Archive for January, 2012

Capitalism needs to reinvent itself, again

January 31, 2012 1 comment


“There is a large and growing wealth disparity and I think it is unhealthy. The lower levels of the pyramid do not have enough money to buy things and keep the economy growing.” That was Steve Morton, director in a major broking firm, speaking at Davos. Translated into plain English, what he is saying is that the incomes accruing to the 99 percent are insufficient to sustain consumption at a level that ensures modest growth in GDP. We have to rebalance income distribution or sacrifice growth. It is not just a question of egalitarianism. Income inequality has hit a fundamental economic constraint. To sustain consumption at a level that permits growth, the 99 percent in the pyramid must have a certain minimum share in income or growth halts.


An analogy might help explain this constraint. Imagine a tribe that depends on hunting to eat in a hunter-gatherer setting. It has a star archer who takes the final shot at the deer. The others hunters help locate the herd, shoo it into place for a kill and help in many other ways. When it comes to meat distribution, the star archer takes most of the meat, leaving little for the others who helped. In such a case, either the archer will be replaced or cooperative hunting will end. What two-thirds of the captains of capitalism gathered at Davos are telling us is that such a situation now prevails in most of the developed world. They have not rediscovered equality. Income distribution has become too skewed in favour of capital, as opposed to labour, and must be corrected to restore GDP growth.


Around 70 percent of the 2,600 delegates gathered at Davos not only agreed that capitalism was in trouble but felt government intervention was imperative to restore a healthy balance to income distribution. The average income of the richest tenth of the population in the Organisation for Economic Co-operation and Development (OECD) countries is now about nine times that of the poorest tenth according to an OECD survey. There is wide support for Obama’s call for all making a million or more per annum to pay as much tax as the median middle class US household, an idea first mooted by Warren Buffett. That such a tax may help pay government debt is a bonus. The primary purpose is to put more purchasing power in the hands of the 99 percent. Capitalism without democracy cannot work. If the lower levels of the pyramid do not have sufficient incomes to sustain a growing economy, then enlightened self-interest, rather than a desire for equality, dictates that their share in incomes be increased. What the Occupy Wall Street movement is telling us is that democracy is simply underlining an economic truth.


Few people at Davos have kind words to say for banks, although most agree that well capitalised banks with strong earnings are a must for an economy. The Davos crowd is not going to tell us that the merger of deposit-based banking with investment banking was basically a device to enable bankers to use depositors’ money to bet on markets, something that caused the 1939 depression and was duly repeated this time. It is a measure of the bankers lobbying power that a plan to segregate the two was defeated in the Congress. Without such segregation by law, the banking crisis of 1939 and 2007 will only increase in frequency, causing chaos. Bankers will use short duration deposits to lend long or make bets relying on implied government guarantees. There is simply no case for allowing banks to speculate with depositors’ money.


Davos has not touched upon a major theme that necessitates a fresh look at capitalism as an economic model. In the late 19th century, agricultural productivity increased so dramatically that it could no longer absorb the available labour gainfully. This surplus labour just fell out of the system causing misery, poverty, migration and so forth, before innovations like the steam engine, etc, gave rise to new products. Industry was then able to absorb surplus labour from agriculture into manufacturing. The entire 20th century has been one great story of productivity growth in manufacturing that has enabled unimagined prosperity for billions compared to what came before it. We now face a similar crisis in manufacturing as that faced by agriculture at the end of the 19th century. Manufacturing cannot absorb even a fraction of the people joining our labour force. Apple for instance has sales comparable to India’s GDP but employs only 68,000 workers. We need another revolution in what we now call ‘services’, but we really have no idea where the required innovations and scientific breakthrough(s) will be coming from. Clearly, capitalism must keep an open mind on required changes to the system. Some thinkers in the past like Marx et al, tried to fashion an economic model based on a static agrarian society just as society itself was transitioning to industry with an entirely different dynamic. Capitalism must not fall into a similar ideological trap. It needs to reinvent itself for a post-manufacturing economy, whatever that might be.

Capitalism may well be sitting atop a deeper transition in the underlying economic structure as non-tradable service industry products replace manufacturing as the main engine of growth and employment. But it has by no means failed. In fact, if one combines the US economy with that of China, then over the past 20 years or so, both economies together have lifted tens of millions of workers from subsistence wages to the burgeoning middle class. Yes, there has been a shift of wealth from the US to China but that only speaks of the efficacy of capitalism rather than its failure. Free competitive markets in labour and capital, and free trade remain our best bets in terms of staying open to new ideas and carrying on the existing businesses smoothly. Free and open competition between players, whether capital or labour, firms or workers, will remain central to ensuring against stasis.


Nevertheless, every tenet and assumption in our model of economic development needs to be thoroughly re-examined and validated. For too long we have not really asked the economists to explain where aggregate profits of firms in a modern economy come from. There is no adequate, widely tested and accepted theory of aggregate profits in Economics. That alone should make capitalism shy away from making a case for completeness. In many other areas of economic theory, such as assumption of efficient financial markets, free competition at the firm level and attitude to risk taking when private losses can be externalised to society or government, there are distortions that have gone unexamined even as technology has wrought humongous change, invalidating some traditional concepts. Unfortunate that Davos will not be the place where one looks for answers to such questions.


The crisis of 1939 brought far-reaching changes in the intellectual tools that policy makers used to manage economies. We have lived with those tools for well over 60 years. With another unsettling once-in-hundred-years transition from manufacturing to services underway, we can ill afford to defend existing concepts in a doctrinaire fashion. It is essential to reach deeper into the basic concepts and re-examine their relevance and applicability to the evolving reality of our world. The band aid being applied through stimuli and winding down of debt are unlikely to suffice for the problems that lie ahead. It is time for everybody to put on his or her thinking cap.



The writer is a trader. She can be reached at or @SonaliRanade on Twitter

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MARKET NOTES: The expected bear rally is here but how far will it go?

January 28, 2012 1 comment

MARKET NOTES:  The expected bear rally is here but how far will it go?



$-Index:  As expected in the last post, the $ turned down from 82 and is currently placed 79.01.  Is the $ rally over?  Clearly, the $ is oversold in the short term.  And in the long term the $ has to head down as QE3 takes hold.  The question really is if we can see another sharp pull back to 82 before the final descent to test 72 or has the descent already commenced?  I would venture there is at least a 50% probability of a pull back on the time charts before we begin the final descent.  Shorting the $ at this time might not be the right strategy.  Wait for higher levels.



Gold:  Gold is behaving exactly as equity at this point.  Gold’s return compared S&P 500 over the very long-term averages about 1.  In recent years, Gold has hugely outperformed the S&P 500 and we may be returning to a period of negative performance soon.  In any case, as far the charts are concerned, Gold’s rally to $1738 has violated the top of the downward trending trading channel and its price action from here on will be worth close scrutiny.  A base formation at $1660-1680 will be the first indication that Gold may intentions to rally further.  Until then, the rally remains a bear rally.  A break above $1800 will invalidate this view completely.



