Reality check 2020

The 30-year Treasury yield this week dropped to its all-time low of 1.89%. The Bond market is sounding alarm bells of a recession. Turns out investors are Ok to settle for 1.89% on their investment for the next 30 years. This is in-spite of the government annual inflation number being 2.3%. What this essentially means is - the investor who buys the 30-year and decides to hold it for next 30 years is guaranteed to lose money. In bonds the price and the yields move in opposite direction. So the lucrative offer is yields fall further and the price of the bonds surge more and then our investor can dump the 1.89% yielding Treasury to a new investor. One day or the other, you really run of fools. Because of government mandating banks to buy the long-term securities as investments - this forced buying creates a market. But with exploding US debt - again at historic highs, there is never short of these papers in future. US Government has already borrowed close to $23T and there is no sign from Washington DC that the spending is going to slow anytime soon. President Trump doesn't give any importance to national debt and so are the democratic nominees who will challenge him in November. We are in a phase historically where this is a complacent notion - Debts doesn't matter. Greece's debt didn't matter until they mattered. The debt market is a lender's market. Under consumption creates savings. Savings create lenders. Buyers would always be there. The existence of lenders is a pre-requisite for a debt market.

Banks buy Treasury as long term securities. They are mandated to do that. Without the mandatory rule to buy it, there is no natural want for it. Foreigners are also piling into the US treasuries. They are looking for yields outside their currencies. With interest rate either being zero or less, the 1.89% is more lucrative to say a Japanese investor or a European investor. Unlike before, these trading are happening without a hedge and poses a dangerous pattern. With their local currency (Yen or Euro) gaining against the Dollar will wipe out this thin wafer of < 2% interest and this essentially has become a necessary requisite for the boom to continue.

Switzerland Sovereign being amongst the top 10 investors in Apple is the same story but they choose the more risky route in Stocks.

The Fed has been buying short term securities from the overnight repo market. There are 2 things that are distinctly noticeable here. First, the Fed does not want to call these purchases QE. It continues to maintain a stand that these purchases do not amount to a QE program where they bought long-term bonds for $85B every month, Secondly they are unable to hide the balance sheet accumulation of nearly $500B since September of 2019. This is the same effect as the previous three QE programs except that the accumulation is without any upper limit. Any QE(n) program needs more money than QE(n-1) - this has always been the case. It is no different this time and hence it QE for sure. Banks like JP Morgan and Bank of NY Mellon - who have tremendous advantage being primary brokers benefit disproportionately from these overnight repos. They peddle money for the Fed basically, and it shouldn't be a surprise that JP Morgan reported its best ever profit during this time.

With all indexes - Dow, S&P and Nasdaq all hitting all time highs everyday, the stock market keeps going higher and higher. Just as trees do not grow to the sky., this will have to stop at some point.
Tesla stocks vaulting to $900 is the new mania around. It is the heavily shorted stock in American history. The excess flow of liquidity is chasing these speculative stocks. It has not only overtaken the market share of a car-major  like Volkswagen in a few trading days, but is in a striking distance from going ahead of Toyoto. Usually when bubbles are at its peak., we see mania companies going this way signaling its climax. Tesla story really looks one. The tech IPOs drying up is also notable after the weWork fiasco. From $90B valuation to being bailed out by its bigger investor just within few weeks. Even in 2000 bubble, the dotcoms failed first and the Nasdaq crashing was after a while. With Nasdaq about to hit the 10K mark - it looks it has ran out of steam.

The rise in price of gold this year is more than 8%. It is probably the best performing asset class of 2020. Gold has hit an all-time high against pretty much every currency except for the US dollar. An ounce of gold is at $1662 which is almost $300 less than its all time peak. The recent surge of gold may not be surprising for some people like me, but the surge of the DXY along with it to 100 is very interesting. Usually they trade opposite to each other because gold is traded in US dollars and they tend to go in opposite directions. One has to finally cave in. The Argument to gold is - if it can rise at this pace with the dollar getting strong., it should rise a lot faster on a sliding dollar which may happen soon. So looks gold finally is coming out as inflation hedge.

Coronavirus is still in its early stages and its impact may be longer and harder looks like. Car sales in China has plunged by 92% since the new year. This looks a pandemic that might have economic impact. As of now, even though it looks serious enough., to me I think, that market has used this reason to rectify an over-bought, genuine sell-off. Coronavirus looks very nastier than initially thought. It definitely can put China's economic order out of place temporarily and this obviously will have an impact on the rest of the world.

It is very possible that the US fed might intervene and reduce rates citing Coronavirus. When that happens, we will all know that the Fed has not only economic cures but also medical cures. Let's wait and see on this. It is possible that the Fed may reduce rates and keep inflating the bubble. Whether investors will buy it this time also is a serious doubt.

The US market has not priced in anything yet, on a Bernie Sanders Presidency which increasing looks very possible. Republicans who think Sanders is the easiest democratic candidate to beat for Trump should be really cautious what they wish for. This is exactly what the democrats thought of Trump in 2016 and we all know what happen after that. Bernie has been a life long socialist. If he wins, it would be an admission that 29 years since the collapse of the Soviet Union in December of 1991, finally Socialism has made it to the shores of the United State of America. Bernie is not hiding the fact that he is a socialist. He has been a socialist all his life and is on record all his life saying He doesn't believe in capitalism and believes in cooperation instead. If Bernie's appeal resonates with ordinary US citizens and they vote for him, it should be admission of failing capitalism in the US. Unlike candidates who promise socialism and govern from the center., Bernie is very different I suspect. He will govern from the left. Any democratic system leads to a socialistic society eventually. This is because there are more employees who vote that employers. That is one reason, the US constitution notably doesn't have a word called democracy. It was founded as an republic. Somewhere in the last half-a-century, the democratic political system in the US has lead to socialistic leaders. 

An economic slowdown is long overdue in the US. Market is just looking for an excuse to sell. The excuses can be - Coronavirus impact in China and rest of the world, Dollar index sliding by 10-20% on sign of a US slow down, Opinion polls that indicate Trump losing Presidency in November of 2020, Earnings shock and bursting of the junk bond/corporate bond market. One of them might happen sooner than you think. There is no rule they don't happen all at the same time.

The Fed trap

The Fed stepped-in to assure the market this week by saying, it will do what it takes to support the present economic expansion. It looks pretty much a July cut is on the horizon and more likely more cuts this year and again next year. Markets exactly wanted to hear that, and started rallying. The S&P hit an all- time high the same day. What is different this time is, in the past - when the S&P and the broader indexes hit historic highs, the Fed would increase the interest rate to cool down the economy. On contrary - the Fed is promising to decrease it, to keep the economic expansion going. Ever expanding expansion of the economy ie., prolong current boom. Particularly with the way the world economy operates these days where there is constant boom and bust cycle - it is a given that the boom market will always lead to a proportional bust market. If we go with that theory - the longest ever bull market that we are in, should definitely create a longest bear market. The longest bear market can only be preceded by a crisis scenario.

