Concluding part to an interesting story....... TAMING THE PERFECT STORM - Mystic land’s markets maintained their momentum as steps were taken to support growth Nilesh Shah Yesterday (THE BREWING OF A PERFECT STORM) we saw how a perfect storm was artificially created. In the middle of the new century, the mystic nation faced this perfect storm as a smart trader used the interconnect of debt, equity and currency markets, along with his offshore presence, to create a sharp and sudden correction in mystic land’s markets. There was complete mayhem and loss of investor confidence as mystic land’s market fell like a pack of cards. Mystic land’s council was shaken up. A sharp drop in its currency and equity indices and rising interest rates were causing havoc. At an emergency meeting, a war room was set up under the command of Arthamantri. Kuberapati was made the chief executioner. Services of a retired Kuberapati was summoned as he had managed mystic land’s economy remarkably well a few decades ago when the eastern neighbours of the mystic land had met with a perfect storm. The war council decided to tackle the market with short-term steps and the economy with long-term measures. The retired Kuberapati suggested trapping the smart trader to trigger short covering. A warning to future speculators was an added bonus of such a strategy. The smart trader was lured into overconfidence by a series of announcements by Kuberapati and Arthamantri where he was led to believe that the mystic land did not have the fire power to stand against the markets. He was made to believe that mystic land had accepted that its fundamentals warranted falling equity prices, higher interest rates and a weaker currency. Continued weakness and huge profits that he reaped, gave the smart trader a sense of invincibility. Meanwhile, Kuberapati marshalled the mystic land’s domestic institutions to buy in all the three markets without impacting prices so that the smart trader had to build more short positions. Arthamantri picked up a weak spot in the watching agency’s conduct and put immediate pressure to upgrade mystic land’s rating. The cornered watching agency obliged, keeping in mind access to the domestic market of the mystic land. The war council zeroed in on the day of the final assault to take on the smart trader. At stake was the mystic land itself. The day began with the watching agency unexpectedly upgrading mystic land’s country rating. This created an immediate upturn in all the three markets. Nitimantri increased limits for foreign investors to invest in mystic land’s debt markets. Kuberapati pushed the debt market into the next orbit of a bull phase by announcing an unlimited buy-back of bonds at 10% higher prices than prevailing market rates after 10 days. This removed the selling pressure building up in the debt market as bond holders were assured profits for holding bonds. Some of the global investors rushed in to buy bonds bringing the much-needed flows. Kuberapati announced steps to eliminate availability of bank finance for import of gold with immediate effect. Leading importers of gold were ordered to reduce imports drastically. Those who did not fall in line were raided. Arthamantri announced a 20% increase in import duty on gold for only six months to induce deferment of gold purchase at the retail end. The police took camera recordings of leading jewellery distributors to track people who purchased gold in cash and raided them to instil fear in the minds of gold investors in the black market. Arthamantri announced an investment scheme with full faith and backing of the government, offering returns linked to gold along with tax incentives. Distributors were heavily incentivized to distribute this product. Appropriate options were purchased in global markets to hedge for the gold price risk. All these steps convinced the currency market that gold demand will be drastically reduced in the days to come. Artha mantralaya organized a battery of market experts from local as well as global firms (with suitable guidance) to advise exporters to rush their dollars home as currency was likely to appreciate. Kuberapati stunned the currency market by announcing an unlimited intervention after 10 days at 10% below prevailing market rate to defend the fair value of currency. Kuberapati’s warning—either you are with us or against us in this speculative attack—was relayed into each treasury room in an aggressive manner. Kuberapati came on national media to announce a never-seen-before aggressive positioning that no matter what happens, he will defend the announced level. This triggered exporters to rush their remittances and importers to defer their purchases. With the drop in yields and an appreciating currency, global investors deferred their sell orders across mystic land markets. Kuberapati and Nitimantri cheered equity markets by announcing an unlimited purchase of equities till indices reached 20% higher from the current level. Kuberapati gave orders to buy index heavyweights in front of the national media, pushing equity markets to hit the upper circuit. Arthamantri and Shrammantri together announced investments by state pension funds in equity markets upto 25% of their annual flows. Both of them committed to buy a large stake in kala sona’s divestment. This investment laid the foundation of long-term flow of domestic money to equity markets. The smart trader and his cronies were dumbfounded by the unfolding events. Their positions were large and known to the market. Their lenders were fair-weather friends. Their profits evaporated quickly and margin calls came faster than they could meet. As the smart trader was not in a position to meet his margin calls, his positions were liquidated. Debt and currency market positions were partially liquidated at a very high price but equity positions remained deep in losses. By the end of an eventful day, mystic land had dealt a deadly blow to the smart trader resulting in the liquidation of his funds. The residual covering of his positions by lenders ensured that mystic land’s markets maintained momentum in the days to come. This momentum ensured that Kuberapati had no need to intervene in the debt, equity and currency markets. Markets learnt to respect Kuberapati. The mystic land’s markets maintained their momentum as several steps were taken to encourage exports and support growth. One, a global mobile phone manufacturer was given preferential access to the domestic market under the condition of being currency neutral. Its exports from mystic land had to match its imports, royalty and dividend outflow every year. Two, a few educational institutions were given preferential access to mystic land’s market to teach students in mystic land rather than spending precious foreign exchange. Three, domestic tourism was encouraged to replace foreign travels by developing domestic tourist hubs and infrastructure across the mystic land. Four, alternate energy sources such as wind, hydro, solar and nuclear energy were developed to reduce dependence on imported oil. Mystic land also instituted a prestigious prize for economists who supported introduction of gold standard in the western neighbours of the mystic land. After a sustained campaign and some disastrous quantitative easing by western neighbours, the gold standard was accepted by everyone. Gold prices moved from four digits to five digits. Mystic land in true sense become a country where golden sparrow lived. Arthamantri, Kuberapati and Nitimantri became part of the folklore of the mystic land. Speculators around the world respected mystic land for centuries to come. Nilesh Shah is Director, Axis Direct.
Posted on: Fri, 21 Jun 2013 01:20:46 +0000
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