Central banks distort investor expectations

In their attempt to change the world, central bankers and governments have not only distorted the economic fundamentals, they have done something far worse. They have distorted the way investors invest

Investors used to like numbers. To determine where they would invest, they would analyze, deconstruct, dissect and evaluate all sorts of numbers on the economy or on companies. They would take this vast quantity of information and put it into charts, use it to make ratios, and compare it to historical averages. With all of this information they would attempt to predict market movements. All of this has changed. In their attempt to change the world, central bankers and governments have not only distorted the economic fundamentals, they have done something far worse. They have distorted the way investors invest.

Take for example Ms Sun. Ms Sun is an investor in China. Like many other Chinese investors she did not want to invest her money with a bank because of the low interest rates or in the stock market because it is basically a casino. So she chose real estate as a safe alternative. She already owns “seven or eight homes” on the southern island of Hainan and logically was trying to diversify her investments geographically.

Ms Sun is considering investing in a development in the city of Tianjin, south east of Beijing. The project she is considering is called the World. The project is three times the size of New York’s Central Park. It was built to house over 100,000 people. But there is a problem. Only 20 homes are occupied and the developer is in financial trouble.

Most investors in this set of circumstances would run for the door, but not Ms Sun. Instead of being concerned about a price collapse, she is sure that the government will step in and make prices rise. She was “mainly worried about buying at the right time, before the government loosens policy and prices start rising again.”

It is not only Ms Sun who has faith in the Chinese government. This week China reported the slowest inflation in 19 months and industrial production growth near a two-year low. Now such news might indicate a steep fall in economic growth and possibly even a recession, but are economists worried? Not at all. They are in complete agreement with Ms Sun. They look at this slowdown as increasing the prospect for more government stimulus; despite the fact that past government stimulus has created massive bad loans like the World development in Tianjin.

One of the main problems for investors and business people is asymmetry of information. Basically some of the players have more information than others and much of the information is simply not available. So investors and employers rely on signalling. Employers hire employees who signal their competence by more education. Investors invest in companies which signal good future perspectives and higher possibilities of success.

The problem with the recent spate of free money is that it has turned signalling on its head. Whenever Ben Bernanke, Mario Draghi, or the People’s Bank of China announces that they have come up with another weird idea for pumping more money into the economy, it should signal that they are worried about the growth prospects for the economy. A prudent investor might deduce that the economic situation is rather dire and it might be a good time to avoid risk.

But that is not what is happening. Instead of avoiding risk at each announcement, investors are piling into it. Since there is no cost to buying assets that don’t really have a return other than what the greater fool will pay for them, assets like gold or Chinese real estate, the demand for them continues to rise.

Markets are beginning to react to nothing else. There is a strong correlation between the size of the Fed’s balance sheet and the S&P 500. There is an even stronger correlation between the exchange rate of the dollar/euro and the size of the Fed’s balance sheet relative to that of the ECB. The euro rises as the US in effect prints more money and falls as Europe does.

The problem with this uncoordinated global economics experiment is that there are many unintended effects. They have caused a great deal of suffering by lowering returns for those on fixed incomes. They have forced pension funds into ever more risky investments like junk and emerging market bonds. They have exacerbated pension issues that could impact municipalities. Dealing with the financial crisis has saddled the ECB (European Central Bank) and the Federal Reserve with vast piles of potentially impaired collateral. Then there are high oil prices and of course bubbles. But the largest issue is the way that it has warped investors’ perceptions.

In the meantime Ms Sun, China economists, and western investors speculate on when the next stimulus package is going to come. They should rather worry about the real economic consequences the distortions have had on disastrous developments in places like Tianjin, because at some point the flow of free money will have to stop.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])



Pig iron contract; signing of our first deal with the Chinese

Dinner diplomacy by the Chinese authorities led to the signing of the first deal for pig iron supplies from China. This is the sixth part of the series describing the travails faced when setting up an international business in the seventies

As we were planning for the big meet, we tried several times to get through the operator to get our call through, and even made an attempt via the reception. All that Amanda was told that some atmospheric disturbances are preventing our calls.

Vijay and I had long discussions on the quantity, price and delivery aspect and we were determined that we should be the first importer of pig iron from China. We were hoping that if the deal goes through, we could invite their people to visit our plants in Agra (some of them had read about Taj Mahal) and then persuade if we could somehow manage and get their agency for booking orders for them. Our ideas and hopes were really running wild.

