Uneasy world cannot support bull run

There are too many tensions and imminent dangers stalking the world that can stymie the bull run. The BSE Sensex climbed 325 points last week to end at 11,192, after Ben Bernanke, the US Federal Reserve Chairman, kept US interest rates steady. The market took this as a sign of confidence in Bernanke’s ability to control inflation and celebrated. More so since Bernanke’s British counterpart had raised interest rates. But the rising interest rate cycle is quite likely to resume soon, for a variety of reasons which are reflective of the tensions and imminent dangers.

One of them is oil prices, which has already crossed $77 a barrel. The Alaskan oil production facility of BP, which contributes 8% of US consumption, has been shut down after the pipeline carrying the oil was found to have been corroded. The oil would now have to be procured elsewhere, which would push up its price.
Another reason for the oil price surge is the situation in Lebanon, which Israel has entered in order to flush out the Hizbullah who were shelling Israeli towns from there. The issue could be resolved sooner, were it only between the stronger

Israel and Hizbullah. But it appears to be a proxy war between the US and Iran, which would be far more complicated to resolve.

Adding to this is the continuation of terrorist attacks, the latest of which - a plan to blow up several aircraft mid-sea - was, thankfully, thwarted in London. One cannot expect the same level of efficiency and investigation in India, where security forces have been undermined; notice boards at airports exempt some two dozen persons (and their retinue) from security checks, including those who are not in government. When the threat of transfer is held over officials doing their job, one cannot expect them to have the morale to stall further terrorist attacks. They must be given back their independence from political and administrative interference.

Coming back to US interest rates, if they are raised, its housing market would go for a toss. One of the things that props US consumption spending is the rising value of US property.

Home owners refinance their mortgages after home prices rise and get higher loans at lower monthly instalments. They then, foolishly, use this for consumption. As a result of this, they have been spending more than they earn over the past three years. Any raise in interest rates would prick the property bubble, reduce consumption and hence GDP growth, and bring down stockmarkets in the US.

If they don’t hike interest rates, then they will be unable to finance their current account deficit. The Chinese are threatening to sell the $300 billion in US government bonds they hold and the US treasury secretary is putting pressure on Beijing to raise their exchange rates.

Then there is the failed Doha round of trade negotiations. It is free trade, negotiated under previous rounds, that has been responsible for much of the global spreading of wealth; China produces goods and India provides services for the developed world. When multilateral negotiations break down, as in the Doha round, bilateral deals happen but these are not necessarily universally good and are, obviously, tilted in favour of the stronger partners.

All these tensions and worries are not at all conducive to a continuation of the bull run. Add to that the pathetic display of public governance shown by our politicians and one begins to shudder. Unable to control expenditure, politicians love to dip their grubby hands in other people’s pockets. Balance-sheets of public sector oil companies have been driven from dark black to deep red because of this. Now, not only are they forced to sell products like cooking gas at subsidised rates (which, being a political decision, ought to be paid by the budget) but, to rub salt in the wounds, are now likely to be asked to pay excise on the ‘refinery gate price,’ which is higher, instead of the actual selling price! Who cares?

Not content with destroying the energy sector, the government now turns its Sadim touch (opposite of Midas) on the banking sector. It asked the boards of public sector banks to review their prime lending rate hikes. Luckily, the boards of three, Bank of Baroda, Andhra Bank and Oriental, had the required parts of the anatomy to stick to their decisions and not cower to senseless micromanagement. Kudos to them!

The current rally is likely to continue awhile but there are just too many risk factors around, both globally and domestically; so it would be prudent to plan an exit. When any of the tensions and imminent dangers will manifest themselves one cannot guess. Uneasy world cannot support bull run