The US stock market is roughly 140% of GDP. Historically, it has always been 30-60%. The great crash of 1987 - often referred to as black Monday, stocks crashed 20% on a single day. Even though the crash wiped out the share value by a fifth, it did not affect the real economy in a big way, because the stock market merely reflected less than 30% of GDP. After easy money for more than 10 years, we have an economy were asset prices are GDP. Financial assets are biggest chunk of it. Any stock market correction, is deemed to reflect an economic correction. The fed has the numbers and knows it. Fed Chairman Powell really got a first glimpse of the economic scare in the last quarter of 2018. There were no takers of the junk market bonds for 41 days, after the Fed insisted on its policy of auto-pilot. The economy was spilling over, with all indexes (dow, nasdaq, s&p and russel 2000) all going down 20% essentially starting the bear market. Once Powell raised the rates in December, it was the last rate hike of the cycle.

The last time, the Fed promised to cut interest rate (after a series of rate hikes) was in 2007. The funds rate at that time was little more than 5%. The Fed had the luxury of reducing the interest rate by 500 basis points to provide a boost to the economy - and still could not avoid a financial crisis in 2008. The Fed brought the interest rate to 0% in 2008. Even that wasn't sufficient to recover the economy from its historic slump. The Fed introduced QE not once but thrice in the next four years. What is interesting is - every QE-n was bigger that its QE-(n-1). From what has happened with those monetary experiments - we can clearly derive that with the current rate of 2.25-2.5% of Fed funds rate, the Fed doesn’t have enough room like last time. It only has just half the ammunition. Going to zero alone is not sufficient. QE has to come sooner rather than later. Also - the economy should have its head above water during this whole period. Any lapse in liquidity or promise to liquidity will choke the economy. It’s a really tricky spot to be in, for Fed chairman Powell. He just can't afford a mis-step. A slowdown will expose all the mal-investments of the last decade., fueled by the fed itself.

As I have already mentioned in my earlier blogs, Ben Bernanke and Janet Yellen are primarily responsible for having persisted with easy money policy for too long. When testifying to the Congress when introducing the US economy to QE., the then Fed chairman Ben Bernanke told the congress that he is not monetizing the debt. He told QE and ZIRP are temporary. Balance sheet accumulation is temporary. Also promised that as economy starts to recover, he will somehow wind down the 4 trillion debt and restore it to its pre-crisis levels. None of them are true. The Fed's balance sheet is just below 3.85 trillion and with fed about to reduce the interest rates, we can safely assume that the debt on fed's balance sheet is not going to go lower than that. Ben Bernanke initiated the mess, Janet Yellen continued with that mess, and it fell on Powell to do the clean-up act, which was way overdue and impossible. Just say the Fed doesn't raise interest rates in July as expected by the market - the stocks are going to plunge. In fact the market wants a 50 bps cut rather than the usual 25 bps. The market is holding a knife at the Fed's throat.

On the political side, President Trump cannot afford is allow the recession to set in. It affects his reelection campaign of 2020 and in general the scope of the economy. No one knows that better than President Trump. As candidate Trump in 2015 he told correctly that the whole economy is one big fat ugly bubble based on ZIRP and QE.  He promised to act on the rising US trade deficit with all its trading partners and is taking some action on it (which may or may not be right). Candidate Trump also acknowledged that the shrinking of the work force participation percentage which has dropped significantly since the financial crisis of 2008. The government released unemployment rate doesn't capture this variant and its published to be lower than what it actually is. Trump during his campaign repeated multiple times, that the real unemployment rate is lot higher than what is officially reported and he even says it is as high as 20% or more. He was so right on that and it resonated with the US electorate. After coming to office though, Trump began to endorse the very same bubble economy as economic prosperity and even took credit for doing it. In fact - He calls it the Best economy in the history of the United States. The numbers do not support it whatsoever.  Because he owned the boom, unfortunately he will have to own the bust too.

The 10-year treasury yield which is used as reference rate for many long-term bonds, notably the US mortgage rates is trading at 2%. The Bond market is right - they are predicting that a 2% interest on a 10-year bond is more lucrative than the annual percentage growth that is going to happen in the next decade. But what it doesn't price in - is the inflation effect. The inflation rate is hitting the 2% level already. It will most likely make its ascend north. The Fed has already indicated that the inflation effect is "transitory of 2%" - which translates to - the inflation is going beyond the 2% mark very soon. With that happening around the corner, there is absolutely no reason for the longer term securities to have a coupon rate of less than that. In general - the longer dated treasury's interest rate are heading higher. It started to happen in last quarter of 2018 and that is where the stock market panicked. Any interest rate hike on long term bonds directly affects the leverage on corporate borrowing. With rising interest rates - rolling over existing debt is not an option anymore and the earnings will have to go down.

The slowing US economy usually takes the dollar with it. The dollar index has broken key levels since the Fed's meeting and is drifting downwards. Gold on the other hand, is breaking the $1400 an ounce and marching higher. To retrace its historic high, it needs to go to $1930 an ounce. It is definitely going there. It has made the price of gold for Asian economies higher. For example, In Indian currency, with the current exchange rate tied to the dollar index, the price of gold has already hit a historic high of Rs. 3580/- for a gram of gold. If we project it proportionally, if the price of gold hits the $1930 dollar mark, the corresponding rupee price for a gram of gold is Rs. 5000/-. This is politically not acceptable and panic would set in for a gold-rush or mania in the Indian gold market. So the only way to avoid this is to allow the Indian Rupee to appreciate against the falling dollar. It is possible then that the price of Indian rupee can move from its current Rs. 70/- rupee mark to say something around Rs. 50/-. That would be logical. The other asset class that is responding better to a falling dollar is bitcoin. As it stands now, it is already over 11K. When bitcoin as an asset class loses confidence and investors are jumping out, the trade is going to the traditional safe haven asset like gold, which is only going to accelerate the price higher in dollar terms.

In the month of May, the US government spent more than any month in its history. The debt accumulated every month is astronomical and has no historical precinct. The debt accumulated in 2018 (budget deficit and unfunded liabilities) is more than the nominal GDP (GDP not adjusted to inflation). This means that, if hadn’t for the rise in national debt (zero borrowing),  US economic expansion would have recorded a negative growth for the year.

If it can go wrong, it will. When it does, it will do so in spectacular fashion: breathtaking collapses, ghastly whitewashes and complete annihilation of confidence. Even though it was always on the cards, it appears more imminent that ever before. As Peter Schiff rightly puts it - Having the economy on ZIRP and QE are addictive in nature. Even though it feels good, they cause more harm than good. Withdrawal symptoms after heavy addiction are always painful. A recession is the absolute cure. Re-introducing ZIRP and QE again to make it work, may not work anymore!

