(1a) COVID put the breaks on all kind of economic activities, fear of GDP slowing down, Individuals losing jobs, Companies making losses etc. (2/25)
(1b) Central banks globally unleashed a liquidity package by lowering rates (so that loans become cheap & u buy more) & doing Quantitative Easing (QE)/buying back bonds (Similar to when you buy an FD from a bank, u give bank the money & increase the liquidity with the bank)(3/25)
(1c) Suddenly everyone had monies or could borrow at almost 0% & all this money started chasing stock markets & commodities (rates were zero so no one wanted to invest in fixed income then) (4/25)
(1d) Yields were going down, Stock Markets went up, commodity prices went up & hence inflation went up (You call this demand-pull inflation - An inflation that happens because there is demand) (5/25)
(1e) Along with liquidity, Russia - Ukraine war & China zero tolerance to COVID & political agendas created supply side problems thereby fuelling Inflation even further up (Ex: Supply of Gas become a problem for Europe from Russia) (6/25)
(Q2) So what’s the situation now?
(2a) You have inflation because of both, liquidity led Demand & Russia + China led Supply problems (7/25)
(2b) You cant control the supply side problem as a central bank because neither Russia & nor China is in your control & hence the focus is on how to reduce liquidity so that the demand driven inflation can be controlled (8/25)
(2c) Which ever central bank infused more liquidity has more demand inflationary pressure today (US & UK)
(2d) US & UK have an inflation target of 2% but their inflation is at 9-10% vs India which infused less liquidity & hence target is 6% & inflation is at 7% (9/25)
(Q3) What are central banks doing to reduce the demand led inflation?
- Increasing rates & Quantitative Tightening (QT - It’s the opposite of QE/buying of bonds that we discussed above) (10/25)
(3a) By increasing rates, central banks are trying to bring demand down (Mortgage rates in the US have gone up from 2% to 7% in 1 year)
- US has already increased rates by 3%
- UK has by 2.25%
- India has by 1.4% (11/25)
(3b) Quantitative Tightening - Central banks have started selling the bonds they purchased during QE. When they sell the bonds, they receive monies from the market & thereby reducing the liquidity with the market (12/25)
(4) How did this affect the capital markets?
(4a) It affected Equities negatively, explained 👇 (13/25)
(4d) Gold went down,
- Gold is bought in $’s globally. So if the $ goes up, price of the gold goes up & hence demand falls & so the price of Gold falls (16/25)
(Q5) But $ was printed the most & there is inflation in the US then why is $ going up?
(5a) $ is a risk free asset, when ever there is risk off in the market, the monies flow into $ & hence it goes up (17/25)
(5b) When you increase rates, it’s a signal that the economy is strong & increase in rates wont derail our growth. Strong economy deserves stronger currency. US has raised the highest rates & hence $ is up (18/25)
(5c) US does not import oil & is self dependent. Another reason why its trade deficit is better than most & hence a stronger $
(5d) Interest rate differentials vs Europe & Japan is also helping the $ (Thread explaining this concept -
(5e) Most importantly, $ is moving higher because the other economies are weak & hence their currencies are even weaker which is benefiting the $. $ has not really moved higher vs the EM currencies. Chart Credit @RobinBrooksIIF (20/25)
(Q6) What did Japan do earlier in the month?
(6a) Japan has not been increasing rates & does not have a very aggressive policy stance & hence yields are still very low & Yen kept falling vs the $ (21/25)
(6b) Japan intervened in the forex market & bought Yen which helped & Yen appreciated 2% vs $
(6c) This is a temporary measure in my opinion & may not make any material impact on the Yen (22/25)
(Q7) What did UK do?
UK is confused as hell. Now that you understand, you decide. UK did the below lately,
- UK cut taxes where by increased liquidity
- Did Quantitative Easing by buying bonds
What do you think should happen to GBP & Yields? You should be able to answer (23/25)
(Q8) Why is India so resilient on currency, Yields & Stocks? Explained in the attachment 👇(24/25)
- Yields & $ have to stop rising for Equity markets to stabilise
- We cant stay insulated if the world goes south, we can only outperform
- US Fed increased rates by 0.75% on expected lines
- Will also keep reducing the balance sheet on expected lines BUT
- Equity, Yields & DXY all showed risk off signs?
Reason is the ‘Dot Plot’, let me explain
Please re-tweet & help us educated more investor
(Q1) What is a Dot Plot?
(a) It is an expectation (as on today) of the future interest rate movement over the next 3 years as predicted by the 19 members of the FED
(b) Every dot represents each fed members judgment of the future rates (1/n)
(c) If u c the Dot Plot below, it shows that at the end of 2022,
- 1 member is expecting rate to be 3.75 - 4%
- 8 members are expecting the rate to be between 4 - 4.25%
- 9 are expecting it to be between 4.25 - 4.5%
- 1 member is expecting rate close to between 4.5 - 4.75% (2/n)
75 bps was broadly expected & hence priced in by the markets & there was no surprise here, which was a positive. But along with this, it was more about what Fed guided on ‘neutral interest rates’, which led the rally. (2/5)
Powel said, we are now broadly in line with our estimates of neutral rates & going forward, we are now going to be data dependent. What does that even mean you may ask? (3/5)
(Q) Lets start with the basic, y does the rupee generally keep falling against $?
(Ans) Interest rate parity. Let me explain,
US interest rates r at 3% & India is at 7.5%. Isn’t it easy to borrow in the US at 3% & invest in India at 7.5% & make 4.5% risk free?
Nope ☺ (2/13)
Lets assume you borrow $100 at 3% from US to invest in India & are expected to pay back $103 at the year-end. In India, $1 is 75 & hence you first convert $100 * 75 to Rs. 7,500 which is invested at 7.5% giving you 8062.5 at the year end. (3/13)
Why when loan rates are going up, FD rates are not? (Quick 🧵)
Repo rate linked home loan rates like the name suggests are directly linked to repo rates. When repo goes up, lending rates go up & vice versa (1/5)
As per RBI, banks have a maximum of 3 months to reset the repo rate linked 'new' home loan rate. Banks may use this in their favour to reset 3 months later in a falling repo rate senerio & immediately in a rising rate senerio (2/5)
But for us as 'existing' loan borrowers, our reset of interest rate date is pre decided on the date of taking the loan (3/5)
My new 🧵 on ‘How India is fighting against inflation’. This thread will answer most of your questions around macro-economics.
Please ‘re-tweet’ / share it in your Whatsapp groups & help us educate more investors. Happy #investing! (1/n)
(Q1) Why does inflation take place?
(1a) Like most of us believe, Inflation happens bcoz of the gap between demand & supply. When demand is more than supply, prices rise & boom u have inflation
But the question here is, y does the demand rise?
Ans - Liquidity! Let me explain
(1b) Imagine 10 of you’ll want to buy a laptop & there is only 1 laptop, we presume the price will go up right?
But in the same situation if I tell you that none of you’ll have the monies (liquidity) to buy the laptop; will the price of the laptop go up? Probably not! (3/n)
There are 2 most talked about reasons for the current IT sector under performance,
(A) Increasing interest rates & hence reset of valuations
(B) Operating margins shrinking because of the ‘Great Resignation’ (2/14)
(A) Lets talk about valuation reset first,
One way of valuing stock is using the DCF method.
(a) You project the future cash flows of the business for the coming 3-5 years & discount it at a particular rate to arrive at today’s value of the business (3/14)