We live in strange times. Markets that are supposed to give you fixed returns are witnessing unprecedented volatility. Short-term interest rates in America are way too higher than long-term interest rates. If the US Congress does not increase the debt-ceiling limit on America’s borrowing soon, debt markets will likely see an unprecedented selloff fearing a credit default by the US. That means America, the citadel of capitalism and the world’s largest economy, will fail to meet debt obligations.
US TREASURY SECRETARY JANET YELLEN SAID THAT a US default could trigger an economic downturn as severe as the Great Recession. According to US government experts, more than 8 million jobs will be lost if America fails on debt obligations. Business and consumer confidence will tank, and the stock market could fall by as much as 45%.
Stock markets have brushed aside such fears after US President Joe Biden and Congressional leaders on either side of the aisle agreed that America could not default. A lot of calmness in the financial markets is tentative, though, as the risk of a US default intensifies. The US government is looking to enhance the $31.4 trillion debt limit. America’s indebtedness challenges old theories about rising money supply leading to inflation to shame as the US dollar remains the reserve currency in the world. There is a minimal challenge in the world to the US currency. For a moment, the world thought bitcoins and cryptocurrencies could put the US dollar out of business. However, that has not happened yet. Governments and regulators have unleashed tighter rules to stop that from happening. Other competing reserve currencies like the Chinese renminbi, the euro and the yen have problems.
Even then, a recession in America will hurt all those countries that rely on the US consumer to buy goods and services. Those countries into manufacturing exports would get hurt first.
What it means for India
A financial crisis does not happen suddenly. There are signs in the voluminous data we use to track the macro and micro economy. There are clear signs of a slowdown in exports. India’s merchandise exports contracted for three months in a row. While oil exports remained solid and non-oil exports, have already witnessed a significant decline. That means goods made in India are witnessing a demand problem already. In the conference call about the financial performance of the March 2023 quarter, TCS, the largest software services company, warned that the weakness is not just coming from the banking and financial services sector. Rajesh Gopinathan, MD and CEO, told analysts that it is coming from across sectors in America. India’s export weakness will impact the trade and current account deficit.
India’s domestic consumption is the only oasis amidst the looming storm. Within that, your investible options narrow down to businesses that generate steady cash flow and pay dividends. It is not the time to be a hero and be adventurous. You may want to lie low for a while. Alphaniti can help you with that too.
References:
https://alphastreet.com/india/tata-consultancy-services-ltd-tcs-q4-fy23-earnings-concall-transcript/https://www.reuters.com/markets/us/biden-continue-debt-limit-talks-amid-g7-travel-white-house-spokeswoman-says-2023-05-17/
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