QE2′s Titanic Voyage

The QE2, now moored at Dubai is a magnificent ship. It is an awesome flotilla of human engineering with 5 restaurants, 2 cafes; 3 swimming pools; a pub, a nightclub and several bars; a casino; a 481 seater cinema; shops; health clubs; the largest floating library and a hospital – all comprising an ecosystem of 3000 people (incl full roster of passengers) that circumnavigates around the world in 80 days. Given the cacophony of the other QE2 (Quantitative Easing, proposed & hopefully stillborn Round 2) in the US, I try to compare this Cunard marvel to the US economy. I randomly switch between QE2, the ship and the Fed’s QE2 (the raising of a shipwreck)

I have been absorbing and echoing popular thoughts that the recent Indian market rally has been fuelled by Foreign Institutional Investment (FII) related flows and that once this spigot runs dry, we’ll have a nice juicy correction. A big enough gash to seriously bleed the short term traders. But I never counted on the Fed docks building and launching another armada of liquidity into the markets! The US docks, from this perspective just never seem to run dry. And now I am big time confused. The QE2 rush of dollars will only add fuel to the fire, right? So, will we be seeing a near parabolic rise in Indian equity? Will the Diwali rockets fire up real high this year? You may have noted my aversion to seeing parabolas in stock charts from some of my past posts and the accompanying note that parabolas are not self-sustaining. Good for the Indian Government really – considering the slew of paper that is about to be thrown into the ring.

Like QE2, the American economy moves slowly and consumes a lot. The QE2 reportedly moves a cool 40 – 50 feet per gallon of fuel. That implies a mileage of 3.7 meters per litre of fuel. A snail (if blown up proportionately) will be supersonic in comparision, I guess. Like the ship, the American economy is moribund and is crawling towards what many are calling a recession? The QE2 has been navigated by 23 Captains till date, the Fed on the other hand has seen only 14 Chairmen at its helm. The QE2 was introduced in 1967, the Fed came about in 1913. The Fed Chairmen are quite sticky: like barnacles I guess. The QE2, when it was floating around used to consume 430 tons of fuels per day. My back of the envelope suggests that the US drinks 2.3 million tonnes of gasoline a day. I guess India’s figure is at 100 million tonnes of petrol a year.

The other important point is that the Royal Navy recruited the QE2 in 1982 to serve the original Queen in the Falklands War. Similarily, the Fed Captain is pushing QE2 to prepare for war. Only this time it will be a war that will be played out on the currency screens of traders across the world. We seem to be bracing for a full scale global currency war as the QE2 sets float. The difference being that this new artifact from the Fed is being pressed into service on an already raging sea of liquidity. The voyage around Tierra del Fuego has always been notorious – imagine creating a tsunami on a particularly nasty day aross this southern tip of South America as a solution to taking ships over and around the bend! Davy Jones Locker, surely. That too a man-made artificial tsunami. That’s what the Fed is doing, I think. Raising the waves in the hope that domestic (read US) yatchs, boats, dinghies and sundry canoes will start ‘consuming’ the momentum by hoisting up their sails, revving up their motors, rigging up the tow lines and picking up their sculls. Really? What many think is that nature will always choose the path of least resistance and this extra liquidity will quit the Atlantic and flow down towards more Pacific waters. Whither QE2? What will it achieve if that happens?

And finally one last lesson to pick up from QE2. It’s new owner is the Nakheel Group – an Asian real estate group with diversified interests in asset management, liesure and real estate whose website, just like the QE2 seems to be quite slow. The lesson is that developing nations one day will get tired of having to bear the responsibility of mopping up all of this money that the QE2 is spilling out. Unfortunately, it’s not a cornucopia – it’s really a runny nose. And the virus is catching on fast. Emerging economies will one day realise that they’d be better off buying US assets and directly injecting equity into the US system as opposed to buying the rapidly falling US Dollar. If the US domestic investment does not get kickstarted by this QE2, can foreigners buy mines, companies, set up offices in the US and provide employment directly? Can they, is the other question. Arnold Schwarzenegger is touring Asia to see who can build a high speed train system for California.

