Growing Dalal Street

Essay-trends

In American writer J.W. De Forest’s long ago novel, Honest John Vane written in 1875 and first serialised in The Atlantic: a Broker, one Darius Dorman, advises Honest John, erstwhile ice-box manufacturer turned newly elected Republican Congressman:-

“Go into finance, that’s the way to make politics worth your while. Capital will become your friend. And capital- ah, Mr. Vane, there’s the word! My very blood curdles when I think of the power and majesty of capital….Make capital your friend. Do something for it and secure its gratitude.”


Growing Dalal Street


Darius Dorman, De Forest’s fictional 19th century general man of business, a-little-this and-a-little-that kind of man, could have been speaking today to Finance Minister P.Chidambaram, Reserve Bank of India Governor YV Reddy, Planning Commission Head Montek Singh Ahluwalia, Commerce Minister Kamal Nath and Prime Minister Manmohan Singh. That is, going by the probable receptiveness he would have found. Dorman’s shrewd advice to Honest John is being implemented by India, and the surging stock market indices bear witness to this effect.

The surge is likely to get a lot stronger. Christopher Wood of the CLSA GREED and Fear bulletin has predicted that the Sensex will be at 40,000 in 5-7 years from now. He reiterated it in his newsletter published as recently at 10 November 2006 on the occasion of the CLSA 9th India Forum held at Kolkata.

The forum was held in, as a previous GREED and Fear newsletter without apology put it, in “The Black Hole” of Kolkata - to underscore the city’s renaissance as an IT and property development destination. The 10 page newsletter makes interesting reading and sees all that is not yet right about India, such as woefully inadequate infrastructure, as a stupendous growth opportunity that is being acted upon even as I write this piece.

This latest vote of robust confidence from the personable and articulate Mr.Wood, backed by his highly reputed global organisation CLSA, lets home-grown master broker and bullish investor Rakesh Jhunjhunwala off the hook. Rakesh must be very glad to toddle back from the realms of the ridiculous to the sublime, thanks to Christopher Sahib’s pronouncements.

Jhunjhunwala, regarded by many as a visionary investment guru, had famously predicted 25,000 on the Sensex in September 2005, when it was in the 8,000 plus range. He expected the 30 share index to touch 25,000 by 2010. Stung by jeering criticism from learned quarters, the latter day Rakeshbhai refuses to predict future Sensex levels and only allows that the trend is “up.”

There are eminent advocates of our glorious medium term future as well. James Wolfensohn, former World Bank President (for 10 years and up till last year),while delivering the 2006 Wallace Wurth Memorial Lecture at the University of New South Wales in his native Australia over the last weekend, said: “Within 25 years, the combined GDP of China and India would exceed those of the Group of Seven wealthy nations.”

Wolfensohn explained that between 2030 and 2040 China’s current $2 trillion GDP is set to balloon to $48.6 trillion and India, with its economy currently weighing in at under a trillion US would hit $27 trillion according to projections made by investment bankers Goldman Sachs. In comparison the US has a GDP of $13 trillion and this is expected to expand to $37 trillion in the same time period.

Wolfensohn, currently the Chairman of CITIGROUP’s International Advisory Board and head of his own investment and advisory firm also said: “You will have in the growth of these countries a 22 times growth between now and the year 2050 and the current rich countries will grow maybe 2.5 times.”

Twenty-five to forty odd years to me seems distinctly medium term when it comes to the destiny of a nation, but to others, particularly those who work the terminals in “finance,” years, let alone decades, are decidedly long term. But even from this more demanding perspective, there is reassurance in some of the emerging global trends.

Hedge Funds, those of the high-risk-high-return persuasion, given to devil-take-the hindmost short-term plays, (and the swift rearrangements of fund flows that partially led to the sharp declines in the emerging markets including India in May 2006), are not doing very well of late, returning a paltry 7.5% p.a. on average. It seems there are hardly any lucrative but mostly undiscovered hedges any more.

It was not always like this, and so Hedge Funds, a new fangled offering 10 years ago, grew in number and popularity from a couple of hundred to over 9,000 as per a recent estimate with $1.3 trillion at their disposal. Contrast this with an estimated $90 trillion of long-term only money in play in the global stock market and one quickly realises a thing or two about depth and stability in “finance”. Also, the wisdom perhaps of backing one’s value plays over a long period. Think Warren Buffet. Also think long term India story.

We in India counting our incoming Foreign Institutional Investor (FII) billions, ( $3.7 in the last two months for instance), have reason to be grateful for the pioneering role played by Hedge Funds towards introducing emerging markets to Western and other developed nation investors. But now, their day is largely done, and almost all have been hard hit by the reversal of their audacious commodity plays in oil, gas, metals, grain et al...

Finance Minister P. Chidambaram complained only yesterday that speculative money chasing oil futures robbed India’s GDP of at least 1 percentage point over the current fiscal because of surging crude prices. This irks him because there is no actual shortage of the commodity in reality but since when has that ever bothered “finance”.

Still, the marketplace has its own correctives, often brutal, that tends to trim “irrational exuberance” as erstwhile US Federal Reserve Chairman Alan Greenspan might have put it.

But for those of us who anticipate apocalypse with the dizzying rise of the Indian stock market over the last three years, let alone the mind boggling future projections, it may serve as an object lesson to remember (and pay tribute) to Economist Milton Friedman (1912-2006) who died last week at 94.

Friedman, who won his Nobel for Economics in 1976, explained The Great Depression, in his 1963 book with Anna Schwartz “A Monetary History of the United States.” In it, Friedman and Schwartz disagreed with the resigned (and Leftist) view that the Wall Street Crash of 1929 and the Great Depression that followed it was an extreme example of Capitalism’s innate instability. Today, a mark of Friedman’s influence lasting from just after the WWII to date is in the acceptance of the view in his book with Schwartz. The duo said that the Great Depression was caused, not by any tragic flaw in Capitalism, but by The Federal Reserve…through mistakenly tight monetary policies that led to the failure of 40% of America’s banks.

The Federal Reserve today is a far more responsive institution. As is the Reserve Bank of India and indeed the Finance Ministry and SEBI is trying too. Financial apocalypse today would have to result from the sky falling on our heads. And if that were to happen we would hardly be worried about the fate of the Sensex.

N.B. All $ figures in this essay refer to US Dollars.

(1,236 words)

Title: Growing Dalal Street
By Ghatotkach
Tuesday, November 28, 2006

Am updated version of this article was published in The Pioneer on the Main Edit Page on 25th October 2007

This and all original essays on GHATOTKACHSERIES are copyright 2005-2006 by Gautam Mukherjee. All Rights Reserved.