Euro-$:  Euro closed at 1.32240 on Friday, breaking above the first overhead resistance at 1.32.  Upon consolidation at this level, the Euro is likely to head much higher, the next logical target being 1.37.  The charts appear to suggest that Greek default on its CDS will be a non-event likely prompting an intense bout of short covering that could take the Euro much higher from here.  Keep fingers crossed for the news out of Greece expected this Sunday.  The downside to the Euro from 1.32 level is very limited.



INR:  The weakening $ in the Indian market is case study in how capricious our foreign exchange market is.  The $ was falling like a stone against the INR even as it peaked at 82 in international markets. It has since come off a bit at 79.5 but nothing justifies the $ collapse from 54 to 49.5 in the Indian market.  But then why argue with markets?  The INR is essentially testing the previous $ high of 49 as the new floor.  It reaction to this area will be instructive.  On holding the floor of 49, $ will likely seek higher levels against the INR though the pace of ascent back to 54 levels may be more orderly and measured this time.  A break below 49 for the $ is highly unlikely at this point.



S&P 500:  Has the S&P 500 already turned down from the high of 1333 on 26th January?  The index has a few days more to spend in this area capped by 1350 at the top before turning down.  Interestingly, a golden cross of 50-day DMA crossing over the 200 DMA is expected coming Monday and one shouldn’t discount the power of that signal.  However, such spurious signals are what you would expect in a bear rally to trap bulls so the event is a bit suspect at this point.  The probability of the S&P 500 making to 1430 should not be ruled out.  Bear rally tops can be hard to predict.  On the other hand you never know when a bear rally runs out of steam.  Frankly if I played bull, I would take all my profits and quit the market unless the market clearly breaks past 1430.  But early bears are easy meat so wait to short until a top is clearly indicated.



Russel 2000:  Russel 2000 hit the indicated target of 800 like bull’s eye making a top of 800.27.  The Index has the potential to make it to 825.  It has time of another 2 weeks in which to do it.  Since mid-caps are where the pros trap the uninitiated, a golden cross on the S&P 500 and a break past 800 on the Russel 2000 are almost given.  Such is the stuff with which bull traps are baited.  You have been warned.



Sensex:  Sensex has the room and the time to nick 17,500 in sync with the world equity markets.  It is unlikely to go beyond that in this rally.  In the immediate term, the Sensex is overbought.  Not bullish on Indian markets in the short term.



NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisio

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Does Rahul Gandhi have a plan for UP?

January 24, 2012 2 comments


Does Rahul Gandhi, India’s putative prime minister-in-waiting, have a plan for Uttar Pradesh (UP) just before he leads his party into a crucial election? UP is in the throes of rapid and chaotic urbanisation as the state tries to cope with a burgeoning population. Urbanisation requires new paradigms in public behaviour, cooperative living, specialisation, planning and organisation. Our public spaces are over-regulated and under-governed. UP needs a new developmental paradigm that puts agriculture at the heart of economic growth to create jobs for surplus labour. It needs a whole host of legislative changes in property laws and innovations to allow easy acquisition of land for development. Where is the vision that grasps all of the required changes and lays out an agenda for the future? Where is the paradigm for a new politics of the 21st century?

Instead, we are recycling tired old shibboleths of identity politics that have little to do with the agenda that UP needs. Salman Rushdie sought to attend the Jaipur Literary Festival. The author was persuaded not to attend on spurious security grounds as the mullahs bayed for a ban on his visit. The state retreated before the wholly illegal and unjustified demand of a few unrepresentative obscurantists disregarding its commitment to free speech and expression and rule of law. Once again the bigoted won space for their religion-based discourse at the expense of secularism. Congress’ penchant to crawl and grovel before Deobandi clerics was on full display. Its main competitor will not be far behind with its own polarisation agenda.

UP has been mired in identity-based politics. In the years gone by, under Nehru and Indira Gandhi, Congress had perfected a caste-based formula for electoral success. The Brahmin-led Congress relied on a combination of Brahmins (20 percent), Muslims (15 percent) and Scheduled Castes (SCs) and Scheduled Tribes (STs) (20 percent) of the electorate to constitute a solid vote bank of 50 percent of the electorate. A left-of-centre agenda brought in some middle class support from the opinion makers. This was a winning combination that ensured uninterrupted Congress rule for decades. Somewhere along the line, tokenism replaced real commitment to SC/STs who deserted in droves to the Bahujan Samaj Party (BSP). The final blow came with the demolition of the Babri Mosque when the Muslims parted with the Congress to ally with the Samajwadi Party (SP). The Bharatiya Janata Party (BJP) was a big gainer at the expense of the Congress in UP for a while but its role in decimating the Congress was marginal. Congress lost UP as it failed to really empower the Muslims and SC/STs, being content with tokenism and cooption of the elites. The BJP benefitted because the Brahmins too deserted the Congress to back the BJP on the ‘winnability’ factor. The BJP and Congress are destined to compete for the same limited pool of votes that will swing with those most likely to win. Obviously by pandering to the Deobandi mullahs, the Congress hopes to win back the Muslims.

The BJP benefitted from the desertion of the Congress by the SC/STs and the Muslims but only for a while. Its strategy of polarisation of the masses along religious lines was a gross failure. While it generated a lot of heat and noise, it failed to achieve its principal objective, which was to unite Hindus on the spurious plea that Hinduism was in danger from ‘others’, meaning Muslims. In the immediate wake of the Babri Mosque demolition, not many bothered to ask how a 15 percent minority could threaten an 80 percent majority. The scenario was inherently implausible if not absurd. The lack of credible numbers was glossed over by adding to the ‘others’ category by roping in Christians, Muslims from Pakistan through sponsored terrorism, differing rates of growth of population and a variety of other rhetorical devices. But none of these carried conviction with the voters. Nevertheless, while the BJP’s discourse won it no advantage in UP itself, it did help the party establish a narrative that branded it as an upper class party, distinct and different from the Congress, thus putting it in a position to win the anti-Congress votes. It is no surprise then that the BJP has quietly shed the strategy of polarisation along religious lines in UP even as it keeps up the rhetoric because it is the only narrative it has.
Meanwhile, it is instructive to examine Congress’s original sin of polarising the electorate along caste lines in the context of UP. The BSP used a combination of SC/STs and Brahmins, whom it coopted from the BJP/Congress fold, to forge a winning combination in the last elections. It is all set to repeat that experiment this time again. The BSP did try to woo the Muslims but without much success. In a sense therefore, the BSP has replaced the erstwhile Congress but without full Muslim support. The essential difference is that the SC/STs are not just coopts in the BSP but actually wield power. The real thing has replaced Congress’s tokenism. In a sense, identity politics has come full circle.