 The war is on. We saw two wars around the time the gold standard was abolished and the major countries of that age took it upon themselves to support local inflation by printing currency to fund war. After the dust had settled down,  the US dollar was to be much more than just the national currency of the US. After the gold standard was abolished, the US was at its zenith, unscathed by the World Wars and it took it upon itself to make the USD a truly global medium of exchange. The people managing the USD (the Fed Captains) therefore, theoretically at least had a global responsibility. They still have. The point is that when the Fed does things like QE2, the pain is equally felt everywhere. That is why this unilateral stewardship of the world economy will make the recalcitrant new kids on the block itching to pick up a fight. The rednecks will stolidly hang on to their artifical currency pegs while the boys in blue will stoke up local inflation. Common man will get crushed under the weight of rising prices and a Government might fall.

Additional reading:

  1. A view from Infosys’ Think Flat blog: Will QE2 sail or sink?
  2. A caption that I do not agree with: QE2 to speed triumph of emerging markets
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Obama Speak

The US President is going around asking his fellow countrymen to produce more graduates and compete with the likes of India and China. These are good points to raise but then when this is accompanied by curbs on granting visas it begins to sound like rhetoric. All under the guise of protecting US borders! The border security bill will hike visa fees to $2,000 per applicant for companies that have fewer than 50% of its workforce as US citizens. Thats a cool $200 million bill for Indian software companies that rely heavily on “body shopping”. The standard line of the Indian industry has been a lament on the lack of the totalisation pact between the two countries. India has to contribute towards social security for the workers that it sends to the US – and if they return back to India, there is no possibility of a refund. I would welcome to hear something from Dr. Manmohan Singh on the issue. He is his usual quiet self.

While India remains preoccupied with flash floods, Kashmir, honour killings and the Commonwealth Games tamasha, China picked up the gauntlet and responded well by making outsourcing completely tax free if delivered from 21 cities. The Chinese have made no bones about the fact that they want to end India’s dominance in the sector. Should India not make a counter move to steal some foundries away from China?

India’s earlier responses sound quite pathetic to me. If the US politicians are ushering their wards back to school and hoping and helping their middle class to retain their sources of income, whats wrong with it? Cribbing about it and making it sound as if some grave injustice is being done against it is mooching. How would India feel if people across its eastern border arrived in hordes and stole away jobs? Some factions cannot even tolerate intra country movement of labour.

The rhetoric in the US however is also missing its mark. Senator Charles Schumer has called Infosys a chop shop. Its easy for the sound bytes to morph into an India/China hate undercurrent (if one does not exist already). Lou Dobbs, a popular media anchor, for instance has written a book on outsourcing and devotes much of his website to the phenomenon and how the American middle class is being killed. Is it? Don’t think so. Maybe going through a very tough phase. An important counterpoint to note is the indirect benefit that this can yield to the US.

It would be good for the US to note that the Indian middle class is gravitating towards more and more consumerism. People are seeing their incomes rise and are swiping their credit cards, buying second houses, ipods, etc. gleefully. This is allowing banks like BoA, Citibank etc to set up their shops in India. While such benefits selectively accrue to the Dells, Microsofts and BoAs of the world, the American middle class can certainly benefit. President Obama should also consider exhorting his masses to match imports (of services from China and India) with American exports to these countries. The oriental appetite for consuming intelligently designed goods and services in the occident will only grow. Americans would do well to understand one basic trait of most Indian middle classes – they are afraid to take risks. Innovation is rarely seen. While hordes of software junkies pound away at maintenance and basic software jobs, there is hardly any technological breakthroughs that emerge from this populous nation. The US has always thrived by managing risk and employing innovation which have set up a very strong financial acceptance to see capital freely flowing to fund ventures that are risky. Indians generally take the easy way out – outsourcing is one of them.

But these shifts and changes, as significant as they can be, happen slowly and the threat of the current American middle class losing its plot somewhere is indeed very real. And such Obama speak will found many takers and therefore votes. Whether the White House politicians actually act in earnest to plug the leak (which in my opinion they should not blindly do) is a different matter. Donations from many top industry groups may be funding the election expenses of these law makers.

In my opinion, its futile for the US (as a nation and culture) to fight outsourcing. Its perfectly logical and sane for the US society to agitate and therefore equally logical for the politicians to flog this sentiment for election victories. The US should focus on earning export dollars (USD should depreciate as years roll by) by tapping into the growing prosperity in China and India. India and China, on the other hand, should open up their economies further, slicing and selling off non-strategic assets to the highest bidders and generating more wealth in the process. Its a great lifetime to spend in the Indian and Chinese capital markets of today.

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