Here comes the Cavalry!

Here comes the Cavalry!


In the formulaic but once popular “Western” genre, produced by the Hollywood Studio System, the last reel of the film often had heroic “Cowboys” beleaguered into a last stand. There they were, too few by far, confronted by cohorts of face-painted and whooping Red Indian Braves, riding horses bareback, and licking the living daylights out of them. But, just as all seemed lost, along came the blue-uniformed United States Cavalry. The Cavalry looked marvellous; galloping to the rescue, tooting whistles and blowing bugles, with their not-a minute-too-soon timing, and their highly effective aggression. The unerring moral of the classic Cowboys and Indians story is-- the Cavalry always turns up to save the day.

But here, in a country with Indians of a decidedly different sort, what do we do about the disgust we feel as witness to yet another horrific terrorist attack? We watch innocents being routinely slaughtered, and wonder at the inept attempts of the government and security agencies. They cannot seem to either anticipate terror or be able to catch very many of the perpetrators!

We have no Permanent Account Number (PAN) system to map terrorists. We seem more intent on finding out “sources of funds” than we do about threats to human life, notwithstanding our almost parallel “black” economy. We have only the haziest notions about who our citizens are, where they live, what they do, where they go, whom they meet. We know even less about our “guests”, both welcome and unwelcome. So how is a blind-folded Cavalry meant to save us? They are, our men in khaki, just as vulnerable as the rest of us!

But, fortunately, in matters economic, not everything that we do is so inept. And a great deal happens globally that influences and shapes our macro outcomes, and over which, thankfully, we have little or no control. A careful reading of the tea leaves seems to suggest that things are about to get decidedly better. This is most welcome, of course, after months of unrelenting pressure that was drawing us closer and closer to the negative tipping point.

The energy consuming world’s No. 1 economic threat, and ours, since we have a 70 per cent oil import scenario, is that of spiralling crude prices. This one threat has overtaken the global credit crisis, temporary food shortages, insurrections, pestilence, natural disasters, political instability and climate change. Crude prices have risen 30 per cent in 2008 alone, and nearly 100 per cent since 2007. Expert estimates suggest that a fair “value” price for crude, inflation-adjusted, is about USD 75 per barrel, and a further USD 10 to USD 15 can be tolerated for demand and supply imbalances. Anything above that is being driven by sheer speculation.

Nevertheless, the situation has grown so acute, that the maximum estimates of a trillion dollar global credit crisis and the five year-old, three trillion dollar Iraq War, pale in comparison. The war can be brought to an end, and may well be, soon after the US general election. And the credit crisis is a mess of sins past. It is the outcome of a bill being presented for a ten-year-long party. But the excess of lending to undeserving candidates, once discovered, can, and is, on its way to being remedied.

But crude oil prices, that crested at USD 127 last week before edging reluctantly downwards to a low of USD 120 plus in intra-day trading on the 16th of May, are another matter altogether. Recent nightmarish projections of even USD 150 and USD 200 per barrel by certain “mad pride” analysts, albeit over the next couple of years, have the potential to derail the world economy, and bring about tectonic shifts in the way it runs itself.

But fortunately, the “Cavalry” of self-correcting market forces is galloping to the rescue. Oil prices are headed downwards at last. In the near future, by the end of 2008, or sooner, they may be nesting at an acceptable figure of under USD 100 a barrel. More and more commentators are now inclined to think, like Peter Morgan of HSBC and Sandeep Sabharwal of JM Mutual Fund, that crude oil prices have peaked. Moreover, says Peter Morgan, the US economy will see revival, not recession, in the second half of 2008.

Others say, it won’t just be oil that is headed downwards but the whole raft of cyclical commodities that have had an excellent bull run after decades of depressed prices. They have seen unprecedented price levels, much above fair value and the demand supply axis, pursued by very large sums of speculative money. This money, from Hedge funds and Private Equity alike has been engorged by the series of interest rate cuts forced on the US and other nations by the threat of recession after the sub-prime crisis.

But now, the speculators are sniffing a change in the wind direction. There is a consolidated resistance from all the real economies of the world, unable to digest such high prices. It is too much and too soon. So the speculators are taking their profits off the table. This process will gain momentum in the coming weeks and bring much needed relief to the world economy. It will stabilise the fast depreciating rupee and the now strengthening but deeply beaten down US dollar alike. This benign development will also arrest most of the remaining recessionary trends in the United States.

The net effect on India, as well as in all the other fast growing economies of the world, will be a revival of GDP projections, a much needed reduction in inflation, a modest appreciation of the rupee, and perhaps a growth inducing cut in the interest rates as well. India can contemplate 8 per cent plus growth rates for fiscal 2008 once again. This reversal of an unhappy trend will also raise all boats including the equity and realty markets in India, with both likely to go up in anticipation.

Sandeep Sabharwal, well known for his often contrarian but spectacularly accurate forecasts, expects a hearty 30 per cent decline in most commodity prices including oil, going forward. He also expects a 10 per cent rise in the equity markets over the next six weeks. Thank God then for the Cavalry because we couldn’t have held out much longer.

(1,050 words)

Gautam Mukherjee
Friday 16th May 2008

Published on Edit Page of The Pioneer and online at www.dailypioneer.com as "The Cavalry's here, so relax" on Wednesday, May 21st, 2008