Practical analysis for investment professionals
06 May 2016

Weekend Reads from India: Interest Rates and Munger’s Take

Posted In: Weekend Reads

For buyers, the price would have to be about right if it’s free. Yet, in some developed markets, zero-bound and even negative interest rates have failed to boost investment activity in any significant way. Savers continue to park funds in “savings” accounts with sub-zero interest rates. Perhaps, the inflation target communicated by central bankers is not high enough, as researchers recently suggested?

Achieving stability has been an important goal of central bank policy in the developed economies. But maintaining that stability has come at a cost. These central banks can’t ease interest rates any lower and it’s turning out to be an unwieldy albatross around their necks. Moreover, prolonged easing has side effects that are far from “innocuous.” Ultra-low rates can be detrimental to businesses and individual saving plans and can have a negative influence on other countries.

But a comprehensive awareness of the limits of central bank activity has yet to take hold and calls from policy makers for coordinating central bank actions have yet to be fully heeded. Nevertheless, perhaps QE infinity and Milton Friedman’s radical prescription — helicopter money — will shift from abstract thought experiments to implemented policy actions. Such measures may prove necessary: A McKinsey Global Institute report released this week, provides a detailed analysis of risk premium drivers and makes the case for diminishing returns over the next two decades.

Once again, Berkshire Hathaway’s annual shareholder meeting — dubbed “Woodstock for Capitalists” — has provided the investment community with intelligent and engaging discourse on a wide variety of topics. Charlie Munger’s description of macroeconomic forces as factors that one has to “put up” with is refreshingly apt. Last year, at the Daily Journal annual meeting, Munger had this to say about the state of the world economy: “Anybody who is intelligent who is not confused doesn’t understand the situation very well.” Buffett and Munger’s relentless focus on the micro — customers, business models, management quality, competitive forces, and behavioral vulnerabilities — deserves renewed attention. Of course the drawback of their lucid insights into the workings of the market is that they make investing look disarmingly simple.

Around the world, financial markets do not appear to be deteriorating. Among the major trouble zones of recent months, China has shown signs of stability and the IMF’s April World Economic Outlook report is less critical of the country. But defaults are rising there and some market observers are skeptical of its underlying health.

Turning to the other notable “growth” story — India — the IMF has retained its high economic growth forecast. But there are inevitable risks to India economic expansion, among them, the threat of another drought. It would be a disservice to not draw attention to the unfolding tragedy and ongoing famine-related deaths. Instead of benefiting from a demographic dividend, India may also have to confront a low-income trap. The country’s jobless growth and dependence on agriculture aren’t helping the situation either.

Below is a list of links to interesting articles I have come across in recent weeks. Happy reading and enjoy the weekend.

Wisdom from the Investment World

Investing

Earth and her surroundings in photos

In a Lighter Vein

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: iStockphoto.com/JLGutierrez

About the Author(s)
Shreenivas Kunte, CFA, CIPM

Shreenivas Kunte, CFA, CIPM, is director of content at CFA Institute, where he contributes financial market insights about India and the developed world. Previously, he taught at and managed SP Jain’s Trade and Applied Research lab, which he helped found. Kunte also served as a country trading strategist at Citigroup’s Tokyo office. He actively contributes to the development sector in India and is an external research scholar at the Indian Institute of Technology Bombay.

Ethics Statement

Beyond the easier to understand, important codes of conduct, “Ethics” for me is awareness; an endeavor for right thought and action.

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