Governments as hounds

India pursuing tax claims against Vodafone is regressive but Britain hounding Starbucks is fair game
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First Published: Mon, Dec 24 2012. 06 13 PM IST
A file photo of Ben Bernanke. Photo: AFP
A file photo of Ben Bernanke. Photo: AFP
From the US to Pakistan, the great “disconnect” between financial markets and the macroeconomy is back with a vengeance. This was the case in 2007 and five years later, we are precisely in the same situation. Investors have displayed a myopic streak that is extraordinary and beyond any attempt at rational explanation.
In the US, the National Federation of Independent Businesses (NFIB) reported one of the biggest slumps in confidence among small businesses in November. This was despite NFIB excluding the effect of Hurricane Sandy. The survey respondents—several thousands of them—collectively concluded that the outlook for their businesses in the following next six months was dismal. The sub-index measuring this sentiment plunged from 2 in October to -35 in November. The chief economist of NFIB writes that it is unlikely to be a merry Christmas for many small businesses. The Federal Reserve Bank of Chicago publishes an index of national activity. That index too is heading towards recession levels. That is not all. Orders for durable goods (capital goods) in the US are no longer growing but contracting. US stock investors cannot be bothered; nor are investment banks that are back to egging on investors to buy stocks at these levels painting a rosier 2013.
This situation is not peculiar to the US. It is a global phenomenon. The reason for that, too, is the US monetary policy. The world operates on a de facto dollar standard. The US sets monetary and exchange rate policies for the rest of the world. On 12 December, the Federal Reserve decided to purchase $45 billion of longer dated US treasuries every month on top of the $40 billion of agency and mortgage-backed securities it is already buying. The rationale for pumping so much cash directly into the economy is elusive except to Ben Bernanke and his dovish colleagues. The yield on the US ten-year treasury note is already quite low at 1.1%. The most recently available data on the annual rise in consumer prices (mistakenly referred to as inflation by most of us) is for October and that is 2.2%. In real terms, it is already negative. American corporations are flush with cash and they do not need lower interest rates. What all this achieves, however, is the adoption of beggar-thy-neighbour monetary policies around the world. The result is easier monetary conditions worldwide than warranted. That is what leads to asset prices decoupling from fundamentals.
In Europe, the German DAX index is near five-year highs although the German economy is flirting with recession and industrial production is down 5% year-on-year. The situation is worse in Italy and France. Finland and the Netherlands are officially in recession. Yet, all European stock markets are up more than 20%. In the UK, inflation expectations are rising. A Bank of England survey puts the inflation expectations at 3.5% in the next 12 months. Industrial production has not recovered after the crisis, despite the massive depreciation of the British currency in the last four years. An extreme example is that of Greece where the economy is in depression with the rate of unemployment at 50% and the Athens stock market index is up 28% year-to-date. Investors, it appears, are not only myopic but also heartless.
At this stage, readers can be excused for posing a counter-argument: should stocks reflect macroeconomic and political fundamentals or should they reflect corporate fundamentals? Well, that is a fair question but not a difficult one. In the US, the corporate sector is flush with cash simply because the public sector has not yet retrenched. One is the mirror image of the other. Without the US government running a high fiscal deficit, the corporate sector will not be generating those surpluses. In other words, the so-called healthy balance sheet of S&P 500 companies is not a reflection of underlying vigorous economic activity, but public sector profligacy. Now, it is easy to answer the question of whether investors are right in ignoring macroeconomic fundamentals.
Further, in Europe, even that fig leaf is missing. Both financial and non-financial corporate sectors are not in great shape. Further, recently, the UK government managed to extract an additional “ex-gratia” tax payment from the Starbucks coffee chain (India pursuing tax claims against Vodafone is regressive, but Britain hounding Starbucks is fair game). That is as anti-business as it can get. Investors have simply brushed it aside. The FTSE 250 stock index is up 26% year-to-date.
In India, there was the hilarious response in banking stocks to the much-discussed move on the part of the government to issue new banking licences. Bank stocks rallied.
Competition is not good for shareholders but good for consumers. Existing stocks should have declined. Indian economic growth rate is down some 80% from the peak whereas the stock market is down only 8% from the peak in 2010.
The year 2008 closed the gap between asset prices and economic fundamentals. We are likely to see history repeating itself in 2013.
V. Anantha Nageswaran is the cofounder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at To read V. Anantha Nageswaran’s previous columns, go to
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First Published: Mon, Dec 24 2012. 06 13 PM IST
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