The discussions began in great spirits. They bargained very hard, for even a dollar reduction per tonne, they had to have private consultations and so on. When it came to delivery commitments, again, they would go into animated discussions first, refer to some higher authorities in the factory before they could come to some delivery/shipment projections. When they raised the issue of shipment delays, we had to put our foot down and ensured that all related banking expenses for amendments and extensions will be to their account. 

Then our meetings came to an abrupt stop and they had received some urgent messages and some of them were called for overall consultations. Once this was over, came the bombshell that they wanted to finalize the contract on that day itself and be provided the Letter of Credit (L/C)details,  In India we could arrange to open the L/C with proforma invoices and application to the bank, and best of the banks would still take a few hours before opening an L/C for a million dollars or (a little) more. We were momentarily in a fix.

Since their price was attractive and delivery promise in line with our own requirement pattern, we agreed to have the L/C opened from Dubai, and even provide a banking confirmation by telex. This sort of negotiations were going on, back and forth, we were tired and feeling hungry, but we wanted to complete it before we took off for lunch. Just then, some deputy came rushing to say that he was able to get the phone/telex lines through to Dubai and asked if we wanted to make a call or send an urgent message. Since our office knew the basic details, I asked them to get the bank to send a brief L/C opening confirmation.  A little later, we had a banking confirmation that the L/C had been established and will be couriered down to Beijing in a few hours. I had also given the quantity, grade of pig iron and delivery schedules.  Other standard conditions would be apply, as usual.

We returned back to the hotel with the basic contract of purchase and, on the whole, elated with the deal we had made. Since meeting the minister involved diplomatic protocol, we were having a general discussion, and Amanda confirmed that necessary information had been passed on to their liaison man, about choice of food, preferences, etc, as they had sought this information, Only one was a pure vegetarian, and I was a ‘restricted’ non-veg. And, we were looking forward to meeting this high official in the evening.

In good old days, way back in the 1960s, there were many Chinese restaurants in Calcutta. We used to regularly visit the one in Park Street. These were run by Indians from Chinatown (they are Chinese origin, alright), but I suppose one cannot compare Chinese in Calcutta to authentic Chinese in Beijing, and their cooking. We were anxious and apprehensive of what was in store for us. 

For me, the next real Chinese meal came when I was a visit to Hong Kong, a few years ago. The Indian contact of mine had met me at the hotel and taken me to a restaurant called the "Green Cottage Restaurant", in Queens, where everything was vegetarian. My host, apparently, was a regular visitor, and was well received and the hostess gave us an immediate table. I could see a couple of glances exchanged between the two, and, in no time, she had removed my chopsticks and replaced them with spoon, fork and a knife. Well, I wanted to learn and eat with the chopsticks and requested the hostess to get me the chopsticks and also a small quantity of green peas. Both looked surprised, but, she readily brought them. My host explained how I should hold these and in the next 15-20 minutes or so, all I did was to learning to use the chopsticks to pick peas by peas and eating them. Initially, many fell in the plate; some in mid air and so on. Since I stayed in Hong Kong for a few days and then on to Taiwan before returning back, I managed to eat a meal or two wholly with chopsticks.

However, during my current visit, I did not exhibit my ability in front of Amanda or Vijay because I was truly not very sure, but yet, I had to urge to expose my capabilities at the right time.

Around 6pm we were taken in the coach to meet the high officials. I do not remember the names, and hardly any of them gave us business cards, which, again, were in Chinese. The discussions and exchange of greetings between our two great nations continued for a little while, before being ushered into a large hall, where, right in the middle was a very large circular dining table.  Seating was done by them, and names displayed in Chinese. The minister sat, let us say, in the centre; to his right, Amanda sat; to her right, I was located; to my right Vijay and to his right Chinese lady who spoke English and who had met us in the first three days.  To the minister’s left, sat Lam; to his left, four Chinese officials, three of whom we had met in the last several meetings.

We were offered both locally made beer and imported scotch; Vijay and I had scotch and the minister joined us; but he hardly had a sip or two during the whole evening. The food was nice, and the minister kept assuring Vijay that all that he was being served were vegetarian items.

He was happy that I was using the chopsticks in a reasonably acceptable manner and was hoping that the food was spicy enough for Indian tastes. General exchange and conversation followed in a very pleasant atmosphere, and, once in a while Amanda would look and tell us about the items/delicacies being served.  

