not just a regular event in the economic model, but a result of limitation of the model. It is imperative that the economic model of sustained high growth, low interest rates, high and continuous liquidity with large resource utilisation be discarded. In the meanwhile, the retail investor will continue to be taken for a ride on the wildest roller coaster in the world.