Meanwhile, the middle castes, variously called the Other Backward Class (OBCs), never with the Congress and not really with the BJP either, have rallied behind the SP. Congress hopes to ally with them after the elections. Congress’s only real leverage in these elections has been its efforts to rebuild bridges with the Muslim community. Towards this end it unleashed a reservation for Muslims in the OBC quota that is all set to unfold on the national scene as well. Grovelling before the mullahs on the Rushdie issue would have appeared the logical thing to do. With Muslim backing, Congress hopes to play kingmaker in UP.

The BJP has discovered the severe limitations of its temple-based politics of communal polarisation. The Ram Temple is barely mentioned. It has tried to raise the communal temperature through issues in other Hindi belt states with its ban on cow slaughter and teaching of Gita in school, etc, but without any real hope. The electorate in UP is focused on capturing power for real benefits in this world and not in the world hereafter. Not surprisingly, the BJP is without an agenda or issue or a constituency in UP and is expected to fare the poorest.

UP has rich agricultural land, assured irrigation and central location. Investment in tertiary agriculture like cold storages, warehouses, distribution, marketing and transportation could transform UP into a food basket and create millions of jobs. Instead, farmers are selling precious topsoil for manufacturing bricks. UP is one big urban ghetto from Delhi to Kanpur along the railway tracks. Urban housing sprawls horizontally with common walls, no space for public roads, no sanitation and no police access to the ghettoes. It is a disaster waiting to happen. It is a sickening chaos crying for reform. Instead, our politicians remain mired in old mindless games of religion, caste and the rural/urban divide when society and its needs have moved far beyond old paradigms.
With caste and religious identity-based politics having come full circle in UP, it is tempting to conclude that politicians would have realised the futility of identity-based politics. Rahul Gandhi’s Congress had little to lose, and everything to gain, by championing a new paradigm that would have galvanised UP and established Rahul’s claim to national leadership. Alas, there is no glimmer of hope on the horizon.

Must UP wait for redemption till Rahul Gandhi and other politicians grow up?

The writer is a trader. She can be reached at or @SonaliRanade on Twitter

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Sensex needs to break atop 17,500 in order to create a bull market.

January 21, 2012 Leave a comment


MARKET NOTES: Sensex needs to break atop 17,500 in order to create a bull market.



Sensex:  Defying all predictions of doom and gloom the Sensex staged an unlikely rally from 15,130 level reaching for the 17,500 area that marks the upper channel of its main downward sloping channel.  What distinguished this rally from previous such bear rallies is mid-cap participation.  Rallies in mid-cap stocks pull in investor participation and stretch out a rally in extent and time.  Having said that, mid-caps too do stage sharp bear rallies in the course of their correction.  Hence investors should be cautious.  A break out of the Sensex atop 17,500 would warrant a revision in my view that we are in a normal bear rally.  Until that happens convincingly, participation should be limited to blue chips only and small stocks should be avoided.



$-Index:  As expected in the last post, the $ turned down from its major overhead resistance at 82 and is currently trading at 80.4.  However, in terms of time, a retest of 82 level cannot be ruled out.  Therefore, the 80 level signifies the lower end of the short term trading channel, which is sloping upwards.  I don’t expect the $ to rally beyond 82 but a significant correction down below 80 is not on the cards until the middle of February.  That also ties in with the notion that the Euro-$ is still not entirely out of the woods yet.  Would cut $ shorts to zero at 80 levels. I am mildly bullish on the $.



Euro-$:  As expected in the last post, the Euro came close to breaching the 1.26 mark against the $ but stopped well above it.  The Euro has a major overhead resistance at 1.32 that likely to be breached in the coming week.  As per charts, the Euro has no business being below 1.32 at this point.  So expect a fairly sharp rally in the Euro in the ensuing weeks.  Not a currency to short even if ECB is effectively well into QE3.



Gold:  Gold acted as per expectations testing its overhead resistance at $1670.  It remains overwhelmingly bearish on charts and may have signaled a new down trend in Friday’s trade.  It is not yet ready to collapse though.  Gold could aim for the lower end of its support at $1560 before staging any significant rally.  For now, Gold is likely to be range bound within these two levels with a downward bias.  The rally we just saw has been clearly exhausted.



HG Copper:  Copper has a major overhead resistance in the 3.9 to 4.0 area that it needs to cross before a rally can take hold.  Copper could test the area in the weeks ahead but the prospects look bleak beyond that point.  The metal’s correlation to the Chinese equity markets could prove short lived.  Not bullish on Copper but would turn bearish close to 4.0 levels.



NYMEX Crude:  Crude continues to consolidate around the $100 mark but the underlying bias is upward.  An attempt at $115 in the near future looks a distinct possibility.  Not a time to short the commodity.



Shanghai Composite:  The Chinese index closed the weekend at the 2300 level, which as noted earlier, is its first major overhead resistance and something of an inflection point.  The coming week will throw up the markets reaction to events in that area.  A breach of 2300 will set the stage for a rally to 2500.  It isn’t possible to discern further moves from the 2500 area.  Remain cautiously bullish on China for now.



S&P 500:  As expected in the last post the US equity markets continued to rally with participation by mid-cap stocks.  The next major resistance for the index lies in the 1350/1370 area that appears difficult to breach.  In terms of time the S&P 500 has plenty of time to take a shy at that level.  A breach of 1370 would warrant a complete redrawing of charts and wave counts.  Until that happens, the present rally should be seen as a bear rally albeit with small stock participation.  This is not a market to short at this point.



Russel 2000:  Russel 2000 is currently poised at 780.  It would take a miracle of sorts for the index to convincingly pierce through the 800 level.  When it does so, the previous top at 850 could well be in sight.  However, that seems highly unlikely.  In a sense the Russel 2000 is a rogue index, pretty badly behaved at times.  So anything is possible.  I would take all profits and be neutral on this index now but definitely at 800.  Anything beyond that is sheer luck.  An unruly plunge on the index at anytime before May this year cannot be ruled out.  The index is toppish.  You have been warned.




NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.

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MARKET NOTES: 14/01/2012. The Euro gets stress tested and still holds out.

January 14, 2012 2 comments



MARKET NOTES: 14/01/2012.  The Euro gets stress tested and still holds out.



$-Index:  As expected in the last blog post, the $ was straining at the overhead resistance in the 80-82 area but a breakthrough didn’t look likely on the cards.  In terms of time, the $ could spend a week or more in this region depending on the gyrations in the Euro markets.  The probability of break past this level is very low barring a catastrophe in the Euro markets.  Retain my view that the $ will likely retreat from here in an orderly correction back to the 76 area.



Euro-$:   As expected the Euro was testing the major floor at 1.26 against the $ and came pretty close to nicking it.  A shy at the even more solid floor at 1.20 remained a distant possibility that never came into play.  On the time charts, the probability of Euro nicking 1.26 is almost exhausted.  Expect the Euro to stage a ferocious rally on short covering any time next week or two.  There is far too much negative sentiment built into the Euro.  Short Euro is a crowded trade if you consider the US mutual funds that have completely withdrawn from the Euro markets in recent months.  Cover thy shorts before they get taken off.  Runs!



