Soft Landing

 The concept of ‘soft landing’ assumes that policy makers understand the economy and markets, that their models and theories can predict the future and that they are supplied with timely, complete and accurate information. Even if policy makers did have the right tools, their efforts would be a thimble full of water fighting the raging current of the markets

What words strikes fear and dread in the hearts of every investor? The words that signal a severe economic contraction? The words that insure bad choices and losses in each and every market? Some would suggest a panic or a depression. Certainly panics and business depressions, especially the present one, are very difficult, but they are foreseeable. Expansions especially those fuelled by irrational exuberance and government policy distortions always end the same way. Absurd expectations are easy to spot. The trick is not to get carried along with the crowd and take an early exit. No, none of these things are either unusual or unexpected. The worst words are a deliberate falsehood, misleading, disingenuous and deceptive. The hideous words are ‘soft landing’.

The words ‘soft landing’ are certainly beloved by central bankers, politicians and (ahem) financial writers. When an economy is slowing, it is always nice to provide a little cheer for investors. After all we don’t want them act like rational creatures and try to protect their investments by selling all at once? Our leaders want us to believe that the situation is under control. They want us to believe that the wise and good in charge of the economy with a few tweaks to interest rates, reserve requirements, fiscal stimulus, taxes and industrial policies can easily engineer a slow down or a ‘soft landing’.

The whole idea is absurd, a financial fantasy, an economic delusion. The concept assumes that policy makers understand the economy and markets, that their models and theories can predict the future and that they are supplied with timely, complete and accurate information. They don’t. So they can’t ‘fine tune’ an economy into a ‘soft landing’.

Even if policy makers did have the right tools, their efforts would be a thimble full of water fighting the raging current of the markets. One of the most powerful forces in markets is momentum. Once the urge of investors to follow the herd starts, it is almost impossible to stop. The enthusiasm driven by Keynesian animal spirits is not something that can be turned on and off like a light switch by making a few adjustments. In order to slow an economy that is out of control means that prices drop. Dropping prices mean that any person or firm that is overleveraged, and there are many, gets wiped out. Insolvent firms mean that lenders don’t get repaid. The trust that prices are rising, loans are secure and money is to be made disappears almost overnight. Once extinguished, the fire cannot be easily reignited.

Yet examples of the illusion of a soft landing exist are everywhere. For example, when housing prices started to drop in the US, most forecasters believed that housing prices would have a ‘soft landing’ in that they would stagnate and rather than experience substantial declines.

Ben Bernanke is a famous ‘soft landing’ proponent. The recession in the US officially started in December of 2007, but in April of 2008 Mr. Bernanke was predicting that it appeared “likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly”. Two months later in June he stated that “the risk of a nasty economic downturn had fallen and he promised that the Federal Reserve would “strongly resist” any rise in people's expectations of future inflation.”

In fact the main feature of the US recession, a collapse in housing prices, was clear a year earlier. In August 2007 the number of sales of homes and property transactions, in the Los Angeles area had dropped 35% from a year earlier and 31% in San Francisco. 

There is another place where property transactions are falling, China. Last week it was just reported that property transactions fell 39% year-on-year in China’s 15 biggest cities. They fell 11.6% in October alone accelerating from a 7 % decline. This is a problem.

In the US and Europe construction usually makes up only 5% of GDP. At the top of the construction boom in the US it made up 8% of GDP. In China it makes up 14% of the output. Such numbers are reflected in the amount of lending. Much of the lending by Chinese banks during the stimulus of 2009-2010 went to local government who lent 42% of that to developers. A contraction in construction would have domino effect all through the economy.

Yet such is the faith in China’s technocrats that even my favourite columnist, John Authers of the Financial Times believes that “China may, just may, have engineered a “soft landing”, bringing inflation under control before its economy tanks”.  Such illusions are what disasters are made of. 

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).



Strained upmove: Weekly Market Report

Nifty to move between 4,700 and 4,900

The market settled lower for the fourth successive week, mainly on global issues and worries over the fall of the rupee against the dollar. Concerns about the slowing pace of domestic growth also weighed on the sentiments, resulting in the market alternating between losses and gains and settling down 4% in the week.

Overall, the Sensex tumbled 676 points to close the week at 15,695 and the Nifty lost 196 points to 4,710. The market is likely to face a struggle in its attempt to notch some gains. We may see the Nifty moving in the range of 4,700 and 4,900.

The indices closed sharply lower on Monday on European debt concerns and the US fiscal deficit issues. Bargain hunting after an eight-day losing streak enabled the market close in the green on Tuesday. The market ended sharply lower on Wednesday on uncertainty in Europe and a lower-than-expected US GDP growth in the September quarter.

The indices witnessed a smart bounce back in the last hour tracking the firm European markets, closing in the positive on Thursday.  The market closed weak on Friday as the EU economic and monetary affairs commissioner on Thursday stated that public finances were under stress.

