The birth of something new is usually joyous. It is a declaration of hope over despair. In the media, the birth of a new newspaper is welcome because it heralds more choice for the consumer. A competitive marketplace takes the market one step closer to completion. For a marketplace to be competitive, there must be a large number of buyers and sellers. So, any addition to both sides is welcome. Particularly, in the marketplace for ideas and opinions, it is good to have diverse views so that homogeneity does not come about, even accidentally.
Notwithstanding imperfections, economic activity dominated by markets as opposed to governments delivers either superior or less inferior outcomes. This idea has stood the test of time well in empirical economics. Rather simply, the collapse of the Soviet Union and the economic ideology (alive in India, Cuba and Venezuela) it espoused is proof enough. Central bankers in most of the developed world have taken that to heart in dealing with financial markets. Financial markets, in theory, have more participants than those engaged in the economic marketplace. Hence, the outcomes of their buying and selling decisions—as reflected in asset prices— should be more superior to the judgement of a few men sitting around the table in an austere government building, deciding whether financial markets are in a bubble or not.
Yes, it is usually only men that dominate central banks. Very few central banks have been led by women. Right now, the central banks of Malaysia and Thailand are led by women. I would be glad to learn about that more.
To reiterate, the reason central bankers hesitate to intervene when asset prices keep climbing is that they find it unreasonable that a few men could overrule the judgement of hundreds and thousands of market participants. Perhaps, the real reason is that it is also politically unpopular to throw sands under the wheels of asset markets. In any case, it is hard to say whether asset prices were in a bubble or were discounting rational optimism (an oxymoron?) until after the fact. Precisely such a debate is under way in India right now. The all-important question is whether the Sensex, at over 14,000 points, is a product of global liquidity or is a rational reflection of the current and prospective high-economic growth in the country.
Regardless of which side of the debate one favours, investors and investment advisors have to acknowledge that their portfolios are marked to market and not the other way around. In other words, the market is the final arbiter.
In a way, acknowledging the final authority of the market is equivalent to acknowledging the existence of a power that dominates and consummates human endeavours. That is the first step towards spirituality. Spirituality starts with the admission by our egos that our opinions are not the final word on the subject—whether it is in the world of investment or otherwise.
By now, readers would have got some inkling of what this column will be dealing with every Tuesday.
More seriously, this column is about global macro and markets. Certainly, “global” includes India and yours truly will not flinch from adding his two paise worth of opinions on the raging topics that engage the Indian minds—whether it is the endlessly futile debate on India vs China or the debate over the valuation of the Indian stock market or the uniquely Indian way of reforming the Indian economy.
Of course, the column will do so with the awareness that one’s opinion is not the final word on the subject.
The dividing line between noise and information is thin these days. In the days ahead, I hope readers will find this column a useful addition to their information and subtraction from the noise surrounding the world of finance and economics.
V. Anantha Nageswaran is the head of investment research for Bank Julius Baer (Singapore) Ltd. His views are personal and do not represent the views of his employer. We look forward to your comments at firstname.lastname@example.org