Gold:  Gold staged a stronger bear rally than I expected though I did note in the last blog that even a rally to $1650 would not negate my bearish prognosis.  In the event it rallied to $ 1660 stopping out my trades with a marginal loss.  Am reinstating them.  Gold continues to be an orderly downtrend with the next target of $1550.  The nick above $1650 was just that nick to shake off traders like me.  A sustained rally above $1665 would negate my view.  But the probability of that happening is pretty low.  If the metal does get to $1550, the level is unlikely to hold for long.



NYMEX Crude:  This is actually a no-brainer.  Crude could linger for a week or more in the $98-102 range before breaking atop this resistance to reach for $115.  Crude is almost certain to reach for its previous high of $146 before the end of 2012.  Will the Iran crisis do it or will it be something else?  I don’t know but Crude on the charts says a shy at the previous high is highly probable after a break atop $105 followed by another minor resistance at $115.  India had better watch out.



HG Copper:  As mentioned in the last blog post, Copper needs to break above 3.7 to have a shy at 4.  At the moment it simply appears to be treading water. In passing, one may not note Copper is now more closely correlated to the level of economic activity in China than the US.  So copper is more properly a proxy for Chinese manufacturing.  How it will perform that role remains to be seen.



Shanghai Composite: As predicted in the last blog post, the bullish divergences that were pointed out there produced a nice 9% rally in the Shanghai Composite.  As one would expect, the index turned down from the first major resistance of 2300 for correction that could reach down to 2200 in the coming week.  Another shy at 2300 should follow that. A break past 2300 would put the Index on the path of a decent tradable rally to 2550.  With due caution, this could be the beginning of a fairly long and durable rally in terms of range and time.  Buy with stop losses at 2130.



S&P 500:  The US Index crossed above the 1290 area and has returned to test the top of 1280 as the new floor.  Upon holding that area, we can say with some confidence that a shy at 1350 before the end of February is on the cards.  The Russel 2000, an index that more accurately represents US mid-cap stocks, is poised just atop 750 and at its 200 DMA.  A break above 780 that clears the 200 DMA and the first major overhead resistance would confirm midcap participation in the emerging rally aiding the S&P 500 rally to 1350.  A word of caution is in order as mentioned in the last blog post as well.  The contest underway is between weak bulls and weak bears and is more technical than a real sustained Bull Run.  The rally can terminate abruptly any time and is not likely to stretch far beyond February end.  It is early bears and skepticism that will sustain this rally!



$-INR:  The $ is correcting against the Rupee having made an all time high of 54.5.  It could correct down to about 50.5.  Below is a major solid floor at 49 that is unlikely to be breached in a hurry.  Note that the $-Index is straining to break through its recent trading highs at 82 while the Rupee is actually appreciating against the $ in the Indian markets!  It doesn’t get more contrary than that and suggests the $ correction against the Rupee is only a technical correction after which the $ is likely to resume its climb against the Rupee.  With the crude oil market suggesting a bullish carnage in the oil market, the prospects for the Rupee in 2012 are anybody’s guess.  Be very afraid.



Sensex:  As expected in the last blog post, the Sensex bounced off the bottom of the trading channel but the rally lacks the firepower of the previous bear rallies.  It is currently poised at the first overhead resistance of 16,200.  Another major overhead resistance looms at 17,000 after that which is unlikely to be breached.  Sooner than later, the Sensex is goanna turn around and retest 15,000.  Would be interesting to see how the Sensex manages to “fit in” and rally in the S&P 500 and Shanghai indices without breaking its neatly defined downward sloping channels.





NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.

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My response to Ayesha Siddiqa [@iamthedrifter] tweets this morning

January 11, 2012 Leave a comment

Grateful to AS for the trouble she took to read & respond to my articles “Changing paradigms in Pakistan”.


Some clarification:


Firstly the purpose of the article wasn’t to predict or even guess at what Pakistan will do to resolve the many problem that it faces. My purpose was more modest. It was to apply Kondratieff’s ideas of long economic cycle to the situation in Pakistan to see if it might explain some of the ferment in ideas & politics that grips Pakistan currently. Anything else was incidental to this purpose.


So the take away for me from the two articles was the following 2 or 3 notions:


Firstly, that Kondratieff’s idea of long cycle duration of 50/60 years roughly bears out in the changing paradigms in Pakistan.

Secondly, as you might expect from Kondratieff’s ideas, the Zia paradigm should come under intense scrutiny now in light of the experience gained in its application. That appears borne out by the political turmoil as democracy struggles with deep state for primacy. Being more interested in finance, I chose to focus on the economic situation but the ferment can and should be examined through a great many different prisms. Viability is just one of the dimensions.

Thirdly, I chose to focus on those elements of the paradigm that were due for alternation as the new paradigm evolves. These, to my mind were: [a] a renewed focus on internal economic growth and the readiness to jettison those elements of the existing paradigm that stood in the way of this objective. [b] Given the repressive nature of the paradigms that have so far ruled, a focus on ways to reverse the repression; be it through decentralization, or giving primacy to people and internal democracy or developmental priorities such as poverty alleviation or a combination of them all.


Again, it is worth emphasizing that this may not happen. What the principle of alternation really says is that when paradigms cycle through extremes along an axis, say economic growth versus preservation of status quo, or authoritarianism versus democracy, the tendency is to move from one side of the mid-point to the other. So if status quo triumphed in the last 50 years then growth prevails in the next 50 and so on and so forth. But these are broad general trends. What specific reforms flow out of that is not something that comes out of Kondratieff’s ideas. For those one must look elsewhere.


And now to the specific tweets:


@sonaliranade @Mehmal the Zia paradigm predates Zia :: All elements in paradigm aren’t new. They are pre-existing. What changes is the emphasis. Thus Islam as foundational concept in Pakistan was there and will always be there. What Zia did was to put it at the center of his paradigm as if praxis of the idea would ipso facto set everything right. That was my intent. Not sure I conveyed it correctly. So agree with Ayesha S.


@sonaliranade @Mehmal Islamization will not go awy with education :: Agree. We are talking 50 years. What I meant was if you focus everybody on economic growth and competition, and you are winning, the emphasis on religion being the sole organizational principle will attenuate and wane.


@sonaliranade @Mehmal Islamization and radicalization are far bigger than what could just be solved by improved economy or education :: Radicalization is something beyond my competence. Concede the point. Mere economic growth will not address the problem and democracy with elections held under the shadow of militia AK-47s may actually compound the problem. Out of my depth.


@sonaliranade @Mehmal Zia yrs a major milestone but problems didn’t just begin there the design has been flawed since the beginning :: Economic problems accumulated with Zia’s intervention in politics. Prior to that Bhutto had made some of the right alternations with respect to democracy and economic focus. He chose the wrong leftist idea – nationalization – but the focus on needs of the common people was the right corrective. The point is he proved too weak to carry the alternation through. Further, we aren’t examining all the elements of a paradigm – just those that I thought will alternate given history. So some flaws in the original design will carry though.


