GENERAL MARKET CONDITIONS/FUNDAMENTAL FACTOR
Crude oil has risen on expectations that Opec will reduce production in order to prevent a further fall in prices. Silver rose towards the close on technical buying and the rise in equities. The Federal Reserve chief Bernanke has indicated an additional stimulus package for the US economy. This implies that the current $800 billion rescue package is insufficient to kick start the US economy.
Is an interest rate cut the solution to all the financial miseries?
In my view interest rates are just a short term measure to stabilize the stock markets. Japan has been following a zero interest rate policy (ZIRP) over the past few years and results are not at all spectacular. In fact there is always fear of Japan moving into deflation and recession. Unless the root of the problem is addressed along with tough measures and politically unpopular measures ZIRP will always be ineffective and some form of asset bubbles will keep on happening after every few years. ZIRP only implies that banks and other financial distribution agencies lend money at a lower cost of interest to the end consumer. Under the current market scenario banks etc are hesitant to lend to each other over growing fears that the borrower may not be able to repay the loans and advances. Banks and financial institutions do want their non performing assets (NPA) to increase. Central banks cannot force them to lend, they can only modify the regulations of lending. Zero interest rate policy under the current market scenario by the Federal Reserve or any other central bank will be ineffective or less effective.
In the early 1990’s Indian banks had huge NPA’s the reserve banks of India (RBI) without playing much with the interest rates along with tough measures had ensured that state run banks cleaned their NPA’s and these banks are in a very healthy position. The west needs to ape India model.
ZIRP in the short run can result in sharp rise in equity markets but sustainability of the rise will be questionable. The current mess cannot be wiped out in one go. It took the world years to dig its own pit and the cover up will take a few months (if not a few years). The credit driven asset bubble has been busted. The world will need to develop some other model for long term sustained growth in light of every rising population.
As an investor what can we do with our investment? Invest in sector specific stocks, specific commodities and land. I still believe land and gold are better long term investments than paper assets such as equities. Do not invest for the short term in the hope of making a quick buck by flowing with the tide. Your buck will vanish. Emerging markets which are less dependent on exports such as India are still a great investment destination. The Chinese economy will switch from a export led growth to a domestic demand led growth. As an analyst I am seeing this turnaround. You will see it after a couple of years.
NYMEX CRUDE OIL (1ST CONTRACT)
Crude oil needs hold $74.30 to target $78 and $83. A consolidated fall below $74.30 will result in $71.80 and $68.80.
Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice. Prepared By Chintan Karnani. Website www.insigniaconsultants.in
-- Posted Tuesday, 21 October 2008
News 
Market Data 
Discover 