Tech bubble 2.0 and the IPO Pins

I use the ride-hailing apps frequently. I pay them every time I close the meter. It is nominally priced and the driver also gets a significant profit too, for every ride. It is a win-win composition for both. It is very hard to imagine an awesome business idea like Uber cannot generate a profit so far in its multiple years of existence. It is also sad that a revenue generation model of ride-hailing apps, where every customer pays before getting off a ride - can be this screwed up. If you don't own any of the cars and any of the drivers - but just a mobile app that facilitate business between the demand and supply of a always waiting customer and a person with a car - Its just mediocre company performance. on any standards 

Before Uber hit the IPO this week, it was Lyft that hit the IPO market couple of months ago. It debut around the $78 mark and is now trading around $50 a share. Lyft lost $900 million dollars last year. The last earnings it reported after going public is yet another historic loss. Uber which wanted to hit the IPO with $120 billion valuation - started to see the week reception for Lyft and decided to rush to the market itself soon. The valuation went down every week and finally when the time came - it was $82 billion valuation. It was lot below the initial estimates. If they waited longer, the valuation of the company would go down even more and possibly the door would be shut completely even, if it decides to wait. Uber loses more money than lyft - they say its $900 million a quarter. Uber hit the IPO market at $45 and immediately traded down below $3. This really means the investor who bought it at the IPO were stung by public investors who got it for less. How Uber stocks performs needs to be watched.

When you buy a stock of the company, you are buying into the future revenue stream of the company. These new tech companies, in their IPO disclosure have explicitly mentioned that they may never be profitable. Pre-IPO investors have an exit strategy in the IPO usually. Founders and initial investors cash-in on the incoming public investors'  money. Why would anyone buy a share of a company that doesn't foresee a profit is beyond human rationalism. Only incentive is the demand for the share amongst the public - the belief that you can sell it to a bigger fool. As it turns-out - one day or the other, you run out of fools and then realize your were the last fool. 

Microsoft, Google and Facebook - other biggies went into the IPO market when they were profitable. However Amazon did not disclose a profit even after six years after going public. All these new tech companies planning its life as publicly traded entities - want their luck to work out similar to Amazon. They may not be as lucky. 

This is tech bubble 2.0

Paul Krugman, Nobel Laureate and Keynesian economist who has been strong advocate of Barack Obama's easy money economic policy and the Fed's approach with ZIRP and QEs after the 2008 financial crisis even admits there is a tech-bubble in silicon valley. The last time it happened in the late 90s, we all know it didn't end well. Investors lost money investing in new dotcom companies, that not only did not have profits, but did not even have sales. Many companies who went to IPOs lost all their money eventually and went out of business.

The recent tech-boom in the industry promises to be no different. We have the same set of companies coming to the IPO market with tall promises for the future but never made a profit in the company's lifetime so far. Pintrest IPO debuted this week. The company has been around for ten years. Never once, it made a profit. Talking about PINS (its stock ticker) - that breaks bubbles, it could very well be one.

If well-known companies like Uber, Lyft can fail miserably in their IPO debut, what is the motivation for other tech-startups that came into existence in the last few years? What is the mind set of the investors who are already behind those ventures? If I was an investor who has invested in multiple start-ups and see productive business model companies like Uber hit the dust in the IPO market - I will be really scared. I would like to exit my current investments and book my returns before things come biting. When all the investors rush to the exit - the whole start-up mania would starve for the funds. One thing we know very well in bust times is - when it goes bad, it goes horribly bad for everyone. If these highly hyped IPOs fail, it might act as a trigger for a genuinely anticipated slow-down that is already long overdue.

The bursting of the tech bubble will definitely be contagious. It will make the other asset bubbles burst including the housing, bonds (both sovereign and corporate). The corporate bubble in particular is almost 3 times what subprime was in 2008. A recession or slow-down would put the US economy into a long period of economic darkness. Trump and the Fed will do everything they possibly can, to avoid it until the markets hit a point - where whatever they do isn't relevant anymore. At the point, the public would know that the reality has finally set-in to the markets. 

NaMo - Wrong person in the wrong party

India would be performing socially, politically, economically and humanely far better without the current set of rulers.

Generally in the recent years, India as a country is so divided. The credit goes to the current government of India. In this fast changing world of Social media, sensation is the new child on the block. A person who can sensationalize certain political happenings grab attention of the people. They gain publicity out of the act. In the ever competitive world of political leaders - every one is trying weird things which they might not do at the personal front.

Mahatma Gandhi very famously told - India lives in its villages. Even seventy years after Independence, it is very toweringly true. Instead of making a difference on the ground in villages - the ruling establishments are taming the people through the media. With every passing day - there is huge one-page Ads on every newspaper highlighting the so called achievements of Narendra Modi. On the ground here - nothing has changed. The political class has only become more crooked and selfish. Publicity as a policy strategy is bad. Ideal way - the schemes and programs of the government percolate enough into the lives of people and there is a natural inclination of masses. This appreciation leads to accumulation of votes during elections. It has reached a point where controlling all sections of the media and constantly propagating a narrative will get them votes. Whether to see if it works remains to be seen in this election.

The political topics that are being discussed in the so called mainstream media is mostly about trivial items. Real issues like lack of infrastructure (electricity, water, roads) and corruption still being daily problems for common man., they do not get prominently debated and solutions sought.  In fact lynching a man for beef-eating or attacking a Kashmiri shop owner in streets of UP is the news of the day. It is a law and order issue. Both the state and the central government are responsible to save the lives of all its citizens. No one can disagree with it. But the twist is - the people who are responsible to deal with this - would comply with the crime. First they speak for it or tacitly support it. A prominent person from the ruling party would pass unjustifiable (often not legal) opinions on them. This creates a sensation and division of the society. There is this new set of population that rebels against the mainstream thought and take a relative radical stand. This fuels discussion on social media and in live television for the day. The rulers get some publicity for their deviance from established norm. New comers to politics tend to navigate this way to make an accent on the political ladder in their party. Ideally people in saffron dresses need to be liked upon and trustable by every other living life. But nowadays, you see people in saffron behaving violently and having a sharp tongue particularly against people of other faith and vulnerable sections of the society.

Not a single day goes by, with the PM Narendra Modi blaming the previous Congress governments for everything that is bad in the country. He even blames Nehru. It is ok, if you do that for a year or two when you have a full majority government. If you do it in your 5th year - you are just being non-performing.The performance of the government is not up to the mark in general. The publicity is to cover them all. If there is real performance - there wouldn't be a real need for publicity. The ruling establishment believes they could manipulate the signals and get away, without underlying actions.