@sonaliranade @Mehmal agree with economy in shambles but disagree with the Punjabi thing the elite dominated by Punjab hut icl others 2 :: I would defer to AS on any facts because she knows them far better than I do and her understanding far exceeds mine. So I am not gonna dispute the assertion here. Having said that Punjab dominates Pakistan, and ethnic identities other than Punjabi, resent that. No doubt the Punjabi elites have tried to coopt other elites but that hasn’t resolved the problems. How you portray that conflict can vary.


@sonaliranade @Mehmal foreign remittances major impediment to serious rethink & restructure of economy so agree there:: Two things from Indian experience bear out AS’ point. I am merely amplifying it. Firstly, Politicians and Civil Servants in India did not reform until compelled to by a bankruptcy. Unlike Pk army, they aren’t armed, their coup making power is negligible, and elections forced a modicum of accountability over them. Even so, until the Barbarians were actually knocking at the door, they did not reform. Neither will the Pk army. Second, what sustains reforms is the middle class. Given half a chance India’s establishment would be back to its bad old ways. That is the nature of the predatory beast. Reforms create a prosperous middle class, who in turn creates upward mobility for those below them and rising aspirations of all is what keeps the virtuous cycle going. So economic growth sans decentralization or democracy will not create the virtuous cycle that Pakistan needs. I am grateful to Ayesha Siddiqa for taking the time to read and tweet on my article. It has helped bring further clarity to my mind.

Thank you.

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Changing paradigms in Pakistan’s evolution — II

January 11, 2012 4 comments


Under the Zia paradigm, the aristocracy was helped back to power over the economy, enabling it to create huge private wealth by bleeding state enterprises and banks. Meanwhile, the restive masses were fed with an excessive dose of religion, whose baneful effects need no further elaboration. The Pakistani economy struggled on, kept afloat by US aid in return for cannon fodder in Afghanistan. Victory was just around the corner in Afghanistan that would unlock untold riches, solving all of Pakistan’s woes. There is no doubt that the Soviet adventure played a significant role in helping General Zia cement his Islamisation agenda with generous help from Saudi Arabia. But these were circumstances that helped an existing paradigm take hold. They did not create the paradigm.

As with the first paradigm, the second too has run out of steam after having been in force for the last 40-45 years. The contradictions it developed in its application over the last 40 odd years are obvious. Nevertheless, it is instructive to see how these contradictions will be resolved and the direction that the Pakistani polity will take after a new paradigm takes hold. One thing is clear though. The new paradigm that shapes the next 50 years of Pakistan will come into being in the next three to five years. What will it be?
Two things stand out from the first two paradigms that guided Pakistan’s first 100 [so to speak] years of formation and existence. Firstly, in fashioning both, the intellectuals chose to give primacy to the interests of the aristocracy over those of ordinary people. Very few societies can sustain such oppressive policies for so long. Therefore, in terms of Kondratieff’s idea of alternation between two successive paradigms, one would expect the new paradigm to begin dismantling the pernicious hold of the Punjabi aristocracy over Pakistan’s polity. What shape such dismantling will take is something hard to predict and the process need not be benign. Secondly, given that the second paradigm favoured preservation of power over economic growth, the new paradigm will strain at the leash to establish an environment that favours growth over preserving the existing order.
Both these run counter to conventional wisdom that says Pakistan is headed for the rocky reefs. Indeed that may well happen. All we can say is that the need to give primacy to economic growth over preserving the status quo, and the need to fashion a more people-friendly and decentralised regime, will receive much greater attention as Pakistan goes about establishing its new paradigm for the next 50 years.

It might help clarify the nature of the stark choice that Pakistan faces in case it decides to preserve the primacy of the existing principals at the expense of growth. First, the Pakistani state is internally insolvent. Its domestic debt can no longer be serviced from internal revenue, which takes one-third of total revenues while the military pre-empts another third, leaving just a third for salaries and establishment expenses, including police and internal security. The state subsists on very expensive internal loans generated by giving the pensioners special savings schemes at extremely high interest. These high cost funds are like a Ponzi scheme that can come unstuck at any time leading to a run on the banks. These funds today constitute about 20 percent of all debt raised by the government. There are absolutely no other internal sources of funds, taxes or borrowing, left to fund the government’s local currency expenditure. And Pakistan’s middle class is in no mood to pay more taxes.

On the external front, Pakistan has a low debt to GDP ratio of 60 percent. However, its borrowing options are limited to the IMF since its political risk is perceived to be unacceptable in the bond market. Pakistan raises about 20 percent of all its external financing through remittances from its overseas labour that could prove vulnerable in a crisis. In effect, Pakistan needs somebody to pay the salaries of its government employees and must find such funds abroad.

Therefore, there is no real alternative to giving primacy to growth over all else in the new paradigm. It is unlikely that China, Saudi Arabia or others will foot the bill for Pakistan’s militarised aristocracy for long. There is some airy-fairy talk of Pakistan coming into untold riches in Afghanistan after the US leaves. This is complete nonsense and nothing more than a fool’s tale for mass consumption. As the US found out in Iraq, access to raw material is one thing but the price is market-driven. Even if Pakistan were to stabilise Afghanistan as per its wishes, the Taliban are not going to be gifting away their wealth to Pakistan, as was the case with hapless Balochistan. Note that the Sui gas reserves run out in 2012. So Pakistan’s aristocracy, old and new, will have to earn their keep. Can it be done?

Meanwhile, neglect of the masses has turned them even more virulently in favour of ethnic identities. Balochistan, Sindh, and even FATA show the baneful effects of no local development. The perception that the military and the Punjabi aristocracy continue to pre-empt national resources persists. Further neglect of the masses risks an ethnic implosion that no amount of military power can stop. So Pakistan’s new paradigm must not only find resources to pay current bills but must also find money for development in the provinces and devolve sufficient power to them to pre-empt a repeat of East Pakistan. In short, not only must development have primacy but must be accompanied by distributive justice leading to the second alternation in the paradigm — the masses over the ‘classes’.

Given the centrality of economic growth to sustaining the bloated Pakistani military machine and the state, does Pakistan have the wherewithal, at least in theory, to generate economic growth that can sustain it and leave something over for poverty alleviation and development?

Pakistan has fabulous agricultural assets, lots of semi-skilled and skilled cheap labour, adequate water and the ready markets for all the food it can grow in the Middle East and China. More than India, it has the capacity to build distribution in these markets for what it produces. Agricultural exports at current prices are highly lucrative and prices are expected to increase by another 50 percent over the next 10 years. This alone can pull Pakistan out of its current mess in a matter of 5-10 years that will be necessary to put the systems in place to support such an agenda.

Note this needs only marginal change in the current rhetoric. Islamisation will naturally get toned down as the masses busy themselves with bettering their lives. The rest of the correctives can come through education. Likewise, the military can tone down its infatuation with toys knowing that its nukes guarantee Pakistan’s security. Education can also give it the space to wind down the jihadi machine. Much of the unsustainability of Pakistan’s current profile comes from its expansionist agenda whether in Afghanistan or India. Both can be safely given up without putting essential Pakistani security in jeopardy.

