Market old-timers have a saying—When the Fed brakes, someone goes through the window. Large rate hikes by the US Federal Reserve have historically caused some indebted emerging market, a reckless corporate or a Ponzi asset class to go belly-up. As Bertie settled into the well-worn chair at his Fat Cats Club watching the S&P climb to a new high, he recollected that line.
While searching for the waiter to refill his bowl of peanuts, he saw the grey-haired market doyen sitting quietly at the bar. Bertie walked over, did a reverential namaste and asked the question that was bothering him. “Until last week's cut, this was the steepest hike in history and absolutely no one goes through the window. How’s that?” The old fox slowly swivelled his bar stool, looked at Bertie, then at the TV screen and smiled. “Come, sit,” he said.
For a brief moment, Bertie thought about fetching the now replenished bowl of free peanuts but then remembered that the man he was speaking to was a billionaire. He decided to curb his middle-class instinct.
“This time it’s different,” the fox said. “You know who has been the most reckless borrower this time?” Bertie sensed that the question was rhetorical. “It’s the US government. Not corporates. Not emerging markets. And a close number two are private market funds—both credit and equity.”
“For now,” he paused for effect as if underlining those two words. “No one can imagine the US Government going through the window. And the private boys have enough ever-greening tricks up their sleeve to never let you know their true asset values.” Bertie nodded and looked at the screen again. “Enjoy the new high Bert but dance close to the door.”
There was a time when Bertie read the newspaper in his commute. Thanks to his newly acquired reading glasses and bumpy Mumbai roads, that habit has been abandoned. Which means Bertie now reads billboards as a pastime. With election season in full swing in Maharashtra, Bertie noticed that political advertisements have almost monopolised the billboard real estate.
Most hoardings proudly tout the welfare schemes that the government has launched in the past two years. Monthly transfers for beloved sisters, free pilgrimages for the elderly, free bus travel for senior citizens—the list goes on. Laudable as they seem, Bertie wondered about how all of this is being funded.
Thankfully, Bertie can read the newspaper once he is on terra firma of his office. He caught sight of a news piece reporting that the fiscal deficit for the state was likely to well exceed the 3% limit this year. In fact, the state finance ministry was already alarmed about this.
Bertie is sensing the re-emergence of competitive populism amongst states. Earlier the one-upmanship was about capital commitments at investment summits but now it seems about who loves their sister more. Bertie wonders if the investment-consumption pendulum has started to move the other way.
Many years ago, when Bertie was an articled clerk at a large audit firm, he used to toggle between Bombay House and Nanavati Mahalaya; the two nerve centres of the sprawling Tata empire. Ferrying audit files between these two buildings was an unwritten part of his job description. Late one evening, files tucked under his arm, an impatient Bertie was waiting for the elevator. When the door opened, the elevator had a single occupant; a tall, distinguished gentleman whose family name was written in big letters on the files that Bertie was carrying.
A young Bertie hesitated but the gentleman said “Please” as he held open the doors. Bertie stepped in and mumbled some combination of “Thank you” and “Good evening”. The gentleman smiled looking at the files and asked “Audit?”. Bertie nodded. “Are you a CA already?” he asked, possibly because of Bertie’s cherubic face.
“No sir,” said Bertie. “I take the finals in six months.” The elevator arrived on the ground floor but the gentleman did not dash off to his waiting car. He walked with Bertie to the famous steps of Bombay House and stopped for a second.
“Good luck, young man” Mr. Tata had said with a handshake. Bertie was young then but old enough to know the difference between a social pleasantry and a genuine good wish. He will always remember the warm glow of that chance encounter. May the great man rest in peace.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
