Good Morning Avantika,

A perk of being a business journalist who writes on finance is that you get invited to some ‘interest’ing events (sorry, not sorry). And when I got an invite for the 4th India Fixed Income Summit last week, organised by CFA Society India, I said yes pretty quickly—what with all the non-stop chatter about raging inflation, rising interest rates, and associated end-of-the-world scenarios. 

It was one for the geeks, all right. Dyed-in-the-wool debt-market gurus and fixed-income experts spoke on many esoteric topics that had the audience listening in rapt attention. 

No, really. 

Some folks do enjoy ‘fixed-income’ talk. 

After all, the debt market globally is much bigger than the equity market. And the signals the former sends are often leads for the equity market to follow. Guess who first anticipated the collapse of DHFL a few years ago? Ask them privately, and fixed income experts just can’t help talking about their superior chops.

Anyway, there it was. The macro outlook for India, state development loans, municipal bonds, performing credit (yes, there’s something like that), the evolution of Indian bond markets—all packed into a span of eight hours. 

And the best was saved for the last: a talk by Zoltan Pozsar, the famed Credit Suisse analyst, on geopolitics and interest rates. Quite apt, I’d say, considering Pozsar’s widely-talked about prediction earlier this year on a global currency regime change.

Source: Credit Suisse

Because that’s what this summit’s theme was too: regime change. 

And it’s why, even if you’re not particularly excited by interest rates or debt markets, you should read on. Because if Pozsar’s right, what we’re facing is a once-in-a-generation global crisis with far-reaching implications.

Home takeaways

Before we get to the whole world, though, a little bit about home. 

The long-and-short of the India macro-prognosis, laid out by Prasanna A, head of research at ICICI Securities, is this: slowing global growth will hurt India too, inflation will remain high, interest rates hikes will continue, and the rupee—already in super senior citizen territory—could age further. Falling to as much as 85 against the US dollar.

So the “the rupee is not weakening, the dollar is strengthening” debate set off by finance minister Nirmala Sitharaman isn’t likely to go away anytime soon. 

Experts who spoke at the summit also had some investment advice.

• State development loans (SDLs) offer good buying opportunities for investors, with attractive interest rates and low risk, some said. 
• And targeted maturity funds (TMFs) offered by mutual fund houses are the most tax-efficient way to tap them, others added. 
• Municipal bonds—muni bonds, in short—though still very nascent, were seen as promising. 
• And performing credit—essentially riskier loans given to businesses that banks generally don’t lend to—as offering neat returns with tidy premiums. Though, of course, with much higher risk. Detailed due diligence is key here, everyone agreed. 

G Mahalingam, former whole time member at market regulator Sebi and an ex-RBI biggie too, also spoke for a bit about the evolution of the bond market in India. It was a bad idea, he said, for India’s central bank to have ordered a write-off of Yes Bank’s AT1 bonds when the fiasco erupted in early 2020. And for bond holders to have been made to stand behind equity holders. Whither risk-reward?

But as illuminating as all this was, for me, it was Pozsar, on screen all the way from New York, who stole the show. And whether you agree with him or not, you have to give it to the man—he sure knows how to build and deliver an argument. 

Once-in-a-lifetime shift

Pozsar thinks high inflation, the kind we’re facing all over the world now, is a ‘generational’ phenomenon. 

The last time the United States witnessed one, it was way back in the 1970s. And that was crushed by the formidable Paul Volcker, the then US Federal Reserve chairman, through massive interest rates hikes. Pozsar believes a repeat might be on the cards now, and that inflation will be an issue for another decade. 

But Jeremy Powell, the current US Fed chairman who has hailed Volcker as a hero, faces an uphill task, Pozsar says. “The Fed’s most important objective is to bring down inflation in the US to 2%, yesterday. And Powell will try very hard”. 

I won’t attempt to give you the entirety of Pozsar’s speech here, but a few samples may serve to give you a snapshot.

“Think of interest rate hikes like Muhammad Ali thought of exercise—don’t start counting until it hurts.” “2% inflation is Mission Impossible for Powell in the near future.” “2032 is when inflation is going to come down.” “We are seeing the mother of all supply side dislocations due to geopolitical tensions.” “Powell’s rate hikes to control inflation could overkill the economy. Unemployment will have to be at a very high level.” “It’s a historic breaking point between the US and China.” “Political maps are getting redrawn. Economic maps will be redrawn.”

In fact, Powell’s challenges are probably tougher than the ones Volcker faced. 

Volcker, Pozsar believes, got lucky with falling oil prices as new investments in energy came on steam. The picture now is very different and Powell will not have that advantage. Also, while interest rate hikes can help lower demand, inflation will still remain high since supply chains have been disrupted across the world. 

This could mean the worst of both worlds—inflation and recession. 

Finally, Pozsar also predicts that a commodity supercycle is coming. (He advised investors to get their hands on the ‘elementary table’. Ouch.) India, however, could benefit if it plays its hands right in the coming economic conflict between the US and China. 

A ray of light, then. At least once you figure out which is the right hand.

That’s a wrap for this week. Please write to kaching@the-ken.com with your thoughts and suggestions. 

Until next Thursday, 

Anand Kalyanaraman