Narendra Modi as PM will be remembered for a long time for demonetization - making 85% of high denomination currency notes invalid overnight. The justification provided for that was to eliminate black money and punish the corrupt hoarders. At that time - it sounded logical and timely. Later on - it would turn out that most of the printed money where returned back to the RBI and it didn't make a big impact. To be clear - it was a bold step and the intention cannot be questioned. I believe it was done with right intentions. Where it miserably failed was - not being able to capitalize on that. The PM should have stick to lower denominations only. Now we have more 2000 rupee note in the market which didn't exist before the demonetization. There is more currency in circulation now than prior to demonetization. It would have been awesome chance to restrict the ATM withdrawal to 10K only. (No one stops you from going to a bank and withdrawing anything more than that). This would have put severe restrictions on cash operations. The big failure of demonetization by the BJP government - was not allowing that "crisis" to benefit the people in the "subsequent years".

The current government prides itself in calling Narendra Modi, a powerful Prime minister. If this was really the case - the GST would have been just a one tier structure say 8-10%, leaving all complexities out. A right move would have been to have a "NO GST" and "With GST of 10%" - that's it. Trying to have multiple tiers and adding few/removing few over these years was a reflection of poor implementations. A clean, simple procedure would have definitely helped in the roll out, and the PM could not even enforce that. With global oil prices being down for almost all the five years, the government coffers were very lavish to take bold financial measures. The public perception has changed from the "Government has no money" to "Government has all the money" and just couldn't do anything meaningful.

The PM should also be pinned down for the failure to change the system significantly on any domain that relates to common man. That is why they are not able to say - the next five years would be as glorious as the last five years. None of what they did has not affected the common man positively and more importantly significantly. A bold PM would have automated the grievance address system on Law and Order in the country by now. India would have a 911-equivalent phone number to call anything that is related to Law and Order / Police calls. Those would have made enormous difference to ordinary people's life. With almost everyone having access to a cell phone, all would have felt - they are just one phone call away to safety in case of a threat or an emergency.

The current government has been seriously undermining various institutions in the country like the RBI, Judiciary, CBI - the investigative agency and Election commission. The RBI governor resigned before his term could end because of too much political pressure from the PMO and its appointment of its own people as members of the board. The recent fight between the top brass of the CBI was pretty wide open. It is obvious the PMO put their people in the investigative agency and used them to target political opponents. There is always a CBI raid on the opposition, and some sensation news related to it. CBI raids on relatives of EPS, the Tamil Nadu CM was done just before the no confidence motion in parliament against the Central Government. They also clearly manipulate the Judiciary and how the cases come for hearing. When Jayalalitha was the Chief Minister of the state, the pending case against her in Supreme Court, for which she was initially convicted by a lower court and exonerated in high court (with some mathematical mistakes in calculation) did not see the light when she was in power or when she was seriously ill in the Apollo hospital. After her Death, O.Paneerselvam was made the CM and when he revolted against the inner circles of the party - Sasikala and her family. Sasikala was projected to be the CM herself and MLAs were moved to Koovathur resort for them to get the numbers in the floor of the assembly. The Central government then from nowhere woke up, took the case for hearing right away and convicted her before she could prove her number in the assembly. Their puppet state Governor was involved in delaying the process and played obediently in favor of the central government and against democratic rules of the state. It was pretty evident they control when the judicial case against the opponents are brought and used as political tool. Unfortunately the way judiciary operates in this country is like that.

The BJP government has been tacitly controlling the election commission to suit their agenda. When in school, we were all taught the by-election to constituencies happen within 6 months of either the MLA/MP is dead or suspended from operating as a representative of the people. In our state in Tamil Nadu,  in the last 3 years, we have seen multiple seats that are lying vacant without a elected member for more than 6 months. Just imagine about the people who are in those constituencies. Without a member representing them, it creates lot of ground difficulties. Election Commission not ordering by-elections in vacant constituency is a big crime because it is their only job. The only reason they do that was in favor of the state and central governments. The people of Tamil Nadu should have realized this already.

These kind of institutional management for political gains are always done by ruling parties. But never in the history of our country it has been done to this scale.

One thing that is both funny and makes me angry is - The court this week pronounced a verdict on a by-election in Tirupurankundram assembly constituency in Tamil Nadu. The verdict was - the election of the ruling MLA from that constituency has been declared invalid. This is because of Jayalalithaa's thumb impression was used instead of her signature in approving the party candidate who eventually won. And that thumb  impression was found to be not valid. The sad truth is - Jayalalithaa is dead already and the MLA is also dead. Its basically a classic case of "Operation Success but Patient Dead". It is sadly Judiciary succeeded and Democracy failed. What Angers me about this joke is - The Joke is on us, the people.

Making the institutions play for their tune has gone one step further. Now the BJP wants everyone to think they alone are synonymous with the military - if you are against them, then you are against the military. This is wicked thing. This is what happens when crooks are running the country.
The recent Pulwama attack - where an Indian Citizen became a suicide bomber to kill our own military personal is something really everyone in our country should think about. Blaming it 100% on Pakistan is propaganda and not intelligence. This is unlike the Mumbai attacks where everyone came from Pakistan. It was imported terror. We don't have control over it. But in this case, if one of our own citizen gets radicalized and bombs our army men - we need to find our why would this happen and make steps so that its not repeated. If training and explosives came from across the border in Pakistan - it really means - our border is porous. Make steps to tighten that. We have enough home work on our side to do on top of blaming Pakistan. The ruling party conveniently capitalized on the tragedy and it made it worse by surgical strike misadventure to convey to the people of India, their strong character. In the end, gave an opportunity to the Pakistan PM to become a noble statesman.

What is upsetting, lately the military is being used as a propaganda tool for their own political agenda.

The armed forces of India belong to the country. They represent the people of the country and not its current rulers. The democratic government merely have an impact on them when in power. They tend to give a perception that if you support the Army, then you support the ruling party is absurd. What is amazing is the current BJP government is pretty successful in propagating this idea so far. When emotions run high, the ploy may work. When reality catches up, people will figure out the difference. In the US, when the Iraq war happened and George Bush was President - They tried to do a similar propaganda where, if you hated the war, then you are against the troops. This made a big impact in mobilization of the people in support of the war for multiple years and also played a bigger role in his re-election to his second term as President. Only after the endless war effort and losing multiple US military personal, did the people of the country realize - war and support for military are unrelated. When the common good is lost - the trust is lost as well. Never before in our country was this kind of campaign done. The military was and is supreme entity in India - people valued it. It is just a armed group to save this country for people's common good - mostly dominated by poor sons of our soil.  Using them as political weapon to segregate society and impose political ideological is mischievous. It is possible - they might go to war to prolong their political ideology and continue with their ruling power. 

The way they have been operating so far, giving another five years to Narendra Modi, Amit Shah and its gang - is very scary. They don't even seem to be "Good People". 