Pakistan is currently in a political ferment and one can see the economic argument for change finding a voice from a few quarters. This is being countered by the deep state, which in effect is saying, but for the dishonesty of politicians, all is well. One can expect this debate to sharpen. It would be tragic if the case for primacy of growth, and devolution of power, does not attract more powerful political backing going forward.


The writer is a trader. She can be reached at or @SonaliRanade on Twitter

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: Changing paradigms in Pakistan’s evolution — I

January 11, 2012 Leave a comment


The Russian economist, Nikolai Kondratieff, held 50 years was about the length of a paradigm’s life cycle. In this interval, it is born, finds intellectual acceptance followed by popular support, and application to real life problems. In application, it develops contradictions, and when these remain unresolved, the search for a new paradigm begins. Kondratieff applied this theory of paradigm shifts to economic cycles but his ideas have a wider applicability to social systems. It is interesting to study the ruling paradigms that gave rise to the idea of Pakistan and its development since the 1920s and to see how they have changed within the framework of Kondratieff cycles. Is Pakistan’s current paradigm due for a major overhaul? Consider.

The idea of Pakistan was truly born when the Muslim aristocracy of Punjab and Sindh realised the inevitability of the British leaving India. It was obvious that the existing feudal order, and the vast rich land holdings that sustained the aristocracy, would be impossible to preserve in a democratic India. The idea of Pakistan arose in defence of the Punjabi aristocracy’s power and pelf. Once it was on the table, it gained support from aristocracies in other places such as East Bengal and even Central UP. But the impetus came mainly from the landed aristocracies who stood to lose land and power in the emerging democratic dispensation. This was amply demonstrated when the Punjabi aristocracy acquiesced to dividing the Muslims in two equal halves, one of which was to remain with India, for a country in two halves separated by a subcontinent. The arrangement actually diminished Muslim influence in the Indian polity. However, since it preserved the Punjabi aristocracy’s hold over its feudal subjects, this ‘moth-eaten’ state was acceptable in preference to rule by a consensual majority of which Muslims would have constituted a 30 percent bloc.

The elements of the first paradigm that fashioned Pakistan and guided its development until the 1970s are interesting. Firstly, the paradigm established the validity of identity-based politics in Pakistan itself. This is now one big problem. Secondly, the paradigm held that given the numerous differing identities in India, and the absence of an overall unitary religious basis for Hindus, India would break apart sooner or later and Pakistan must be in readiness to grab its due shares of spoils to fully establish a home for all Muslims. This began with the seizure of Kashmir cutting off India from the Central Asian land mass. The ultimate aim was to seize control of the rivers that fed water to the Punjab plains. Being in readiness meant establishing a well-oiled military machine and Pakistan went about putting such a machine in place by offering itself as an expeditionary force to the US. This element of the Pakistani paradigm held absolute sway till it was tested in 1965.

On the economic front, Pakistan’s superior natural agricultural resources, free enterprise unburdened by taxes, US military aid, and annexation of Balochistan with its oil and gas, gave the Pakistani economy an excellent head-start. Pakistan was miles ahead of India on most parameters of development right up to the fateful year of 1965. The early years in Pakistan, despite the political failure of its politicians, amply validated the idea of Pakistan for its people.
What the paradigm failed to take into account were two major developments that proved to be its undoing in the 1970s. Firstly, Pakistan largely ignored the needs of its masses in the provinces for development since building the war machine took priority over developmental needs. Secondly, what remained after feeding the war machine was gobbled up by the Punjabi aristocracy, which flourished, westernised and officered the military machine. By the 70s the Punjabi middle and upper classes were indistinguishable from the military and still remain so. The less well-off, casting about for an explanation why they were marginalised, took to identity-based politics to explain their impoverishment. The Bengalis in particular, blamed the Punjabis.
As identity-based politics took hold, provinces other than Punjab were extremely resentful of the Punjabi pre-emption of resources. The 1965 war with India, meant to seize the rivers of Kashmir using proxy militias, shattered the idea that India was an easy pushover. With that stalemate, the idea of feeding a military machine to undo India came under scrutiny. Combined with identity-based politics, especially in East Pakistan, and the impoverishment of the masses in both wings, the military was compelled to jettison Ayub Khan and promise democratic reforms that saw the rise of Zulfikar Bhutto as an ideologue. The 1965 war was quickly followed by the 1971 debacle that completely demolished the ruling paradigm and saw the emergence of Bangladesh. With that, the two-nation paradigm was effectively buried and fresh ideas came into play with the rise of Bhutto. The search for a second paradigm had begun.
Two powerful sets of ideas competed for a while for the domination of Pakistan’s discourse in the early 70s. One was the leftist idea, lead by the charismatic Bhutto, that favoured a leftist economic agenda centred on ‘roti, kapra aur makaan’ (food, clothing and shelter) for the masses. This met with powerful opposition from the right-wing conservative Punjabi aristocracy and the military. These two groups opposed such a progressive agenda using a combination of religious and security state arguments citing the threat of disintegration of Pakistan from India. This threat, coming in the wake of the formation of Bangladesh, was very credible, if misplaced. Slowly but surely, Bhutto — despite having the advantage of being in power — had to cede ground to the military in terms of countering India, and to the religious right in terms of strengthening the ‘ideology of Pakistan’. General Zia stepped into this melee to firmly establish a new paradigm for Pakistan that has since guided its destiny. What were the elements of the Zia paradigm and how have they fared in guiding Pakistan’s destiny?
The central purpose of the Zia paradigm was to preserve the power of the military and the Punjabi aristocracy as before. The two groups had effectively merged after the middle and upper middle classes began to send their best into the army. The corporate interests of the military were no longer incidental as the army took in a third of all government revenues by then and was loathe to downsize after the loss of Bangladesh. The Punjabi aristocracy had had to cede significant assets to Bhutto’s nationalisation programme and was keen to wrest back its lost assets. The two were natural allies with Zia helping the aristocracy to claw back lost assets by openly looting the banks through bank loans never to be repaid.
The paradigm they cobbled together was both ingenious and powerful. Firstly, the Zia paradigm postulated that the reason Pakistan had failed its destiny was because it was not run according to Islamic principles. India could still be undone by the strategy of a thousand cuts using guerrilla proxies, firstly in Kashmir, followed by Punjab and elsewhere. Zia actually wrote out a paper for the army to this effect. Indian retaliation to such use of proxies, such as in the 1965 war, could be deterred through the threat of a nuclear weapon. This preserved the power of the military and in fact helped it pre-empt further resources. As a potential pay off, Afghanistan was added to Kashmir, where strategic depth would facilitate confrontation with India besides giving Pakistan much money through control of access to Central Asian oil, gas and other mineral resources.

