So, you heard what Jim Rogers, the commodity guru, has had to say, and he says this has been long overdue and these kind of conditions are brought on by a lot of leverage across markets around the world. Do you agree? Do you think that the kind of factors that influence the markets are going to take them down even further?
Arnab Das: Well, I think it is certainly a risk. I think there has been a big build-up in public sector leverage in the US and many other countries, particularly in the West, as a result of the pandemic and to some extent, the war in Ukraine. And I think that has been a factor in keeping growth so high and in generating a boom in investment, construction, manufacturing renaissance of sorts in the US. I do not think that is the only thing that is going on. Though, I think what has happened here is the market was extremely buoyant and arguably priced for something approaching perfection when it got a bit of a wake-up call that the economy was slowing down from last Friday’s non-farm payrolls number in the US.
We have long been in the camp and I particularly continue to believe this myself that we are going to have what we call a bumpy landing, not necessarily a hard landing, kind of a deep recession of the sort that the US usually has because there are a lot of things at play here that have been quite a bit different than a conventional cycle, not just the fiscal and the public debt, but also that obviously we are coming out of a pandemic, we are coming out of a wartime shock. The US is now an energy exporter, so actually benefited from the war. There has been a huge influx of immigration into the US supporting growth and helping to disinflate the US even though growth was so high.
My question is this, that these factors have existed for a long period of time. I mean, it is not new. Geopolitical tensions have been around. You alluded to them as well with Russia-Ukraine. We have spoken about the impact of oil prices in the past as far as the Red Sea crisis is concerned, all of these factors whether you look at the American economy which many are saying that the fear that a recession might hit, that fear has been around for the longest time, whether the Fed is going to cut interest rates, all of that has been up in the air. So, as far as factors go, what about what we are expecting tomorrow that is playing on investor minds today, is it only what has happened in the past and is it a late reaction what we are seeing today?
Arnab Das: Yes, I think there is a bit of that in particular, like I said, I think triggered by the much weaker than expected, although I have to say not necessarily recessionary, number in the non-farm payrolls number last Friday.
So, I think what is gripping the market right now is a kind of concern that the Fed has been waiting too long for evidence that inflation has slowed enough to cut rates and that we might be tipping over into a recession, even if it cuts in September and hence, people are baying for an intermeeting cut or a 50 basis point cut.
Look, I think a correction may have been long overdue as Jim Rogers was saying. I do not necessarily disagree with that. But having said that, like I said, I think we are in this kind of bumpy landing sort of place, not necessarily a hard landing.
So, I think the Fed is still going to wait, unless the selloff really gathers a lot of steam and financial conditions tighten so much that its hand is forced.
I think they are still going to go relatively more slowly than the market is expecting here because this is a bit of a correction triggered by a much worse than expected number, rather than a sign. There has been no specific sign that the economy is clearly in recession, that the labour market is clearly tipping over into recessionary territory.
So, that is what I mean, that this kind of, you cannot even call it a knee-jerk reaction for the kind of meltdown that we have seen across global bourses this time and there is a sense of recovery, I may add on Wall Street. The Nasdaq is recovering over 600 points from the kind of lows it has seen this day. S&P also around 100 points recovered and the Dow is recovering more than 300 points. So, in terms of volatility in these market conditions, in such a market, which are the key factors that will come to play and what should you watch out for?
Arnab Das: Look, I think it is substantially if not overwhelmingly still about the labour market in the US. Of course, the data on that is going to be not coming in thick and fast. I think the market is concerned because the so-called Sahm rule has been triggered that when the unemployment rate moves above its three-month moving average by 50 basis points or more, that means that you are already in the early stages of a recession. We will need to see more confirmation of that to validate the sell-off. It is going to take some time for that to come.
So, I sort of agree that there is probably going to be some volatility. If you are a long-term investor, you want to buy on these big kind of corrections and dips and big increases in volatility. If you are a short-term trader, you probably want to kind of hold back and wait for the knife to fall further and for it to start to turn around before you step in. The underlying question here is whether you think that the fundamentals in the US and perhaps in some other countries are all that bad and that it is a serious problem that there is so much public debt. I think it is a problem. I do not think it is a serious problem that so serious that the US is going to have a problem financing itself or even be unable to finance a looser budget deficit if and when the economy goes into a recession. I think in that scenario when we get confirmation of a recession, we will have bond yields lower as well as equity prices lower and that is a more traditional kind of environment. After all, we are in a world now where bonds yield something, interest rates are positive, and the economy is clearly responsive and dynamic, at least the US economy is responsive to movements and rates and bond yields. So, I think we do not need to worry about a major crisis here.
So, you are not particularly worried, but how will foreign cash flows move in these conditions? Does it look like advantage India to draw FIIs at this stage or will they still wait it out to see if India stays insulated like many are hoping and do believe?
Arnab Das: Look, the money is probably not going to come pouring in right now amidst this volatility into risky asset classes, including equity markets generally and including Indian equities, just because it is a kind of risk off. This may not be the very moment. But I think, again, here, institutional investors, long-term investors are going to take the long view on India and many other markets and probably will say okay, well, we have had a big correction, we have had a big correction even in India which is often priced above perfection and so I think money will return when the risk off abates and that could be and I expect when the correction abates and if not, it will come because there is a bit more of a slowdown and then things will start to turn around. I think India is on a trajectory.
There needs to be a bit of a course correction, that was the message of the election, but India is on a trajectory which is broadly speaking the right one, which is to liberalise the economy, which is to invest in infrastructure and to grow both manufacturing services and services exports and to continue to integrate with whatever in the world economy continues to be open for business which is kind of a good story for India when it comes to professional services, technology services and potentially manufacturing if the liberalisation is in the labour market and in land acquisition and other such areas can continue to proceed. So, I think the future for India could be quite bright. The government has to keep doing the right things and more of them and people will respond. Investors around the world will respond.
Well, a lot depends on several domestic factors that are at play, but you cannot ignore the cues that the RBI would get from the Fed. Are you expecting the Fed to make any out of turn rate cuts? Will they buy their time till September you think? And if they do, what do you sense is going to be the pace of rate cuts that we need to watch out for?
Arnab Das: I think the base case should still be that they go by 25 basis point increments starting in in September. I think the scenario in which that is not the case, in which there is an emergency kind of rate cut, whether that is intermeeting or 50 basis points or both, is a scenario in which things need to be materially worse, not just that financial markets are experiencing a significant, some would argue healthy and necessary correction, it would need to be a correction that is really quite serious and signals that a lot more is wrong than we have evidence for so far. So, I would not rule it out, but I would certainly not make it my base case bank on it or trade on that basis.