The E- Commerce CRAP

The Indian government has stepped in more to regulate the ecommerce Industry. They are formulating procedures that would trim the ecommerce business. The intention they say is to protect the brick and mortar stores spread all over the country. However the whole thing is absurd.

This is one classic example of how the government usually behaves with complete lack of common sense. First they allowed foreign companies to run ecommerce ventures in the country. With more than a billion consumers and a improving middle-class, foreign and local investors have poured in tonnes of money as investment. With a high-inbound of cash into the business, the firm just doesn't know where to spend the money on. Because its all online - there is not even stores/parking expenses. All they need is warehouses and shipment centers. With competition also increasingly growing and with the intention of market dominance, these ecommerce firms use investor's money to offer irrational discounts on the products they sell in their platforms. So a product that has a cost price of Rs. 70/- and a selling price of Rs. 80/- in a outside shop, is being sold for say Rs. 50/- Who pays for the difference - its the investors money.

Every ecommerce firm tries to replicate Amazon.

Amazon has been a leader in the ecommerce space globally. With unlimited investor money looking for returns, mainly sourced from low-cost borrowing rates in developed countries - it became a ideal target. Business of Amazon has been expanding for a decade now exponentially and it is always considered the phoenix bird of the dotcom boom-bust era. The way the business model works - Amazon has reported loses every quarter for most of its lifetime. The shareholders did not gain much from their investment because of the lack of profit. All earnings were re-invested to grow the business. Jeff Bezos mindset is that, grow the business wide and high, the company will eventually be profitable. In late 2015/2016 is where Amazon reported a significant quarterly profit in a quarter since their inception. As soon this happened, investors started piling into the stocks and the share has risen from low double-digits to over $2000/- since then. Recently it has corrected to somewhere around 1500 bugs. On the business side, their ecommerce business has never yielded a significant profit in spite of their long life-span in the business. The reason is this - they do not sell the products for a "profit" in their platform. They sell a lot for a loss. The loss is compensated by the new investor money.

Internally within Amazon, these products are called C.R.A.P - acronym for "Cannot Realize A Profit".

To maintain the market dominance and rival the competitors in number of purchases/revenue, not a single day goes by without a strikingly discount-sale, that no other for-profit business would do. They would ship a 30-40 pound heavy dog-food bag to your house every week that costs $40. They would sell TVs to your house, the price would be lot less than what you would find in the nearest store and on top of that, they offer the shipping to be free. On top of that, if the TV is broken en-route, they would send a replacement. The cost the consumer pays is way less than all these that make it happen.

Consumer is god damn-happy he is getting the best deal and also it is all being door delivered. He saves on the effort and cost that takes him to go to the nearest store and do a pick-up himself. They deliver to the remotest of remote part of the country. All the consumer has to do - is stand-up from his sofa and open the door when Amazon delivery guy knocks in your door. This is absolutely good thing for the consumer. No question about that.

However for Amazon and its investors its a horrible deal.

What is amazing and mind-blowing, is the ecommerce firms are able to do this for so long and making Amazon's Jeff Bezos the richest person in the world.

One sad truth - Amazon has amazingly proved that such an illogical business model can work and prosper. Any company that does this will fail. Amazon will definitely fail as well.

The latest entry to this kind of business model is swiggy and Zomato. It is very hard to miss them on the Indian city streets these days. They have hired thousands of people who deliver food to customers who order using their mobile app. The prices are significantly low - sometimes its obvious it doesn't even add up for the expense on the food and the cost it takes to deliver it to the customer. Rs. 15/- breakfast for early users is common. For comparison - this same breakfast would cost at least Rs 50/- on the floor of the restaurant. These companies also lavishly shower money on their delivery boys. Apparently they earn more than Rs. 25,000/- a month. They operate like Amazon actually - first they offer unrealistic discount to get more people on the platform, buyout the competition, take a leader role in the industry - and it so turns up - they end up never raising prices to actual cost prices. They very well know as well its customers that customers will only be in the platform only until the discounts last. In a real-price structure the business would cease to exist. Once the prices are nominal or above nominal, the customers have no incentive to stick to the platform - either they would walk to restaurants themselves or would start cooking at home, which is lot cheaper. The biggest loser in this game when it gets over finally, is unfortunately the delivery boys. They have been delivering food for years. There is nothing to show for. They didn't acquire any skills or knowledge. Finally they don't have the lavish income too.

What is very amazing about Amazon, Swiggy, Zomato kind of companies is how long they survive? A early failure is good thing. They can be good ordinary companies that are serving customers well. They can't be these extra-ordinary companies which drives competition out. 

Decade of BOOOOM

One thing that the media in general does good is to celebrate anniversaries. The 10th anniversary of the 2008 financial crisis is no exception. Continuous coverage of what happened then and how it was all solved. CNBC basically did a reality show with so called saviors. They called in Henry Paulson, Tim Geithner and Ben Bernanke to give them a pat themselves, each other and how they understood the gravity of the problem and provided the right cure to the ailing economy. They faithfully paid respect to their respective spouses and made some biblical references - which made them look credible than what they actually are. In reality instead of solving a smaller crisis with real medicine, they sowed the seed for a bigger crisis and what they essentially did - was to take the economy back to its artificial highs.

Arguably the bigger culprit of the three was Ben "helicopter" Bernanke. The future would judge him as that one person who would take a nasty hit for his decision to bring the fed funds rate to zero percent and then additionally coming up with monetary experiments like QE. Actually what he did was the easiest of all - print some money and mask the problem instead of solving it. Janet Ellen was never able to raise the interest rate to pre-crisis level even after 8 years since the crisis. The current Fed chairman has raised it significantly but is still low at 2%. He may never be able to raise it the 4.5% that Ben brought it down from. So bottom line - The troubles Ben Bernanke created would never be solved until a bigger crisis hits. Instead of solving the smaller crisis - he blew up the scale of the crisis exponentially and let someone else in-charge to handle that.

Bring down the interest rate was the easiest thing. You don't have to be really smart person to do that. It is a universal truth that you lower the "cost" of money - the business is going to boom. The business would boom so long as the interest rates remains low. Interest rates have been low for 10 years. Even with the 2% now - it is still historic low. Raising interest rate is the hardest part. Usually the interest rates rise because the inflation is rising or to cool the economy from over-heating. With 10-years of low interest rates - the boom is everywhere. In the first decade of the 21st century the boom period were confined to dotcom (3% range) and then to housing (1%). However after the 2008 financial crisis - the boom is no longer confined to specific industries but in multiple industries. Forbes magazine recently called it the "Everything boom". We definitely know the tech-savvy Nasdaq is in 8000 range (5000 range in year 2000 caused the dotcom crash) is most likely in bubble. The housing prices getting back to well above the prices during the housing boom is probably in a bubble too.

Probably the newest bubble in the bond market is the biggest of all and would put the very government that had the authority to fix the last crisis, putting everything in jeopardy. Bond market would include student-load debt, auto-loan debt and credit card debt - all historically high in trillions.