All sectoral indicates settled lower in the week. The BSE Metal index and BSE Consumer Durables index, both down 5%, were the worst performers.

Among Sensex stocks, Coal India gained 4%, Larsen & Toubro rose 2%, Maruti Suzuki, Tata Motors and Cipla added 1% each. On the other hand, Jindal Steel & Power (down 9%), Hindalco Industries, Sterlite Industries (down 8% each), Reliance Industries and ICICI Bank (down 7% each) were the major losers on the index.

The top gainers on the Nifty were Coal India (up 4%), L&T (up 2%), Maruti Suzuki, GAIL India and Tata Motors (up 1% each). The laggards were led by SAIL (down 13%), Jindal Steel & Power (down 9%), Hindalco Ind, Sterlite Ind (down 8% each) and Hero MotoCorp (down 7%).

The government on Thursday approved 51% foreign direct investment (FDI) in multi-brand retail. The move is seen as a major signal from the government to go ahead with key reforms negating an image of policy paralysis. Reserve Bank of India governor D Subbarao said 51% FDI in multi-brand retail would attract foreign capital into the country. “It is a visible measure (taken by the Centre) that will bring in right capital in the country,” he said.

Food inflation fell sharply to single digit at 9.01% for the week ended 12th November from 10.63% in the previous week. Food minister KV Thomas stressed that the government is concerned over high food inflation and is taking steps to bring it down.

Attributing the weakening of rupee to uncertain global economic environment, the minister of state for finance Namo Narain Meena said it will increase inflationary pressure by pushing up import bill. The rupee has weakened 18% against dollar so far in 2011 and had touched a historic low of 52.73 on 22nd November.

“The main reason for depreciation of the rupee against US dollar is uncertain global economic environment, particularly unfolding of Eurozone sovereign debt crisis,” Mr Meena said.

On the international front, Italian two-year government bond yields rose to new euro-era highs above 8% on Friday after a weak treasury bills and zero coupon bonds auction and despite the European Central Bank buying debt in the secondary market. In another development, Standard & Poor’s downgraded Belgium’s sovereign credit rating by one notch to ‘AA’ from ‘AA+’, citing a slowdown in the economy and “protracted political uncertainty”.

In the US, Congress’ special debt-reduction committee failed to reach an agreement earlier this week, setting the stage for $1.2 trillion in automatic spending cuts and re-igniting worries that economic-stimulus initiatives that are set to expire will not be renewed.


A small contra trend recovery could materialise but bears in control

It is now very clear that the bulls have to regroup and make serious efforts if they have to stem the rot as the bears run riot. The first step in this direction would be to stage some sort of a small come-back this week

S&P Nifty close: 4710.05

Market Trend

Short Term: Down         Medium Term: Down        Long Term: Down

The Nifty opened lower for the week as the bear hammering continued. We saw a bottom on the 23rd (as was envisaged in last week’s piece) as the Nifty staged a smart intra-day recovery but it was successfully tested the very next day. The Nifty lost another 195 points (-3.99%) on higher volumes than last week as the bears tightened their grip. The sectoral indices which outperformed the market were BSE Healthcare (+0.23%) and BSE Capital Goods (-0.18%) while the ones which underperformed were BSE Metal (-5.35%), BSE Consumer Durables (-4.91%), BSE Oil & Gas (-4.81%) and BSE FMCG (-4.31%). 

The weekly histogram MACD has fallen below the median line confirming that the bears are in control. It is now very clear that the bulls have to regroup and make serious efforts if they have to stem the rot as the bears run riot. The first step in this direction would be to stage some sort of a small comeback this week. If they are unable to do so then they will be in a more precarious position.

 Here are some key levels to watch out for this week.

  • As long as the S&P Nifty stays below 4,741 points (pivot) the bulls will remain under pressure.
  • Support levels in declines are pegged at 4,608 and 4,506 points.
  • Resistance levels on the upside are pegged at 4,843, 4,929 and 4,975 points.

Some Observations
The bears have established their supremacy and the onus is now on the bulls to rescue the desperate situation they find themselves in.
1.    Resistance in rallies is pegged at 4,929, 5,019 and 5,109 points (retracement levels of the fall from 5,399-4,639 points.
2.    A double bottom at 4,640 on the intra-day charts gives an upside target of 4,800 provided we do not sustain below 4,700 now.
3.    The volumes in the last two weeks fall have been high implying that rallies if any will be sold into.
4.    If the recent lows hold a small contra trend bounce is expected which could top out around 1st December 2011.
5.    If the small rally does take place around 1st December, use this as another selling opportunity.

A temporary bottom as expected materialized around the 23rd November, which did trigger some short covering during expiry. However, it has not been able to maintain these gains and it will be interesting to see whether we witness a smart recovery into the mid of this week, which can be used as an opportunity to sell. If the rally does take place then the battle will become interesting rather than a one sided one as seen for the last 3-4 weeks.

(Vidur Pendharkar works as a Consultant Technical Analyst & Chief Strategist,


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