A Tale of Two Markets

By: Ram Seshadri | Wed, Jun 9, 2004
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This is a tale of two markets - one in the US and the other in India - and is intended to highlight the great divide between US media and the rest of the Free World's media (I include India in the Free World) based on the just concluded Indian Elections. I will provide an American viewpoint, albeit with a jaundiced eye. It concludes with a commentary on the state of the Indian markets and what it means for the US markets.

India held the world's largest elections in a monthlong saga that culminated on May 13th with a stunning defeat for the incumbent administration. Looking at the outcome superficially, as almost all of the American media has, a boom in the economy apparently did not benefit the country's poor and hence they threw the incumbent rascals out and ushered the new ones in (albeit one that suddenly catches the fancy of US media: an Italian-born woman in a Sari). My take, thanks to having been born there, is naturally different. But, before I provide my thoughts, let me take the US media to task once again on this shameful display of ignorance and arrogance in their coverage of another fully functioning democracy, one of the few in the world.

The US media displayed their arrogance in their non-existent coverage of what was a pretty interesting campaign in the world's largest democracy. The media were essentially silent on the whole electoral exercise in India last month though they have been lavishing their attention on the Chicken Farmer in Shanghai for several months now. Once China's Premier vowed that the nation's bureaucrats would take "forceful measures" to slow the bubble economy, the WSJ and sundry publications suddenly lost all interest in the Chinese chicken farmer being uprooted from Shanghai to make way for his neighbor's daughter's upscale condo or some such nonsense. The WSJ prides in these "human interest" stories, but as we know from the Tech bubble, the WSJ's interest in publishing these stories can be more indicative of a significant top than a worthy exercise in explaining a new trend.

The same media paraded its ignorance of the ground reality in India when they trumpeted Ms. Sonia Gandhi as the new benefactor of the "impoverished masses" (WSJ's term for Indians who voted for her though I am glad they did such a quick exercise to find out who voted for whom!). News that Mrs. Gandhi will be the future PM was plastered in the front pages of almost all major newspapers though we still don't know if she will be the PM since she has not indicated for certain that she wants the job (She has since declined the job). Now that the US media have suddenly found an intense interest in highlighting her face on their front pages, the fair question (pun intended) to ask, is if a certain Mr. Vajpayee had won the election whether the Western media would have been so keen to adorn their pages that way? Why do I have a sneaking suspicion that he would be page 8 material?

While the reaction of the US media elite was highly predictable, the reactions of Indians and Indian-Americans in the US was not.

Writing in the online message boards of "Hindustantimes.com", a US-resident, Indian citizen wrote without obvious irony: "It will be the darkest day in indepedent India's history to appoint a foreign national at the country's highest office. Are we short of one able person to lead our country?"

I would ask this same US resident and millions others in the US who feel that way: "How come California couldn't find one American-born citizen to lead the world's sixth largest economy? Do we have to import an Austrian born bodybuilder to repair our finances?"

Or how about asking the same denizens of this fair nation: "Why would anyone want to elect Mr. Bobby Jindal, a foreign born US citizen, the governor of the State of Louisiana last November? How shameful that the great State of Louisiana couldn't find a native born Louisianian with their wonderful drawl to run for Governor?"

In my opinion, most people expose their xenophobia rather than than their intellect when they make such racist arguments. These same arguments fell on deaf ears in India when the incumbent administration made an issue of Ms. Sonia Gandhi's ancestry. I guess the Indian masses made the smart decision that it did not matter where a person came from, compared to where they are now!

Or Consider how little Ms. Gandhi is known in supposedly her "hometown". The Associated Press reports that even though the denizens of Italy's tiny town of Orbassano, near Turin celebrated Ms. Sonia Gandhi's victory, many other Italians were unaware of the results. "Ms. Gandhi has a surprisingly low profile here despite her Italian origins" reported the newswire. One Italian visitor commented on Indian elections thus: "Back home in Italy, she (Ms. Gandhi) is considered a foreigner. She had left home a long, long time ago and she hardly visits her hometown". So we have an immigrant to India (however harsh it may sound to Western ears) who by virtue of being married to a political dynasty gains the right to serve the people. There is nothing new nor mystical here, with Alberto Fujimori and Eva Peron having shown the way decades ago. Only Ms. Sonia Gandhi combines the foreigner and the dynasty to create a new twist to their plots.

The comments from one message board writer on the same site was more interesting, laced with wry humor: "See how open and democratic we are! We've even outsourced our Prime Minister to Italy. Looks like the US needs a lesson from us."

My own take is that the people of India have accepted her as an Indian whether her name and face makes it look unnatural to some. The unnatural argument put forth by some Indians (and Americans) has the same roots in our obsession with "All American" faces in advertisements and the media - White and wholesome. It will not be long before more foreign born or foreign sounding faces and names make a beeline for the Media and Congress - the last domains of previlege in America. Indians in the US who like to believe that race cannot be a criterian for success in America cannot make the same argument for their left behind brethren in India.