The interest rate on the 10-yr US treasury is around the 2.96 mark now. With the fed going to raise interest in the last week of September - it is almost certain to hit 3% and probably going north after it. Just for an example, let's say you buy the 10-yr bond today for $100,000. The US treasury guarantees you an coupon payment of $3000 dollars every year. At the end of the 10-year term, you get your $100,000 back. With the government's its own CPI number stating that the year-over-year inflation is 2.6%, it is hard to understand why would anyone buy the 10-year bond that yield just 3%. On top of that - you pay tax on your capital gains on the $3000 earned in interest. The CPI is probably on an upward journey. So your coupon rate is not going to change. The inflation rate could rise to 4 or 5 percent or more during this 10-year term. Because of rising interest rates, the principal amount of $100,000 is going to fall in value in the ten-year period. It makes absolutely no financial sense to buy the US bond market whatsoever. There is never going to be shortages of US treasury that is coming to the market in the years to come - as the government is running and will continue to run trillion-dollar deficit budget. The Fed has promised Quantitative tightening - where it will sell the bonds it accumulated in the last 10 years. Bottom line there is going to be a sea of bonds coming to the market. Who is buying it now - Only the person who wants to lose money would buy the 10-year paper. If not - the buyer is propping up the bond market to favor the US treasury.

Ben Bernanke was referred to "Helicopter" Ben for his reference of throwing money from a helicopter to the economy. He is going to be identified as this person - who took the economy in a helicopter to the sky easily with QE and 0% interest rates - but never knew how to land it safely. There by - crashing the helicopter vis-a-vis the entire US economy. (He ejected with a parachute though)

After the financial crisis in September of 2008, Initially George Bush and then Obama - convinced the rest of the world that the crisis was universal and there needs to be coordinated effort from all Central Banks across the world to respond with easy money policy. This month, Subba Rao, the former RBI governor from 2008 to 2012 rightly pointed out that artificial prop up post-crisis, is the primary reason for the Inflation caused in run to the general elections which Congress lost miserably and the NPA problems which Indian banks, particularly public sector banks are facing now. Just as the hot water in the shower - the heat is not when you move the knob to red. It is usually after sometime - there is a lag effect.

The crisis in Turkey - is also distinctly similar. The Central Bank of turkey has raised interest rate to a whopping 24% today. When they try to analyze the reason for its current economic state - they pinpoint to the good old times - when the economy was booming. It is also almost always - unprecedented booms in country's lead to unprecedented corrections. If there isn't a correction - rulers of the country should only blame themselves.

The US market is in so big bubble, the investors are contemplating a scenario where there is never going to be a bear market. It is all going to be rosy from now on. With the longest bull market in history, it cannot be blamed on them - their memory has faded.
It is clear example of misallocation of resources at the time of boom. In that scale the boom in the western world is bigger and longest. The bust is where people realize what all went horribly wrong in the boom. That day will eventually hit the western world soon - and that would make the 2008 financial crisis look like a walk in the park - which Hank, Tim and Ben are now taking credit for solving.

There are some talks that - when the next crisis happens, the US government would continue to the prop up the stock market by buying stocks. For the record - Japan is already buying corporate bonds and stocks. If that happens on America - it will go on to be the day, USA disassociated itself from market economy because it is just broke. It would be no different from fascist or socialism where governments control companies and industries. To overcome a crisis - they will do whatever they can to mitigate the crisis in short-term. Stimulus checks and Quantitative easing in western capitalistic society were very unexpected until they happened. But I really doubt, if it will all work. Would they buy Apple or buy Amazon? Why not Blue Apron? Probably they will buy the Dow or may be Russel 2k only. Those would be desperate times.

I talk to people who started their working career post 2008 and are unaware of the nature of recessions. They keep asking me - how does a slowdown or a crisis look like. As has been always, financial crisis is like a beautiful women. It is very hard to describe to others on how it looks like. But when it comes, pretty much everyone recognize it.

Trade deficits and why it matters

Recently was shopping in one of the famous retail stores in California. There were these group of teens. The conversation was to this effect. Why should all the products in the store have to come from China? Why isn’t there anything that is made in the USA. Immediate came the reply from one of his friend that - it is child labour. I wondered what a stereotyped answer it was. It was a typical answer for a classic youngster growing up in the western countries. That is what the media and the thought process do it to you. America has an enormous trade deficit with the rest of the world - It is to its advantage whatsoever. Rather than a bad thing for the western world - in fact they should be thanking China and other Asian economies for sending them goods all through the year. It is a result of hard labour from their part. The western countries readily consume its fruits.

As said by one famous economist - America gives a bad name to capitalism while China gives good name to communism. Whatever may be the underlying economic principle of a country in operation - whether its capitalism, communism, fascism, monarchism, feudalism - everything revolves around one big parameter - there is a significant portion of the society that is "very productive". Usually in theory all systems work. Everything tries to achieve the maximum productive nature of the society. None of them are designed for failures. But the way it is preached and practiced (over a period of time) is what makes it fail. If communism can fail in Russia - capitalism can fail in western world , provided the spirit of the ideology is not followed. Communism did not fail Russia - the way it was practised made it fail.

There is an enormous trade deficit the western countries in general, and USA in particular have against developing Asian and some European economies. It is the difference between the import and export a nation has. More import than exports would increase the trade deficits. It adversely affects the long-term prospective nature of the country. It is not logical for a high importing country to be successful economically for a long time. The current US President Trump - acknowledges this anomaly unlike his predecessors. However the way to solve it by introducing tariffs is probably not the right way. USA has a trade deficit of $800 billion dollars a year. It is roughly a quarter of its annual budget. 

The way it all started - nations don't export for the sake of exporting. They export more of what they have and import of what, they don't have enough. That is the primary principle of exports. Ideally the export is not to send goods to other countries without the local economy not utilizing it but instead it is the surplus resource generated by the "productive" population - that is privileged to send it over to other nations that need it - so that we can import those we don't have or insufficient nature of it. Every exports results in a monetary advantage. No one would send products to a consumer without being paid for it. Unfortunately the payment made are usually the "new money". It is just like any other private sector employment. Employers hire workers for what they can "export" out of their daily work - so that at the end of the pay cycle they "import" salary. Exports has to be higher than the import for a productive employer/employee relation and hence productive employment. Any distortion in the set-up leads to a break-up of this relationship. The same principle applies to nations. It cannot be different.

