Markets

What I read this week: Why SBI raising rates is more important than RBI rate hike

Markets give too much credence to monetary policy but this week SBI raised the deposit rates even before RBI policy decision. The banks are simply not getting enough deposits at current rates to fund credit growth and that is good news for depositors. Second article is an interview with Martin Armstrong who gives a non-consensus view on capital flows and global markets. Last article is on importance of margin of safety which most investors realise only while going through a period of losses.

I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…

Why SBI raising rates is more important than RBI rate hike?
SBI has again raised deposit rates, albeit marginally, not only for shorter duration up to 90 days but also for longer maturities. They are not only realigning their rates to market but also making a judgement call of taking long-term money. It was the biggest beneficiary post demonetisation and had got huge float money. So, they never needed high-cost time deposits hence they had cut deposit rates deeply so as to disincentivise any deposits flowing to them. In fact, the entire banking system was flooded with more than 15 lakh crore of almost free money lying in deposits and hence cut the rates deeply to make time deposits unattractive. This, in my view was the biggest reason that disheartened fixed deposit investors went all in to mutual funds and insurance products.

But I am digressing from the topic. So, cutting the long story, a couple of things have happened in last one year.

1. The float money which SBI all along thought will become more permanent in nature has all been withdrawn and

2. Credit demand is becoming more durable in nature and higher bond yields are here to stay leading to double whammy for banking system and especially SBI. They are not having enough deposits to fund credit demand ….. period.

So, they have gone ahead and raised the rates and not waited for RBI rate verdict. Infact, RBI can only influence overnight rates, not the deposit rates which banking system should be offering to their depositers and that is why what SBI did today is more important then RBI policy decision.

If banking system starts receiving enough deposits (I doubt) at these deposit rates to satisfy credit demand and reduce the gap between deposit growth rate and credit growth rate, then this is the top in interest rates. READ MORE

Connecting the Dots
One of the finest interviews on global markets, capital flow and surprising explanation why equities will be the last man standing.

Some points from Martin Armstrong interview

1. This is really a consolidation (Equities). And what you must ask yourself is if interest rates are definitely going higher. Theres no question about that. So, effectively, youve got the bond market going down. Youve got people concerned about government on all levels.

2. The safe haven, actually, is equities. And the amount of money in the bond markets versus equities is – everybody knows its close to 10 to 1.

3. There are certain times in history when the stock market is the problem. And then on the other side of the coin is when government is the problem. And thats what we have.

4. Its amazing how people just dont look at history. I mean, if you look at the DOW – all this stuff about, oh, higher interest rates, the stock market should go down. Just look at the data and youll see that is absolutely false. The Federal Reserve doubled interest rates between 1927 and 1929 and the stock market doubled. The thinking process before socialism was quite different. As long as interest rates were going up, it was viewed as bullish for the stock market because it showed there was still a demand to borrow, which is correct.

5. China is eventually going to be the financial capital of the world. But we havent gotten there yet. They still have currency controls and things of this nature, so its not a free currency to be able to invest in or trade yet. Yet, it is the third largest bond market in the world.

6. Basically, the trade is long dollar, long US assets. Youre seeing a lot of major capital throwing the poor out of Europe and coming over here. You have the US fund managers that keep selling the stock market saying, oh, its overvalued, overvalued. Well, the foreigners are buying it.

7. The issue is people will run to gold when they question the validity of government. And thats where the politics comes back in. Its a question of your faith in the government. Full Interview https://www.macrovoices.com/macro-voices-research/podcast-transcripts/2032-2018-07-26-transcript-of-the-podcast-interview-between-erik-townsend-and-martin-armstrong

Searching for the world's best investments? Begin by 'Inverting'
The biggest mistakes in investing can be divided into two: errors made by a companys management and errors made by investors. Capital allocation, what a management team does with shareholders money, is the greatest challenge. In the words of Charlie Munger "I cannot begin to tell you of the decades I have spent sorting through the wreckage that follows flawed capital allocation decisions.

Of course, as value investors we can profit from a companys prior bad decisions in the gloom and undervaluation that follow in their wake. Clearly, such capital allocation errors should be avoided at all cost.

In my opinion, the worst three capital allocation mistakes that a companys management can make come from

1) over-priced acquisitions made at the peak of the cycle,

2)excessive investment in the business at the wrong time, and

3) the failure to understandthe true nature of how the business competes and how that competitive landscape may change”

Investors, as fallible humans, can also set themselves on a path of woe without any help from a companys management team. Victims of this slippery slope can find themselves in error for several reasons. One of the easiest mistakes to make is to misunderstand a business identity. For instance, believing that its a true growth business when, in fact, its just a well-run cyclical business enjoying a powerful (but soon to ebb) tailwind.

This leads to a high opportunity cost in lost profits and sometimes even outright capital losses.

Another all too common failing is to fall in love with a management team or an investment and lose objectivity. In our investments, we are called to be rational investors, not cheerleaders. Perhaps the greatest challenge is to forecast the durability of a companys competitive advantage or 'moat'. Finally, a lesser but still painful mistake can be to pay an extravagant price even for what is arguably a wonderful business.

Mr Munger concludes, "The future is always uncertain, so we protect our capital the best when we invest it in situations where we have identified a margin of safety” but it is only possible if you have long enough investment horizon. READ MORE

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