To Reflect my thoughts on stock market today based on few chapters that i read from Intelligent Investor and some other literature. Stock market is at all time high BSE ~30,000 NSE ~ 9300, Is there any chance for this to continue any longer?
Yes, for few more percentage points and then a downfall is imminent and below are the omens-
- PE nearing about 22-23 which is almost at the same level as we had in 2007-08. As per Benjamin Graham (BG), at this level of market a conservative investor should reduce the weight-age of equity in the portfolio if there are good fixed income options available. What he meant to say is that downfall is going to happen soon so secure your portfolio.
- Fed has started increasing the rates, The asset bubble created since 2008 crisis by keeping the interest rates low and QE, is going to end soon as people will have higher rates (EMIs) to pay. Default will rise & we may witness another 2008 which will spread to the global economy.
- The increase in Fed rate is also going to increase the capital cost for companies which will in-turn hit their bottom line. Increased rate will also make dollar stronger which is the world reserve currency, making it difficult for companies to repay the dollar denominated loans and also hit on their hedging costs (TATA motors recently had incurred huge hedging losses).
If increasing the interest rates is going to cause so much problem then why can't fed keep its interest rate zero all the time?
Because with Zero interest rates, Time value of money will be lost and everybody goes insane on spending and longer this insanity continue, dangerous it is for economy. Below is how it will hurt overall economy -
- There is no incentive for investors to save money which will lead to increase in artificial demand of goods hence inflation (To contain inflation is main task of Central Banks as Inflation will eat into Buying power of consumer/currency)
- Bank deposits/Bonds are no more interesting, people will start chasing risky assets and may end up loosing money there or supporting economical nonviable models.
- Banks have no way of getting deposits or giving loans as there won't be much profit. Overall Banking (deposit/lending business) will start loosing money.
- Also the built up of unnecessary capacity during low interest regime will take the most hit during the high interest scenario so the near Zero Interest should not continue for long time.
- Low Interest rates is not a viable business model - see Japan example