While analyzing the causes for her electoral victory, the US media chimed in with predictable cliches. One blathered that "Ms. Gandhi had a mandate from the impoverished masses who were left behind in the Indian economic boom". This is the same old tired argument made by the US media whenever another country has an economic boom - there is something wrong with a boom in a foreign locale because somehow somewhere 1% of the country does not experience it. The pseudo intellectuals who bemoan this kind of boom, are the same morons who do not raise an alarm when the Federal Reserve creates multiple artificial "booms" in the US through easy credit which benefit mostly those who already have capital or have access to capital. What a shame!

The truth in black and white terms about the electoral results is this: Ms. Gandhi won 219 seats out of a maximum 539 (that's about 40% of the vote - less than what is commonly referred to as a majority - 50%). The turnout in this election by Indian standards was abysmal: 50-55% (India's famously poor people have a predilection to vote even under the most strenous circumstances and hence turnout routines reaches 70-80%). The incumbent administration did not do shabbily either: they won 188/539 seats (about 35% of the vote). So what we have here really is a swing vote in certain key states that tilted the equilibrium in her favor. There is no indication of any "Mandate" here except in the US media's ignoramus imaginations.

In addition to the big change at the top, India's average age of it's leaders posted a welcome change. Rahul Gandhi, Ms. Gandhi's son, won his contest as well and with him came a gaggle of new leaders who beat their doddering competitors. This perhaps best reflects the genuine strength of this past election and the new emerging India: almost half the population is below 40. The new politicians also soared past the average education levels of the India's notorious scandal ridden politicians. Mr. Gandhi has an MPhil from Trinity College, Cambridge, his fellow party men, Mr. Pilot, has an MBA from Wharton, and a certain Mr. Scindia, went to Harvard and Stanford.

The true causes of Ms. Gandhi's victory may be known only after an exhaustive analysis of electoral rolls. As of now, we can only surmise that a certain segment of the population was tired of the administration building roads, setting up IT and Telco infrastructures but ignoring farmers who have been coddled with subsidies for almost 50 years now and are still nowhere near as efficient as a Thai farmer or a US farmer. So there is some aspect of sour grapes here. Also, it is clear that the incumbent administration made mistakes in a couple of key states (Gujarat and Tamil Nadu come to mind) where it was aligned with very unpopular and despotic leaders. This torpedoed the administration's chances at the margins.

But in the final analysis, what this election may boil down to is how important it is to have the right last name! Just as in America or for that matter, any place else in the world. Ms. Sonia Gandhi wouldn't have had the tiniest chance if she had contested the election as Ms. Sonia Maino which is her maiden name. She was a Gandhi and that name carries a huge and instant following that other names don't in India.

For those who doubt the power of last names, just ask President Bush when he was contemplating running for Governor of Texas in the early 90's. Would he be where he is today if his last name had been just George Anybody?

Looking at the drama surrounding the elections, the Indian stock markets gained global attention on May 17th with their own "Black Monday" due to the change in administrations. I think this highlights how much volatile our own markets are going to be this year as the gains from last year's foolish easy money policies from the Federal Reserve are crushed in a heartbeat when there is a sudden event. Following that line of reasoning, I think there is a strong probability that US stock markets will have a "Black Monday" sometime this year.

What could precipitate such a dire scenario? I think there are several possibilities: Oil which is currently trading at $41 can easily spike to $45 a barrel if and when there is a terrorist attack on oil installations in Saudi Arabia. As I write this, there is a news report that talks about Saudi forces battling militants in Riyadh. Similarly, Venezuela could have a forcible change of government that will make the Indian democracy's change of government like a walk in the park. Since Venezuela is the most important supplier of light sweet crude (the favored kind of US crude) to the US economy, this will cause Oil to spike to $45 in a heartbeat. Similar events can cause a "Black Monday" in US stock markets very easily.

There are other possibilities: there could be a terrorist event in the US that attacks public installations or public officials such as politicians. That would cause the US markets to recoil in horror.

These are the kind of dark events that no one wants to foresee because they are too horrible to think about. But I think one should be aware such a possibility exists, especially now. Why do I say that?

My train of thinking is thus: If the Indian economy which was soaring, with markets that were undervalued with a forward P/E of 11, had a 17% crash in the stock market in one day because a democratically elected government changed hands, can you imagine what will happen in the US markets where the economy is trudging along, where the markets are wildly overvalued, if there is a sudden shock to the system? The recipes for a crash then become much easier to fathom.

With that caveat in mind, I would caution all investors in US markets to tread carefully this year. What happened last year was a historical aberration that may never happen again. I said as much in a previous article. I think investors need to focus on cash and gold rather than stocks and bonds this year.


Ram Seshadri

Author: Ram Seshadri

Ramadurai Seshadri
Alyx Funds LLC

Ram Seshadri is investment manager at Alyx Funds LLC

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