The last couple of decades has seen clear malfunction in the trade deficit patterns of the world. The consuming nation like the western world - keeps consuming for ever. The exporting nations do the hard work for the rich nations. Because countries like the USA don't have anything much to offer to the world as goods and services - the exporting nation is unable to import sufficient amount of goods. There by resulting in the accumulation of reserves by the exporting nation. Even though USA spearheads in certain areas like internet and other technologies - the exports of that is not enough w.r.t the imports of other products resulting in trade deficits every year. On the other side - exporting nations have trade surplus. This accumulated reserves - usually called the forex reserves keep going higher and higher. This money is often visualized to be for the "rainy day" - when money flows outwards of poor & exporting  countries. But in fact - they end up owning more reserves than they actually need. With this reserves fast accumulating and sitting idle in the coffers of the exporting nation - is swindled back as investment money - again to those same nations that don't export enough. Recently we have seen trends where sale of critical pieces are being blocked in the US for fear of run over by foreign governments. Countries like China, which has enormous savings and very high forex reserves of multi-trillions would easily buy-out star companies like google, Microsoft with a fraction of the money. The US would definitely wouldn't like that to happen and put regulation so that they absolute take overs don't happen. In one sense - it might make sense, but it is a bad deal for those nations which has consumed less - and saved/exported enough over may years. They are not able to import enough nor make smart investments.

Going back to the child labour being in question - If it is true - the western countries and all exporting countries from China should feel them so privileged that Chinese children are doing them this great service, while their children are having cushy life with video games and recreation being bulk of the day-to-day activity. Let us not under estimate the hard work of the people who make products that the world needs. There shouldn't be any complains until we give export to serve these hard working kids. Savings come from hard work and under-consumption. Every investment made with the savings - are someone's hard-earned money. Taking advantage of that is both economically and morally bad. So instead of younger generation in the US blaming countries like China for their trade-deficit - they have to think about how to reverse that change. Having a truly free market capitalistic society would be the answer to it. Unfortunately western countries are not that anymore.

Contrast Capitalists

I recently visited a jewelry shop in my native town. Even though I have been there quite a few times - i observed some interesting thing. The shop was more than 100 years old. Its larger than most of its neighbors. I have heard about the quality products (gold and silver obviously) they offer. They have loyal customers who extend for generations. You see the cashier's place in the front - there is a person who is easily in his sixties - and you can guess he is the owner. The politeness and attention to details on everything happening around him cannot miss anyone's attention. Behind his chair is photos of this great grandfathers - at least six generation photos. A simple glance at them would reflect they 100 years they were in this business. Their traditional commitment to business and track record is impeccable. There is jewels all over the place. I am sure they pack everything everyday end of business, put it in an iron locker and next morning come again and put them all on display. There has to be some procedure like that to ensure the assets are all safe every single day. A careless mistake on a day, might ruin the whole business in one day.In India - it is very common to see family businesses like this that have been run for centuries. It is not only big entities - even small eateries are run over generations. Even though they had the might and intelligence to spread the business to other parts of the country - it was not a norm to do that. They often restricted themselves to their own cities and towns. They services their community with their needs. It is also very true that they employ people from successive generations. They provide livelihood to families. There is no corporate ascending ladder that you jump fast - it is a stable, slow, efficiently run businesses.

I was in a corporate meeting in my office today. There was a business proposal for a start-up company and someone was explaining the sales pitch to get some investors in. The way it works - you have some idea typically using the internet. You explain the idea to people with money. Make them invest some of their money into your firm. You use that as your seed funding and take your idea to the next level. During the presentations, I just saw something that caught my eye and left me completely mind boggling. Trying to show-case the new start-up in good limelight - they have introduced a notable silicon valley investor as a board member. The intention is to communicate that he is part of the board and his past qualification - it goes on to say investor who has made "successful exits". It left me wondering - why would someone exit his successful business? He should continue to run it, expand it and satisfy his customers. instead why would someone exit (sells) that too multiple times? Can someone be so good at so many businesses. As it turned out - he is just an investor who throws in money at prospective companies only to sell it to someone who can afford to pay more than you had invested. The investor cashes out of that business. In corporate financial sense - this is perfectly rational. The investor provides capital, flips it on a profit when things are good. Wonder - when things are good, why not stick to it and make it bigger? Probably the answer to it is - why take risks when you could sell it and take a handsome return. The whole mentality of buying / selling stocks in the open market has taken a step forward and crept into buying/selling "service" companies. People just do the flips - wonder if they are real businesses that help the society.

In the above two examples - we have seen both edges of capitalism in play. In corporate America - the usual rule is to start a business, take it to the next level where it can be sold. Move on to the next big idea. This is very prevalent in service based companies rather than manufacturing firms. The concept of customer loyalty is organization based. It is the corporate mentality of doing business. In western countries - it is also very common to keep expanding your business. You read business newspapers - every CEO would say they want to multiply the business by 10 times by next year or something similar. Needless to say - you need to talk like this to be a CEO.

It just turns out the whole mindset of an Indian business is completely different from their western counter parts. Ethics and culture are embedded into their business models. 

The biggest con - Bitcoin

As I write this post, its Aug 16th, 2017 the US market is open and trading mid-day and one bitcoin is trading around $4300. What a run it has had so far. The market share of bitcoin is around $70 billion USD. With the Dow and S&P hitting all time highs - giving handsome returns, wonder why investors would ride the bitcoin speculative wave, as everyone knows - it might be very risky. So far - the investor have been handsomely rewarded. How long could this last? Frankly no one knows!

There was a time long long ago - carts were pulled by horses or bulls. Some people contemplated the idea of operating a cart without an animal tied to it. The idea was stupid, it was thought then. The common sense was the cart wouldn't run without an animal in front of it, given what was reality at that time. History turned a new page, with the invention of mechanical motors that would operate a wheel rolling over again and again to cause forward motion. The automobile replaced carts/animals. Even though it was considered dumb at one point of time - humans then conceived that it could happen.

Is Bitcoin such a revolutionary idea that would change the world we live in on how people use money as medium of exchange?

Before we get into what it is going to be, lets see what it is now. Bitcoin as they say it is a "Digital currency". There are thousands of digital currencies on the internet.Not sure if bitcoin is any superior or inferior compared to others. There is also no guarantee this bitcoin is the best digital currency for next few years. They are being traded actively though. Bitcoin stands-out from the rest as most popular of the crypto-currencies. Even after you read multiple articles on digital currencies - it is very hard to get your head around it. Lot of things are more confusing. It is complex to the core. Something like currency should be lot simpler than that.

The biggest characteristics of bitcoin (or any digital currency for that matter) is its finite availability. It could rival to any fiat currency - that the government can print at will.

If there is an unlimited supply of bitcoin - there wouldn't be a market for it. Even though it sounds promising with respect to that fact - there is infinite number of digital currencies available over the same medium. With market forces determining the value or worth of each of them, its quite unstable.

Bitcoin is not used in day-to-day trade. Smart people would call it a financial asset rather than a currency. For now even people who own bitcoin do not consider/think them as as store of value that they plan to keep for their retirement. They think it just like any stock. They want to hold it until they think its a right price to sell. Unlike companies that have factories and machinery- bitcoin has nothing to back itself except the confidence of the bitcoin buyer. It is really a risky speculative trade. People are speculating the price of bitcoin and pushing it higher as more buyers step in than sellers.

