Has the Indian Rupee found a Short Term Bottom?


Editor’s Note: This is an article about Washington Post, CNBC and Financial Television media in general.  It is NOT an investment article. No one should NOT invest or consider any investment based on any information contained in or inferred from this article or any portion of  it. All investment decisions or conclusions should be discussed with your investment advisor and should be subject to your suitability requirements and risk tolerances.

According to an old basic tenet of investing, the media often provides a contrarian signal. In fact, the more well respected the media entity, the stronger the signal. The gold standard of such signals remains the August 1979 cover of BusinessWeek titled the Death of Equities. The old article posted on BusinessWeek.com is still worth reading. As BW editors tell us:

  • “At the time the story was written, the stock market had sustained serious losses and the long-term health of the U.S. economy was a significant concern.”

 

Inflation was rampant in the late 1970s and investor psychology had been ravaged. So it seemed perfectly reasonable to argue that Equities were Dead. Now we all look back and see what a great contrarian signal that article provided to do just the opposite, buy U.S. stocks.

Today, India is battered by the twin forces of high inflation and plummeting Rupee. Indians are in a state of shock and dark humor is making the rounds in India. People are asking each other what will hit 100 first (century in Indlish) – Rupee/Dollar, Onions or Petrol.
 
The media, both Indian and global, has gone to town about the collapse of the Rupee. On this past Tuesday, the volume of the media uproar went to a new high, or so it seemed. The Washington Post finally woke up and wrote its India in uproar over rupee’s fall article. It began with “The Indian rupee is in a free fall these days and the whole nation is aflutter. ” For some reason, this article rang a bell for us, the old media contrarian signal bell.

Even more aflutter was CNBC, that “first in business worldwide” network. Unfortunately, they were the last to the story. Having ignored the fall in the Rupee for weeks, this wonderful network woke up on Tuesday morning and did two over the top segments about the Indian Rupee. The bell rung by the WashPost article suddenly became a bell chamber. It was an “aha” moment for us, a classic contrary signal.

It was not the perfect signal of course. Because the next day, Wednesday, was Fed minutes day – the day on which the minutes of the July 30 Federal Reserve meeting were to be released. The minutes were perceived as hawkish by the markets – both stocks and bonds fell on Wednesday afternoon. And predictably, the Indian Rupee went to a new low on Thursday in India touching Rs. 65 intraday.

But sanity returned the next morning in America and interest rates fell on Thursday. Predictably, the Indian Rupee rallied on Friday in India. This shows that the fate of the Indian Rupee is almost entirely in the hands of the U.S. interest rates market.

This brings us to the other side of the contrarian signal we received on Tuesday. U.S. interest rates have exploded to the upside since May 1, 2013. It has been the steepest percentage rise in interest rates in the past several decades. The spike has been due to fears of tightening by the U.S. Federal Reserve and the firming of the U.S. economy. And as the sensible & pragmatic Tony Crescenzi of Pimco tweeted on Friday afternoon:


  • PIMCO @PIMCO Tony Crescenzi: “There’s only so far a market can move on the same thing, be it earnings, economic data or Fed policy.http://” ow.ly/odlYw

At this point, the awfully negative story about India’s economic mess and its pathetic Rupee is well known and well factored in the markets. So the Indian Rupee is due for a respite. And the three Rupee collapses in the last 2 years have seen 2 periods of relative stability – January-February of 2012 and then July 2012-May 2013.

So we wouldn’t be surprised to see a period of stability return to the Indian Rupee and even a small rally from this past week’s deeply oversold condition. In full disclosure, we also expect stability and a fall in U.S. interest rates for at least a short period of time.

Let us be clear. We are not talking about a decisive change in the fortunes of the Indian Rupee. The Indian political system is an utter travesty, the Indian financial system is in an awful mess and nothing matters more than the election in 2014. This brings us back to America in 1979. Those were the malaise filled days of President Carter. Nothing looked right or felt right at that time.

Then in 1980 came President Reagan and America went back to being America. But a new bull market did not begin until 1982, three years after that classic BusinessWeek contrarian signal of August 1979.

Will the election of 2014 usher in a new era in India and for the Indian Rupee? Who knows? All we can say today is that Washington Post and CNBC may have given us a short term contrary signal on the Indian Rupee.

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