It is not very easy to hold spaghetti with chopsticks; they were always sticky and slippery, besides being long. I have enjoyed these while in Rome and Milan in one of my European trips, but never had pasta which looked like it was fried and spicy. I looked up Amanda for her comments. She mumbled: the minister is watching you just eat it, you will find it nice and tasty.   Well, with her assurances, I pushed it through and to be honest it was nice.  As the minister was looking at me still, I smiled at him to say that it was nice and tasty. He beamed.

At the end we wound up our dinner with a Chinese liqueur, which was nice, and thanked the minister for his hospitality, co-operation and generosity for sparing his valuable time, and hoped that this would be a breakthrough in our relations when the pig iron start arriving in the country.

The next day, we spent some more time in the Handicrafts Centre, Great Hall of the People, Ming Dynasty palaces and so on, before we caught our flight to Hong Kong.

Upon arrival, we collected English newspapers of the day, and even before going to our rooms, sent a telex for Dubai office to call us by phone.

The first shock was that the government of India had stopped the import of pig iron under OGL, and the notification was effected on the very day we reluctantly signed our contract because of the firm deadline for acceptance that the Chinese had given us. But because of the protests from the trade and industry, there was hope that imports would be allowed if the L/C had already been established. This was very upsetting.

When Vijay raised the issue as to what happens to the L/C that your office has established? Well, I said, I took the precaution of putting an inspection clause; in that either you or me should visit, inspect the goods before shipment. So, simple we won’t go for inspection, because I became a little suspicious when they forced the issue, gave us short notice and suddenly claimed that phone lines were working. I have a feeling that their embassy must have got the information first thing in the morning and because of the time difference, passed on the same to Beijing,

At the Kai Tak airport, we had checked in our baggage and waiting for the flight announcements, Vijay was returning to Agra, and I was on a direct flight to Dubai. Amanda was with us showing us some photos that she had taken. Mr Ram, how did you like the spaghetti? Why, it was nice.  Well, you know, you had confirmed your choice of fish, sea food and chicken; so what you really enjoyed was not spaghetti, but baby octopus!

I laughed all the way to board my flight.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected])

  You may want to read more:


Govt to roll back ban on cotton exports: Commerce minister

“Keeping in view the facts, the interests of the farmers, interest of the industry, trade, a balanced view has been considered by the Group of Ministers to roll back the ban,” commerce minister Anand Sharma said, adding, "a formal order to lift the ban will be issued on Monday”

New Delhi: Buckling under pressure from its allies, the Indian government Sunday decided to lift the ban on cotton exports in the ‘interests’ of farmers, industry and trade, reports PTI.

“Keeping in view the facts, the interests of the farmers, interest of the industry, trade, a balanced view has been considered by the Group of Ministers (GoM) to roll back the ban,” commerce minister Anand Sharma said, adding, "a formal order to lift the ban will be issued on Monday”.

The decision was taken by the GoM, headed by finance minister Pranab Mukherjee, last Friday, after a directive from prime minister Manmohan Singh to ‘urgently’ review the decision, amid stiff opposition from agriculture minister and Nationalist Congress Party chief Sharad Pawar.

Western Indian states Gujarat and Maharashtra, two main cotton producing states, had also demanded immediate lifting of the ban imposed last week.

On 5th March, the commerce ministry had imposed the ban on cotton exports on the grounds that the country had already shipped 10 lakh bales more than the exportable surplus and it had reduced the domestic availability.

However, Mr Pawar, who heads Nationalist Congress Party—a coalition partner in the United Progressive Alliance government—had termed the ban “highly objectionable”.

“They (commerce and textiles ministries) kept me in the dark. I came to know about this only after a notification was issued by Directorate General of Foreign Trade (DGFT),” he had said.

Early last week, the textile ministry had said the ban was imposed after taking into account “the trend of domestic consumption and depletion of domestic availability”.

“Almost 94 lakh bales (170 kg each) have already shipped out, against an estimated export surplus of 84 lakh bales,” the ministry had said. It feared the exports could reach 100 lakh bales by mid-March with registration of export contracts touching 120 lakh bales so far.

India is the second largest cotton exporter and 340 lakh bales of cotton production is estimated during this season.

Meanwhile, a delegation of Gujarat cotton farmers also met Sharma on Sunday, demanding lifting of the ban.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)