An idea of investment & prevalence flagrant economy!

11-July-2020,

Take this game, U  receive 1M$. U can either choose to keep it or offer it to a stranger. If you offer it to the stranger, the money will instantly quadruple (4 time) & the stranger will receive 4M$. At this point, the stranger can decide to keep all the money or return half of it back to you (as of condition prevailed before the arrangement of contract). This makes no economic sense, the result is often counter-intuitive. People exactly do the same in the stock market like they are playing the game in the casino. Humans have an innate desire to connect dots & make sense of the world around us. To this end, we construct flimsy accounts of the past and create stories that can easily explain outcomes.

Often, we forget the simple theory of cause and effect. When the glass falls, we need to know why it fell? If someone gets the assignments instead of us, we may have a question to ourselves, why this happen to me? Without a deep search for reasons, we would go around with blinders on, one thing simply happening after another. The world does not make sense without cause-and-effect. These are flimsy event we didn't sense at all. 

Social Distancing in Stock Market rally and economic outcomes.

The stock market went on a spectacular rally. A rally is so phenomenal that people couldn’t believe what they were seeing. Every day the market kept making new highs and it seemed like anybody (not ease) could make money betting on stocks. However, this rally wasn’t necessarily premised on sound fundamentals. There were no structural government reforms. There wasn’t a drastic improvement on the economic front.

At one end, everyone’s curious to know what is happening in the economy. At the other end, they’re scratching their nails on why the market isn’t reflecting. And the conversation ends with “for which bulls I should bat? “which leaves me flummoxed. In this piece, we will look at some of not-so-common but obvious trends. Bull usually leave a trace of tails which decorated by HNI (High Networth Individual) and FII (Foreign Institutional Investor) while the same for bear too. India has a success story of great trends by these HNI and FII combined unless no matter how economy perform retail and DII data remain weak so far, After the rally of 2008 mostly by FII were India-US bilateral relation started smoothening and closed together(Read US corporate Lobby and Nuclear Deal Diplomacy to deal with 2008 Economy Crisis).

There are times when markets react to economic indicators almost instantly. This is usually when the real release beats the market expectation. Right now, US unemployment report was one such event. The S&P rose 2% on the same day when unemployment rate surprisingly fell to 13.3% in May. The consensus was ~20%. In the whole covid-19 pandemic we are currently living through, economies have rebounded faster than expected and markets have taken cues. The connection between macros and markets gets stronger when it is a surprise. In such a scenario, markets are likely to adjust in the shorter span. Once they have adjusted their expectations, there’s no like movement in the subsequent months.

Read my Tweet

Follow the right distance to look out prevailed condition.

By 30000 feet from sky macro view, we are seeing everything small & smidgin, the roads, the block of farm, the apartments, and so on but also most importantly the current environment or the sky. Now understand in an economic context, when interest rate falls, the currency depreciates and vice a versa.(Gold price and Interest have a strong inverse relation and it starts hitting violently when the interest rate goes to negative) However, in an environment where interest rates are falling across the globe, will currency depreciation happen across countries? Even if it does, would it have the same impact? The sky then plays a special role. Economy and market are not a function of a single variable; they reflect the bunch of pictures. Bull does not react to every indicator(watch Spanish Bullfight instead rub the mind here) but they do consider the product of indicators and underlying story thereof.

Investing follows the three wheels which are important more or less to each aspect. Macro Economy, Fundamentals, and Technical. Even when the macro scenario is unfavorable at large, there are companies doing well. The desire to derive instant conclusions should be replaced by thoughtfully questioning the internals. At any time, the power of macro, technical, and fundamental together can not be ignored. The relevance of the sync could be a book on its own. However, the key takeaway is one needs to develop their own investment philosophy and decide what works for them based on their own investing goals.

Nutshell

Economy and market usually follow co-relation but neither two situations nor a response to them are exactly similar as we witnessing right now. When few bulls are ready to move with pre force before the actual game start(Read -Sprints 100M race) the condition goes null and void. Invest when the economy is in the worst case if you not dare to death or can defeat the dares. If you defeat the dare you will with over the death.

Thank You

Jignesh Desai