Firstpost

The real economy appears to have decoupled itself from the markets. This is why even as the economic data looks worse and worse, the markets are rising higher and higher.

A few days ago, we were told that the GDP for 2011-12 would fall to 6.9 percent – the lowest in three years.

On Thursday, the commerce ministry reported that imports rose twice as fast as exports in January: we are on course to report the worst current account deficit (of around 3.5 percent) in eight years. About Pranab Mukherjee’s budget deficit, over which he spends sleepless nights, we shall not even talk about it.

On Friday, the Index of Industrial Production (IIP) for December 2011 showed a fall to 1.8 percent from 8.1 percent last December. Mining is de-growing (-3.7 percent), manufacturing is down to a crawl (1.8 percent), and only electricity (9.1 percent) is soaring (on what kind of wings, one doesn’t know).

Granted, we shouldn’t go by what happens in one month. But the nine-month figures are not any more reassuring. Mining is down from 6.9 percent growth in April-December 2010 to a negative 2.7 percent in 2011; Manufacturing (which is three-quarters of the IIP) is down from 9 percent to 3.9 percent, and only electricity is up from 4.6 percent to 9.4 percent. Overall, IIP is down from 8.3 percent last year to 3.6 percent this year in the nine months.

Then why have the stock markets taken wing? Or is it only on a wing and a prayer?

Why has the Sensex gone up 15 percent in five weeks, when the news is getting scarier by the day?

There are three reasons why: money, money, money. Too much money is driving stocks up like crazy, and this situation could continue for a couple of more months, never mind whether the economy is going downhill.

And where’s the money coming from? Europe and America, primarily. But also our own cash hoards.

America is in an election year, and so politicians have every reason to pump up the economy. And the US Fed has played ball by saying that it won’t raise rates all the way to 2014 – unless something extraordinary happens.

As for Europe, sick Europe, the central bank – as if in atonement for past monetary conservatism – has simply opened the spigots of cash. In December 2011, the European Central Bank (ECB) lent banks €489 billion, or about $630 billion) for three years at just 1 percent. Every bank landed up with empty sacks and then used this money to invest in securities that yielded more than 1 percent. The ECB literally gave them a licence to print money, and boy, did they do that?

The ECB’s purpose was to ensure the credit markets did not seize up due to the eurozone crisis. What it has ended up achieving is fattening bank balance-sheets by gifting them short-term profits.

And it is not giving up on this great idea. Later this month, the ECB will be funnelling another €1 trillion ($1,300 billion) to banks, who don’t seem to have enough sacks to carry the loot.

Little wonder, a lot of that free cash is leaking into India – perking up our bulls. Between 1 January and 8 February, foreign institutional investors (FIIs) invested a net Rs 18,529 crore in stocks, and Rs 16,518 crore in debt.

Now you know why the Sensex is up 15 percent in five weeks, when it went down 25 percent in 2011.

Now, you also know why the rupee, which looked like sinking without a trace below Rs 53 to the dollar, is now well under Rs 50.

With the Bank of England also getting into the act (it is pumping £50 billion), the world’s two largest economies – the US and the European Union, plus Britain – are into beggar thy neighbour monetary policies. Japan, of course, has done so for the last 20 years, and still seems to be getting nowhere.

But it is not only central banks that are oozing cash. When the ECB opened its tap, corporates began refinancing old borrowings at lower costs, too. They are making money by arbitraging between lower and higher costs. Our own Reliance has joined the queue. And if the European cash mela holds for a while, Indian companies owing money through foreign currency convertible bonds (FCCBs) and other external loans will manage to refinance their old loans, too.

The big cashboys of UK and US are all rolling in money. Ambrose Evans Pritchard, writing in The Telegraph, says that US corporations are holding $1.73 trillion (Rs 8,563,500 crore) in cash, and British non-financial companies £731 billion (Rs 5,731,000 crore)

India’s top 100 companies (as in the BSE 500) had cash or cash equivalents of Rs 3,30,000 crore  at the end of March last year. This figure could only have risen since then because companies are not investing much, and the profits have swelled in the nine months since then.

Reliance alone reported cash of Rs 97,000 crore in December 2011 (including the balance money that came in from BP for sale of a 30 percent stake in Krishna-Godavari offshore gas). It announced a share buyback costing around Rs 10,500 crore – which it will recoup in less than two quarters.

But more than that, Reliance is still raising money. This week, a Reliance subsidiary in the US announced that it had raised $1 billion in 10-year bonds at 3.45 percent more than US treasury yields.

When a company sitting on $20 billion in cash raises another $1 billion, it offers us a clue on what is really going on.

Companies with cash are trying to make money from money. The chances are corporations worldwide are trying to earn more treasury incomes by investing in assets outside the business – including bonds and stocks – to bump up their earnings in an uncertain global export environment.

The world is awash with money – and this money is what is feeding a part of the stock boom, worldwide and in India.

Now you also know why the real economy is looking different from the financial one.

You can’t argue with money. Ride it while it is buoyant. But you could also be sailing over the Niagara. So don’t put money in stocks that you cannot afford to lose.

My personal prediction is that our market will rise for another few weeks till the budget disappoints us all by being too timid, and falling flat on its face.