If you could paint a rosy picture of these gloomy times, it would have emerged something like this: you would have sold your crypto assets three months ago, sitting relaxed with no debts, don’t have any equity market exposure, especially in the US market, don’t drive a car which runs on fossil fuels and to add a pinch of salt and pepper, you have shorted Netflix. Of course, all these would be fantasies of an Intelligent investor when he looks at hindsight through the rear-view mirror of his gasoline-powered car.

In short, this is sheer optimism in the face of looming adversity transfiguring into an inflation-infested economy. Global economies are taking the toll of the CoVID pandemic and governments’ financial resolutions.

In fact, US and UK economies have been running well for the last 40 years. But the pandemic turned everything upside down. Survival turned into the priority, and to keep the pace, every nation rolled out unlimited stimulus packages.

The rich and mighty Uncle Sam shell out more money to buy bread and butter for his child. The bread and butter came in every shape and size: quantitative easing, lower interest rates, and even pocket money for each citizen.

But, a few things went terribly wrong. First, the liquidity was in excess amounts. Second, it was infused into the economy at the wrong time: lifting of CoVID induced lockdown and supply shortages triggered by the Russo-Ukraine conflict. In developed economies like US and UK, it could do nothing but create high inflation and a negative real rate of return. Now, increasing the interest rate is the only door open in front of them. It is as if a high dose of stimulus medicine damaged the liver of the economy.

In India, the situation is quite different, and thankfully, we are still better placed. In the past, we have experienced this sort of inflation and successfully kept our real rate of return intact without slipping into negative territory. The credit goes to our economic think tank, which urged the RBI not to keep enough cash in hand and stay away from dumping unplanned yet excess stimulus packages into the economy.

History shows us that we have been accustomed to similar economic cycles. RBI pumps up liquidity during an economic slowdown to boost the economy and let the demand-supply wheel roll again. On the other hand, RBI increases the interest rates when the economy expands to suck the liquidity out of the system and let the steam out of the inflationary pressure.

Indian economy sailed through the wild tides of the 2000 dot-com bubble and 2008 sub-prime crises. If the present CoVID pandemic crisis is similar to those crises, the way out depends on inflation data post dot-com bubble and subprime crises. The inflation data of the US and India is given in the table below:

The above chart clearly shows the following facts.

• Unlike the US, India is familiar with its inflation. But India’s economy is no more standalone. Today, India catches fever when the US sneezes. The rupee depreciation during FII outflow is a recent example.

• In the US, inflation during the post dot-com bubble and the subprime crisis wasn’t high. So it provided enough room to stimulate the economy without fear of further spike in inflation. This is the prevalent strategy to come out of a crisis or recession when inflation is under control.

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But during post-pandemic days, if the interest rate is continuously raised to curb inflation, it will open the door for a unique recession. In a sense, even fiscal policies are helpless, and the past lessons turn useless this time.

Till now, the Fed is playing a very brilliant game; something economists say, ‘a great balancing act’: a clever attempt to cool off inflation by never letting the economy slip into recession. So let’s hope the Fed will make a safe landing.

Even during this gloomy phase of the economy, opportunities are aplenty for investors to participate at a reasonably good valuation and invest in long-term wealth creation. Side by side, keep enough liquid funds to add positions to your equity holdings if the economy slips into another recession.

Happy investing!

Akhil Bhardwaj

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Alpha Research