(To be continued)

The writer is a trader. She can be reached at or @SonaliRanade on Twitter

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Market Notes: 7th Jan 2012: Bullish Divergences on the Shanghai Composite Index

January 7, 2012 Leave a comment

Market Notes: 7th Jan 2012:  Bullish Divergences on the Shanghai Composite Index



Shanghai Composite:  I have long held the view that the Chinese market is in an orderly long-term correction since October 2007 and that the Index should bottom out in January this year.  At the level of 2150, further downside to the Index is limited.


There two very early tentative signals, that at around 2130, the Index has bottomed out for now.  Firstly there is a double bottom at 2133.75 on the charts.  Not so significant by itself, this should be read with a series of rising bottoms on the 14-day price ROC since the 15TH December even as the Index continued to fall.  That’s a clear cut bullish divergence.


This is at best a preliminary flag.  A cross above 2300 over the next few trading session will validate the signal. On the other hand, a fall below 2120 will probably invalidate the signal.  Either way, maintain my view that downside on the Chinese market is limited from these levels.


$-Index:  The index performed exactly as expected nicking the 81 mark and currently stands at 81.7.  It is a strong resistance area that attracts selling.  A significant break away from the area is not likely without further consolidation.  On the other hand, the $ could linger in this area till the end of the month.  Whichever way it spends time here, the $ should turn down from 81/82 level by the 1st week of February.  The $ rally is now mature in price terms but may have a week or two more to run in terms of time.  Not bullish on the $ unless it decisively breaks past 82.5.


Gold:  Gold showed bit a pulse in nicking the $1620 level as the Euro tanked and rumors of panic buying in some EU countries circulated through the market.  The nick is not significant in as much as a rally to $1620 was expected anyway. Euro shakiness as it tests 1.25 level in the next two weeks may let the gold linger here for a while.  However, nothing on the charts suggests anything but a test of $1400.  In terms of time Gold has a long distance to traverse before it is out of the woods.  First downside target for gold is $1550 followed by $1400.  A spike to $1650 would not invalidate this view.


Euro-$:  As expected, Euro plunged towards 1.26 levels, and currently stands at 1.27200, not far from it first target of 1.26 that could be achieved next week.  Is the plunge vicious enough to take it to 1.20 levels, the second target? In terms of time and structure, I would rate the probability of a fall much below 1.26 as very low.  A Euro rally could on the cards unless the Euro cracks 1.26 with a huge momentum.  The strength of the ensuing Euro rally could surprise. I normally don’t discuss fundamentals here, but since this prognosis is goanna raise many eyebrows, my suggestion is to consider the scenario where FeD steps in to buy say Italian or Spanish bonds directly.  Note there is no legal bar to this and the Geopolitical impact of such a move would be staggering.  So watch out!


NYMEX Crude:  Crude is currently at $101.56 per barrel.  It did not break its minor overhead resistance at $105. Typically you would expect this to happen in 3 or 4 attempts and this was third in the current series beginning in November 2011.  Crude may come back to confirm its current base being built at $100 before taking a shot at 105 and then 115.  Crude may not flare up unless something untoward happens in Iran but it isn’t bearish.  Stay long.


HG Copper:  Copper is currently positioned at 3.42650.  Having made a minor double bottom at 3.26 it is currently headed towards its first resistance at 3.6.  Copper needs to break beyond 3.7 for a meaningful rally.  Not bearish on Copper but would only above 3.7 if the Chinese markets turn up as expected.


Sensex:  The Indian index on the charts is an unmitigated disaster.  The index should turn down and retest closing low of 15,100 before any further significant move.  A break below 15,100 opens the way to 14,750 followed by 12,600.  The Sensex is likely to hug the bottom of the down channel for the next few weeks.  A crossover below 15,000 appears on the cards.


Geopolitics:  Markets discount geopolitical trends into prices, sometime with fair accuracy, some times not.  At other times they are caught completely unawares.  But there should little doubt that the information trickles into the market and many players act on it and their actions are reflected in the prices.  This trend will only gain further momentum as Wall Street rivals the CIA in hiring ex-CIA analysts now.


How about the inverse?  Can the markets be used to validate or invalidate a geopolitical outcome?  In theory, the outcome is embedded in market price if informed players have acted on the outcome.  Are there enough such trades in terms of volume that would make such an analysis possible?  Here are two very important geopolitical issues:


1. Will Germany have its way with austerity that it seeks to impose on PIGS or will it concede?


2. Will Iran be sanctioned aggressively or will there be a war in Iran?


Following is what the markets say on these questions in terms of price signals.  Germany will concede and there will be no war but Iran will hurt terribly.  In Iran regime change is more likely than war. Purely as some food for thought I offer the following scenario for consideration.


Here is what we have in the current market prices:


  1. Despite a scaling down of the world economic growth from 2.5% in 2012 to about 1% or less, crude shows no sign of going back to sub $80 levels.  This is despite a substantial step up in domestic gas production in US & Canada that has reduced demand for Middle Eastern crude.  China will take up a part of the slack as will India.  But the markets are showing a step up in crude prices to $120 when they should be falling back to $80.  Is trouble brewing in the Middle East that may send prices rocketing?  What else could account for the “anomaly” in crude prices?
  2. The Euro is at 1.27 headed towards a test of 1.26 level.  It is now almost certain that if German austerity is pursued to its logical conclusion, when PIGS are experiencing a GDP contraction of 10 to 15%, a severe deflation in EU will happen.  Therefore, either if Germany does not relent, or is not compelled to relent; the Euro will collapse tripping the world economy itself into a recession.  That is to say, the Euro at this point should be kaput.  In the markets the Euro may be tanking but, despite the deluge of bad news and near certainty of deflation if it does, the Euro is testing 1.26.  At the very least it should be below 1.20 by now.  So where is Euro’s strength coming from?
  3. Gold has been sold to investors ad nauseum as a hedge against hyperinflation and currency collapse over the last four years.  Now we have the real prospect of a collapse of the Euro.  But gold paradoxically is bearish!!  Even in a bearish market, one would expect the rush into gold to cause a spike in the market but nothing interrupts the orderly progress from 1920 to 1400 levels.  What is keeping gold down?
  4. $-Index I use the $-Index as a proxy for the real greenback.  If you expect the Euro to collapse, you would expect the $ to be whooping it all the way to parity.  Yuan is inconvertible, Japan has a debt of 300% of its GDP and hardly any other currency exists.  But the $ is an orderly 81.5 and the momentum up gives no indication it can even make it to 88, forget parity or higher.  This when there is no other currency left?  Why so? On the other hand, an orderly fall back of the $-Index towards 0.72 is more than likely.


