You have been on the button in getting the macro and the positioning of the currency market and the bond market right. Lots of selloffs have happened. The currency has collapsed, yields have shot up. Equity markets have seen a risk off moment. Bitcoin has got smoked. Are we nearing the end of the pain or there is still some more flush out left?
So it is a two-part answer and you are right from the timing standpoint. It increasingly appears to me that we are nearing an end, perhaps three-four months of pain ahead and we will have clearer skies perhaps during Diwali or December. But the final flush is still is left and I think that that is the deepest part, the most painful part for a typical investor who was naïve in getting into markets and stuck with FOMO and got into stuff which promised few things but did not deliver to him as per expectation.
So, in a sense, both parts are true. We are nearing an end, the macro is no more as dark a red as it was appearing in October, November, December. It is turning amber again and perhaps it is the beginning of the end to use a cliché. So to that extent, maybe there are clearer skies ahead in the couple of months’ time.
When you say Diwali, are you waiting for a timewise turn because in the next three months, if time correction kicks in, things will look up or are you waiting for that sledgehammer kind of a selloff which is that last part and the most painful part. When that arrives, it does not matter if it is Holi or Diwali, you need to buy.
I may have appeared as if I were foretelling, but of course, I am not. and I had no sense exactly when it would play out. I am just giving a sense that given how much water has flown under the bridge, perhaps the climax is closer. Diwali is just a date, winter perhaps. I am waiting for a market timing point of view because my timing is the final flush which coincides with liquidation and liquidation of positions of naïve investors.
“The next trade will be bonds. Start allocating money to bonds in the next three-four months, systematically, perhaps you will get higher and higher yield over next three-six months.”
From a pure macro point of view, I am looking at solving two problems that the world economy has to solve – one that it has to solve for the energy crisis and for that the tactical solution is the solution of the Russia-Ukraine problem. It is very likely that Russia would use the weaponry of actually squeezing energy for Europe in winter and would make things significantly worse than where we are right now. So I am not trying to give an impression that things are fine now. It is just that a lot of pain is in already. But my sense is that the crude perhaps would peak during winter at $140-150 and that would be quite painful for asset markets.
« Back to recommendation stories
Second thing that we have to solve for macro is financial conditions in the US. They have tightened significantly but then the central bankers across the world, but more specifically, in the US are actually haunted by the ghost of the 1970s. Central bankers need to clear this perception that no we are not in ‘70s and that the wage-price spiral is not likely to happen to the extent that it did in the 1970s.
No one knows for sure but let us have this cleared in the next couple of months. We need to see the core PCE in the US. Core inflation in Europe actually has come off from where it is right now. We need to see that the shelter inflation is not resulting in significantly higher core inflation. All of that has to happen in the next three-four months, I assume that would have played out and then which is why I am arguing that perhaps we will have to clearer skies.
So you are saying that the climax is still ahead but this is not a time to short the markets anymore, is that the clear message?
I cannot say better than that. This is the precise point I have been making for the last one month, that the time to short bond and equity both are behind us. If you remember July, August, September, October I sort of cautioned people that do not get stuck with FOMO, stay out of small and midcaps.
If at all you are a compulsive investor, be in the index and that is about it. Now I am doing the reverse of it. I am saying do not be too courageous now. It is bad but then it is not a setup in which you can short bonds at 760 because they are 160 bps higher than where they were last monsoon and equities because they are 20% cheaper from forward PE multiple standpoint versus last monsoon and winter. The time to short is clearly behind us but that does not mean we quickly jump to time to go long. It is the classic hold that okay you can stay out, chill, wait, stay in the mountains for a few more months.
Tactically then what do you do, do you stay defensive, what is the next best trade, I mean clearly long dollar seems to be it?
Absolutely, whoever can do it. I am aware that not too many people can actually pile on to this trade but I have been sharing with you for last many months that stay long dollar, convert as much of your net worth into dollars, not by doing LRS. You would be surprised in the next few months there are going to be massive restrictions coming to move money out of India given the mess that we are in in terms of current account deficit, but simply through long dollar futures you could preserve your wealth in dollar terms.
That is a clear trade even now and therefore in the financial markets, the only short trade is short INR and long dollar. Now what do you do with money? I think I would still say that long dollar cash is a good position to be in.
I have been trying to highlight for last one month that the one place where perhaps one can incrementally begin to dial risk is the bond markets because they are boiling right now and perhaps we will get better yields, but for systematic investors these are good levels – 7.5-7.60% on government bonds. One gets about 8% annualised yield in state development loans, PSU bonds these are great levels to lock your money for 10 years.
If you are an asset allocator, the next trade will be bonds. Start allocating money to bonds in the next three-four months, systematically, perhaps you will get higher and higher yield over next three-six months and that is when yields peak as the annuities will bottom.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)