Digital currencies would go down in history as the most successful marketing campaign that created lot of hype that would only result in an eventual and complete collapse.

In the 2000 dotcom bubble - many companies that were valued very heavily went to zero. In my opinion - bitcoin and other digital currency are no different. They will and have to go to zero. Investors would lose every bit in this speculative bubble. Of course some would make money. But the concept of digital money is fundamentally flawed.

The bitcoin endorsers use the word "Mining" that is intentionally distracting. I just checked the dictionary meaning of mining. It is digging up the earth for coal or other minerals like gold. Mining of minerals has always been an occupation since human beings first arrived on this earth. Some people took the effort to get some thing out the ground that was rare and attractive, sold it to someone who is willing to pay the price of it. This has happened generations after generations for centuries. Since the bitcoin community wants to equate the process of creating a new bitcoin - they smartly enough, borrowed a word from the real money - gold. Put in a word mining - to get the feeling to the public as though this is being "mined". They apparently "mine" bitcoins from multiple computers and by solving difficult mathematical problems - that is what they say. This is no replacement for mining something that is tangible like precious metals. Using the word mining is completely illogical for crypto assets.

The mere fact that its not being accepted to buy any significant purchase of merchandise like grocery, furniture or a hair-cut proves that its not a currency - at least yet. People exchange the bitcoins for dollar or Euro. Rather than the bitcoin itself - the dollar value behind the currency is what makes it attractive. There might be some one who is selling drugs online and would want to accept bitcoin for the convenience of being anonymous - that would at this stage be an exception and not an example. So far, the universal acceptance is not there. None of the central bankers have really backed this so far. With a large population in Africa, Asia and Latin America completely unaware of technology - a platform that offers digital currency is no where in the picture.

Gold has been a commodity all along human history. It has been elevated to money for centuries for its unique properties unlike any other metal on the periodic table. During the last bull run - it touched a high of $ 1900 for an ounce. If bitcoin can go until $4300 and possibly even more - When this bubble finally burst spectacularly- this money would flow back to the ultimate safe haven asset which is gold. It bitcoin can hit the numbers what it is now - there isn't an upper limit for gold. It could go up multiple times with ease from its current level of $1300/ounce.

What a mess?

Alan Greenspan, very famously told this about quantitative easing and zero percentage interest rate that - It was like urinating in the bed in the night. Until you wake up in the morning you don't realize what a mess you have created.

After the 2008 financial crisis - the US Fed announced to the world of the extra-ordinary measures needed to save the global economy from a 1930s style great depression by bringing down the federal funds rate to zero and buying back trillions in treasuries and mortgage bonds to support an ailing economy. We are almost nine years since and have not reached the 1% mark yet. The other Central banks of the world were no different and followed the US Fed with its quantitative easing programs.

If you can recollect what happened in 2007 - this is just before the bursting of the  US housing bubble - everything seems to be going great until one thing happened. The Fed started rising the funds rate aggressively.

It is no different now.

Its like an ailing patient on a ventilator. The patient is just fine until he is on the ventilator. The moment it is taken away - the patient is going to have complications. In medical terms - its called weaning. The patient is taken off the ventilator and the hope is he can live without it. But as soon as there is a complication - which includes unable to breathe and possibility of instant death, the patient is hooked back to the ventilator. That would be a apt description of how the US economic state is now. The 0.25% federal funds rate increase in December of 2015 and then again in December of 2016 were just token increases for the Fed to save its faces rather than for economic tightening. The patient being on ventilator for too long had become the biggest ailment than the initial disease.

With the employment numbers well under the Fed's target and inflation now creeping well above the 2% mark - also with the Dow Jones index hitting 21K - with historic consecutive winning sessions - an act not seen in last 30 years, it can be agreed that the economy is heating enough and warrants a rate hike.

If the Fed reacts, it will burst the monster bubble it created.

If the Fed doesn't react - the bubble would only get bigger and bigger, to cause a 1930 style great depression - which exactly the Fed is taking credit for saving the world from.

The bubble in the silicon valley is very obvious. If the Nasdaq 5k was a bubble in year 2000 - it is a bubble now too with Nasdaq lingering around the 6k mark. The fundamentals have not changed. The start-up environment in the silicon valley is so much heated up - it just doesn't make monetary sense. Recently Snapchat published what it thinks was its valuation of 24 billion dollars - and admitted that it may never be profitable. Any investor that is in sound mental health knows - not to throw a penny to it. If this is not a bubble what else is? Why would you want to invest money on a company which themselves say - it will only take in more money than giving it back. Who would take the loses from those transactions?

Company valuations, particularly start-up companies are simply ridiculous. There is no way - they are worth what they say they are. Investors are going to rush out of the silicon valley and no one will be spared. The party might just be over.

It is very striking that the Snapchat IPO and Dow hitting 21K on the same day - would be recollected in history as the peak moment for the whole big bubble.

For anyone who has lived through the 2003-2008, can easily re-collect the pain from the crash in the US housing prices. Proxy-government entities like Fannie Mae and Freddie Mac had loaded toxic mortgage backed securities with AAA ratings on unsure investors. It was the biggest piece of odourless crap ever assembled as investment material. When everything started collapsing the US government and treasury had to step in to save the market by buying these mortgage bonds - that no one would buy. In the process - the government only managed to increase its own debt. What wasn't good for the investor - was not good for the government. Except that it was left out in the open as the only buyer in the market. The house prices have retraced their path to the top now, thanks to the low lending rates. Now there are lot of hedge funds that have bought in to the real-estate hype and the result would be no different than what happened in 2007/2008. The mere scale of it might be much larger than 2008.

With the government and global Central banks stepping in to the bond market - the whole market is artificially priced. With all the risks mitigated by the policy makers, there isn't a free market for bonds. Why do you want to hold bonds when you could make a lot of money on a stock market running on steroids? In that case - the yields on the bonds fall dramatically and as is the case - the price of bond increases. Sovereign debt funds are squashed with bonds. What is really not priced in is the serious consequence of inflation that could have a lasting effect on bonds sold already. Just imagine the inflation reaches a 4% mark - why would you want to hold to a 10-year US treasury bond that yields 2.5 % or less.  Already the spread between the CPI and yield on the 10-year is bad. So whatever bursts the bubble - one market that is sure to get ruined is the bond market. With the patient in a ventilator for a decade- the bond market was never in fair play.

For the US Fed - It is damn if you and damned if you don't moment finally.

If the recessions in 2000 and again in 2008 were painful - the one that is getting formed in the horizon is bigger than both combined. The bigger the bubble, the bigger the consequences.

This cannot end well. Buckle up folks, it just may be dawn!