Now consider the scenario where Uncle Sam agrees to save the Euro under a few stiff conditions:


  1. Germany will relent on its austerity for PIGS else the US will step in to buy Italian or Spanish debt directly in their domestic market.  That would undermine Germany in the EU, prop up the Euro and effectively kill all EU independence from the US.  Would the Europeans wish to see that?  So why would not Germany fall in line with US wishes and strike a deal with PIGS that is less onerous than now?  In return the US FeD will backstop the ECB with QE3?  The details don’t matter.  Ultimately, the US steps in to save the world because there is no other way to save itself.  Accounts for the steady Euro?
  2. Uncle Sam in turn gets the EU to back it fully in terms of sanctions on Iran and technology denial to China.  KSA will meet any supply shortfalls at its preferred price, the main and the largest crude buyer now being China, not the US.  KSA wants Iran sanctioned and hogtied.  China needs the KSA crude badly enough not to upset KSA.  Russia will play ball reluctantly. India can take a hike.  Accounts for the fat risk premium in the oil prices as sanctions cut Iranian crude availability on the markets?
  3. Gold isn’t up to its usual panic levels because informed players see no panic.  In any case everybody is up to their gills in gold expecting all sorts of poppycock scenarios that don’t exist under fiat currencies.  Nevertheless prolonged uncertainty in Iran will provide a floor to gold prices at $1400 or thereabouts.
  4. What is almost certain is that the fat risk premium in the oil price will limit any recovery.  So for all that FeD may do via QE3 for the Euro, slow growth is a given and that accounts for the bearish equities.  One caveat though.  An announced QE3 for the Euro could result in a spike in US equities and the charts reflect that possibility.

All told what does the analysis using just market data indicate as the two or three likely geopolitical outcomes?

  1. Germany will have to back off from the austerity for PIGS under US pressure and or threat.  The US not gonna let Germany trip the world into a recession and every Tom, Dick and Harry will support the US.  WILL IT HAPPEN?  I don’t know.  But markets are consistent with this scenario.
  2. EU will hop on board to squeeze the daylights out of the current regime in Iran.  China will bend to US and KSA pressure at a price. Japan like India has no options. Russia will make noises to stay on the right side of Iran but will cooperate.  Iran’s falling output will keep oil prices elevated.  KSA will collect from China & Japan and split proceeds with US for more arms.
  3. India will learn the hard way that it is still very much a unipolar world and you can’t play both sides for the best bargain if you are a two-bit player.  For non-alignment to work you have to a very strong player – almost equal.  Nehru thought numbers could make up for strength but he was wrong.  The neo-nonaligned forget we don’t have even numbers now.  That’s consistent with Indian markets tanking all the way to 12,500 most of 2012.
  4. Overall markets are fairly orderly factoring in a world much like now, growing much like now, and if Obama actually wins over Germany with QE3, he will be back in the Whitehouse.

As I said this all for fun and debate.  Think about it.

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Market Notes: 2011 ended flat but there were fortunes to be made & lost.

January 1, 2012 1 comment


Market Notes: 2011 ended flat but there were fortunes to be made & lost.


$-Index:  As extreme pessimism hit the Euro, the $ rallied to its overhead resistance at 81 but appeared in no hurry to breach it.  While it could still make an attempt, or even fake a head above 81, the probability of the $ heading towards the first floor at 76 appear higher.  Expect the $-Index rally to fade from here.  Have a feeling, the $-Index is going to be the key driver of world markets in 2012.  Watch it like a hawk.


Euro:  Euro has a significant floor at 1.26.  As per script it is heading towards that area.  On the time charts, there is room for the Euro to test that area in the first few weeks of 2012.  However, barring a catastrophe, hard to see what more disaster in the EU could take it past that level.  On the other hand, a significant rally could take hold from the 1.26 area.  There is a rock solid floor below 1.26 at 1.20. I would not be selling Euros at these levels.


Gold:  During the week, Gold nicked the $1550 mark in cash markets on thin volumes but did not breach the floor convincingly.  Expect the metal to retest this resistance in the coming week.  A breach of this level would open the way to $1400.  On the other hand, a failure to do so would see the metal rally back to $1620 level.  Either way, the metal shows no sign of bottoming out yet.  At best, a weakening $ would help the metal in a bear rally.


NYMEX Crude:  Crude continues its recent rally from $76 level that was touched in early October and has paused for consolidation at the psychological mark of $100.  The more significant resistance lies at $115.  Crude shows no sign of weakness and should test $115 in the coming weeks helped by a weakening $.  Note the fact that crude prices have not weakened in line with the dip in equity markets or in deference to the pervasive doom and gloom.  While this could reflect resilience in the Crude market, it may also be a pointer to the fact that the gloom and doom are over done in the short term.


Copper:  Copper, unlike crude, shows no sign of strength.  As a proxy for world industrial activity, that’s bearish.  Copper is however dealing with some significant structural problems in the Chinese markets.  Nevertheless, weakness in the Copper markets is a cautionary flag.  That said, Copper has a significant floor at 3.0 that is unlikely to be breached in a hurry.  Upon a retest of that level in weeks ahead, the metal could rally modestly to 3.75.


S&P 500:  1270, which is also the 200 DMA area for the index, is the critical level to be watched in the next week or so.  A break above 1270 would open the way for a retest of the recent high of 1370 that was seen in May 2011.  A failure to do shows up the abyss leading to 1000.  In fact it might be that we cannot go to 1000 in the New Year unless we go to 1370 in the short term.  Mind there is nothing on the charts that makes this case except for the fact that 1270 has been tested 3 times and such important resistances usually break on the 4th or the 5th attempt.  On the other hand, considering the rally from the low of 675 in March, 2009 as a whole, we are at place in time where the a rally would be very weak and led purely by shorts taking profits countered by late sellers selling into the rally.  This tug of war between two weak sets of players can continue in the next few weeks.  Test of 1270 will be the first indication which of the two weak players has an upper hand.  There is little doubt that broad sentiment favors a fall which sort of leads one to suspect that overdone skepticism could trap the early bears into a rally.  1270 will tell.


Shanghai Composite:  The Chinese index at 2200 is way past over due for a rally in terms of time and level. It is oversold in line the pervasive negativity on China.  Chinese market behavior has a way of going past the edge at turning points and this time may be no different.  It does test once patience though and throws all chart assumptions into disarray.  But then markets are supposed to test conviction.  Cannot say when, but a rally of sorts is overdue in China and could happen in line with the S&P 500.  For long-term investors in China, the downside from here is limited.


Sensex:  The Sensex is a picture of weakness.  It is headed for a retest of 15,000 a level it is likely to breach.  While a plunge to 12,600 may not happen immediately, and there could be intermediate rallies from 14,500 area, the main trend remains down.  Incidentally, the Indian index’s correlation with the world equity markets has weakened considerably over the last few months as bearish sentiment takes firmer hold. There is tremendous amount of bad news flow ahead for Indian markets.


INR:  The Rupee continues to weaken after some RBI effort to stem the slide.  RBI’s war chest is empty and better preserved to defend the Rupee at a level where the downside is limited.  That would be the area around 58.  Expect no significant rally in the Rupee until March.  One could see a small rally of sorts there if India manages to successfully negotiate its way through India Inc.’s Foreign Convertible Bonds folly.  Until then things look pretty bleak.


NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.

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