Editor’s Note: This is not an investment article but an article of celebration and an article about differences between science and technology. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
As if right on cue for Deepavali, the Indian Stock Market rallied to an all-time high this Friday. In fact, three successive highs were recorded by the Sensex this week to close at 21,196. This is a joyous occasion for all traders in India and all holders of Indian stocks around the world.
What a rally it has been from the horrible days in summer? The Sensex closed at 17,996 on August 27, 2013, the day before it bounced from the summer doldrums. The 18% rally from August 28 to the Diwali close is to be celebrated during this Diwali.
We understand that the economy in India is still plagued by high inflation and slow growth. The middle class and the poor are both hurting at this time. Sales in many stores in Mumbai are down double digits with some stores reporting 50% decrease over last year. These are troubled times indeed.
This rally in the Sensex has a positive message to Indians, in our opinion. Don’t dismiss it. Look, India is the only stock market among the BRICs to rally to all-time record highs. India is the only stock market among the BRICs to post a gain in 2013, a decent 9% gain. This is telling Indians something they should all know – the fundamentals of the Indian economy are solid.
Look at the other BRICs. The Chinese economy has to undergo a long, hard, and painful restructuring from a fixed asset investment economy to a consumer spending economy. The imbalances in the Chinese economy have reached a level that has never been seen before in economic history. The world hopes Chinese leaders will succeed in this mammoth restructuring but no one knows for sure. Brazil is facing a secular challenge from the end of the commodities supercycle. And Russia is almost totally dependent on high oil prices to keep their economy growing. Most of other emerging markets have grown off of Chinese demand and may have to restructure their own economies.
India stands virtually alone among emerging markets as a potential beneficiary of global trends. Because Indian economy has the sound basis of domestic growth, secular demand and an entrepreneurial class. This is why we have always been and remain bullish on the micro story in India. And a drop in oil prices is nothing but great news for India.
Obviously the macro story in India is pathetic, mainly due to an utterly incompetent government and a political class that seems focused on getting personally wealthy by plundering the Indian economy via corruption. The Indian people, especially the middle class, know this very well. That is why everyone we know is praying for a change in government in the 2014 election.
The other problem in India is a lack of technology. The Indian educated class understands science and can talk a good game but they remain utterly ignorant of technology. So ignorant that they don’t even understand what they don’t know. Take, in particular, the technology of money.
Technology vs Science – Finance vs. Economics
There are many economists in India and they are good. But they are all arm-chair thinkers. It is not their fault. After all, India has never built financial markets except the stock market. India still lacks a vibrant government bond market. India still lacks a corporate bond market. India has not even thought about a local government or state bond markets in which individual states can raise money for development needs.
As Robert Shiller of Yale, this year’s Nobel Prize winner, wrote in his book:
- ” … finance has been central to the rise of prosperous market economies in the modern age – indeed this rise would be unimaginable without it.
This basic understanding seems completely lacking in today’s India. That is why Indian economists seem mesmerized by science of economics rather than technology of financial markets. They seem obsessed by “why” rather than “how” without understanding that “how” leads to success while “why” can be very expensive. Let us give you a simple example.
Arvind Subramanian is a well known economist at Peterson Institute for International Economics. Recently he wrote an article in the Business Standard titled What saved the rupee? It is a good article in which Subramanian discusses four factors. His fourth factor is what, he argues, saved the rupee.
Subramanian doesn’t even spend a line on why the rupee really turned. In fact, it seems clear from his article that Subramanian did not buy either the Rupee or Indian stocks on August 28, the day the rupee & Indian stocks turned. That may be why he is obsessed with the “why” question. In contrast, anyone who wanted to buy or actually bought Indian rupee or Indian stocks on August 28 was entirely focused on the “how”.
And the “how” process deals with non-academic but extremely important questions like “is this the day to buy?’, “will rupee or stocks continue to fall after I buy?”, “am I catching a falling knife”, or basically “how do I know today is the time to buy?” These “how” questions are extremely important and actually far exceed the importance of “why” questions at least to the professional investors.
Financial technology studies the above “how” questions and develops statistical technologies to understand “how” and “when” trends exhaust themselves. Remember, the frightening fall in the Indian rupee in the summer? Remember how you woke up every day to find that rupee had fallen again in Singapore & London? That fall was a classic intense fast trend. And like all forces of nature, financial trends exhaust themselves. That is the rationale behind statistical techniques of trend exhaustion.
How did they work on August 28, 2013 in the Indian rupee, in Indian stocks and in emerging markets in general? Look at the chart below. What you see is a trigger of a daily DeMark buy signal in emerging markets.
And what do professional investors do when they see such a signal? They put on trades to take advantage. We discussed this on August 31, 2013 in our article Indian Rupee, an Existential Battle & Echo of Soros vs. BoE?
In that August 31 article, we described the trade in which an institution bought 1,125,000 shares of EPI, an Indian stock Exchange Traded Fund, on August 28 at $13.10. The shares of EPI closed at $16.89 this Friday, a spect
acular gain of 29% on the capital invested.
Others must have stepped in to buy as well on that day. But “how” is this reason the Rupee turned?
(daily DeMark buy signal in EM on August 28, 2013 – courtesy of @rr_trades)
An Indian exchange traded fund (ETF) is a portfolio of Indian stocks that is traded as a unit. So when you buy an ETF, it electronically results in buying of proportional amount of Indian stocks. And that is done by transferring money into Indian rupees in India, because Indian stocks trade on Indian markets.
So when institutions stepped forward on August 28 to buy Indian ETFs in New York, the money in Dollars was converted into Rupees to buy stocks on the Indian stock exchanges. So when Indian ETFs in New York began their rally, Indian stocks in India rallied and so the Rupee rallied with inflows from Dollars.
This is a classic case of “how” markets turn and “how” technology of markets, of statistical finance is employed in finding solutions. This is the difference between the technology of financial markets and the science of economics. This is something you will not find in the “why” articles of economists like Arvind Subramanian.
This is why Raghuram Rajan is trying to build deep capital markets in India. India needs such markets and their sophisticated technology to deliver steady credit to Indian economy and to protect it from rapid convulsions in capital flows.
So if you have made money in the rally in the Sensex, thank Devi Lakshmi and support Rajan’s drive to build financial markets in India. Then the blessings of Lakshmi will be bestowed on all Indians and not just on the Sensex investors.
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