Archive for January, 2012

: 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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