When Will Fed's Tapering Begin?

This is a trillion dollar question. When will the Federal Reserve in the US, actually start reducing the supply of cash that it has been flooding the US since the Lehman Crisis in 2008. This excess cash has, as we all know, found its way across the world and sustained economies and asset markets be it stockmarkets, commodities like gold or oil. Slowly turning the tap off, will naturally make a huge difference to a whole range of factors across the globe. In India, there would obviously be impact on stocks, value of the rupee and the overall economic growth since a lot of the high growth in the last one decade has been financed by incoming foreign funds.  A taste of what could happen if the tapering starts was visible earlier this year when the Fed chairman gave indications and our stockmarkets and currency went for a tail-spin. But since then, thanks to the US govt shutdown in October and other factors, the tapering seems to have got postponed. But then, as RBI governor Raghuram Rajan said that, "it has been postponed". Or the tapering is inevitable. So what signal is Fed looking at?

 Earlier this week I came across this article in Business Insider that gives interesting indications    (http://www.businessinsider.com/hatzius-fed-will-lower-unemployment-threshold-to-6-percent-2013-11). It seems the Fed is looking at two US economic indicators of unemployment falling to 6.5 per cent-6.0 per cent and inflation rising to 2.5 per cent. Well, while all this hardly gives you a sense of certainty but it does give you an idea of possible milestones for one of the most economic events of recent times to get kicked off. 

A Problem Called Europe

Uncertainty over events in Europe and its impact on the European crisis continues to take a toll across the globe. In India, its impact on stockmarkets this week is clearly visible where despite the Finance Minister's clarification on GAAR (which to some is "half-hearted", if not half-baked") there have been downward moves in the market and less-than-required-enthusiasm. To me, the "euromess" if I am allowed to coin this has two important messages. First, to enjoy economic benefits of a economic union you need to have monetary and fiscal policies both under single control. Minus the fiscal levers and fiscal discipline, it is not very difficult to get into the kind of mess Europe has got into. For instance, tt is now common knowledge that all the members of EU have flouted their fiscal deficit many times during the period the Union has been around. Included in the list is Germany which at times pontificates to other nations. If you take a step back and take a hard look, you will see similarities between and Europe and India as well. While India's monetary authority has been taking action in the recent past in India we don't find matching contribution by the government on the fiscal front.

The second lesson from Europe is the more worrying one. Recent elections have thrown out governments that have been following policies of economic austerity. While there are eminent economists such as Paul Krugman who feel that these policies should have not been initiated in the first place since what was required was more good old Keynesian government spending to create jobs and not worry about deficits and inflation as some governments have, the message from the electorate is that if a government's policy doesn't work for people, it will be thrown out. But can people throw out a system be thrown out if it doesn't work? History is replete with examples be it Germany in early 1930's or many others when demagogues seized power after thwarting democracy, free speech and free markets, encashing on people's desperation. In Spain, it seems about 50 per cent of the youth are unemployed. Anybody in the know of the economic situation can tell that the current euromess and global financial crisis will not go away in a hurry. Thus, while it will be easy for political parties and politicians to seize power encashing on popular disenchantment, it will not be easy to deliver the moon they promise as there are no easy ways out of the mess. The danger lies in people getting disillusioned with existing systems altogether and we will have a global cesspool. If one reads accounts of Greeks reeling under the impact of austerity measures one would start realising the meaning of "lost generation". While in US the situation is better thanks to a lower unemployment rate, but profound changes are already happening to people and their lives. Popular media is documenting how people even in their 70's are continuing to work sometimes at half the pay, because they can't afford to lead the retired life. The other scary lesson from anti-austerity movements is that once people get used to certain things they will not be able to live without them. It will be difficult for politicians to convince people on matters of economics. For instance, how will you convince people in India to pay user charges for electricity, cooking gas and diesel? Who can? Try telling this to our legislators who dole out one freebie after the other to the public as if there is no tomorrow.          

High Cost of Drug Discovery and Stock Prices

With not too many really interesting things to write about, I thought I will just put up this post about an  interesting article that I read last week. The article appeared in Forbes http://www.forbes.com/sites/matthewherper/2012/02/10/the-truly-staggering-cost-of-inventing-new-drugs/ that talks about the actual cost developing a new drug. Like others, I also used to believe that the average costs of developing a new drug is around $4 billion but the author rightly argues that we need to divide the total R&D spend by the number of drugs approved. This means we take into account the failure of drugs to make it to the market. The results of the exercise for global pharma giants are dramatic. They are spending far more money than what is popularly believed. We all know the original drug discovery needs deep pockets but when you look at keep these figures you realise just how deep the pockets need to be. Now, what are the implications for Indian pharma firms? Clearly, it is a tall ask for Indian companies to make a transition to be part of original drug discovery club. No wonder not too many Indian firms are now talking about these ambitions unlike even what it was some years back. An important aspect here is that the stock market doesn't really reward drug discovery and will look at it as an expense unless you can quickly monetise it in the near future (that's 6-9 months for you). Of course, they can be part of certain segments of the drug discovery process like discovery of the molecule or trials. So, the next time a pharma company talks of drug discovery we know the context in which those statements can be evaluated.     

Eurozone: Our Misplaced Hopes

Went to All India Radio studios on Tuesday as an expert in their stockmarkets programme to   comment on news developments. One of the anchors asked me what I thought of reports that European leaders wouldn't be able to hammer out a solution to the eurozone problem this weekend and whether it wasn't too much to expect something like that over a weekend. I agreed with the anchor and said that the problem was just too big and too messy for a weekend clean-up job. As in every economic crisis driven by a financial crisis, trust and faith become casualties. Somebody has to lend for the borrowers who can't pay. The job was done by financial insitutions for sub-prime guys before many of whom went broke. Governments then stepped in and some of them are now broke for that reason or general over-indulgence. Anybody who is lending now needs an assurance that the money will come back. When governments go broke just who gives that assurance and how? Just how much of your future income do you use to mend your today? You got to be kidding to think that this will blow over soon. How much more time will this take? Some more years? Perhaps.