Nifty PE crosses 24|A statistically informed entry-exit model!


While talking about intergenerational wealth transfer, we should look at real interest rates and not the nominal one. The real interest rate is meaningfully +ve in India after a long time. This is what Raghuram Rajan used to explain in his Dosa Economics illustration (misguided argument, in my opinion). I think that the real interest rates in India have been contrary to that in the US during the past decade. So, it is not clear to me that the government of India has been effecting an intergenerational wealth transfer.
Also, it does not look very probable that interest rates will decline in India or in the developed economies.

(Yogesh Sane) #750

True. But real interest rate calculation is based on CPI, calculation of which is sketchy. IMO, CPI is understated so actual inflation is higher than headline number and actual real interest is lower than stated number.

Even if we assume real interest rates are +ve, they are trending lower and today’s real interest rates are much lower than what existed a decade ago and significantly lower than the levels before liberalization in 1991. High real interest rate is preventing investments (because that’s what borrowers pay and savers earn) which in turn limits growth. Government has identified this and is pushing RBI to lower rates. RBI is sticking to its inflation targeting policy for now.

Interest rates are actually ticking higher in India and Fed also likely to hike rates higher in 2018. So nominal rates have bottomed out in US and developed economies. Rates are just coming off near zero levels. but in India, real interests rates could continue to drop even if nominal rates rise (or stop falling).

My observation is US Fed was able to avert a real crisis from escalating into a depression by transferring wealth from savers to borrowers (and except for rich and financially savvy, no one even noticed it until it was too late). After looking at Fed’s success, Indian government appears to be taking a leaf out of Fed’s playbook to cause some similar wealth transfer to generate demand, jobs and boost GDP. Such wealth transfer is much easier and effective than subsidies and other redistribution programs.

(sarangg) #751

You’re right - the options expired worthless. However, my stocks have done very well, and I have slept like a baby even with 100% long exposure to the market. Since September, I’m up nearly ~18%, including the capital lost on the hedges.

Risk means that more things can happen than will happen :slight_smile:

I have rolled over to the December '18 puts at a 10,000 strike for Rs. 204.

(vaibhav) #752

Two questions Yogesh

  1. Do you think foreigners would invest in India when it has negative real rates?
  2. Don’t you think negative rates (not negative real rates) in developed world is a bad idea?

(paraa) #753

The existence of the thread has been modelled on data for 10 year period of 1999-2009.With current elevated levels and if it stays for a longer time frame(till around 2019), there would be a paradigm shift in base valuations especially since the last 8-9 years have not seen any real crash(like the dot com or 2008-2009)

(Yogesh Sane) #754

Yes, if they have even lower interest rates. Foreigners also face exchange rate risk something that domestic investors do not face. There is a theory in economics called real interest rate parity which states that real interest rates around the world should be same over long periods of time. Of course there are some assumptions in this theory that do not always hold e.g. capital controls, taxes etc but what the theory says is if real interest rates are different between two countries then exchange rate between their currencies is expected to adjust to bridge the gap.

No. Interest rates are negative because there is more demand than supply of bonds thus bonds are priced higher than their par value thus rates are negative. Its bad for investors in those countries as they earn negative rates but good for developing countries as negative rates causes capital to flow to countries like India where real interest rates are higher (on a relative basis). Which means foreigners provide capital to fund our infrastructure which meets our funding gap as our savings are not enough to meet our investment demand (aka current account deficit).

(vaibhav) #755

specifically, I mean to ask on other countries’ equivalent of what we in India call as ‘reverse repo rate’. Suppose there is not much credit demand and banks park account holders’ money at central bank at negative reverse repo rate. How would the public react to their bank balance eroding just like that?

(newone) #756

Does anyone feel there is "irrational exuberance’ in the market now?


USA has contracted about 200 tn $ as future payments (GDP of ~17 tn $), largely to baby boomers (Kotlikoff’s book: The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy). This necessitates an intergenerational wealth transfer. Same with large parts of Europe, where high tax rates have already made them welfare states. Japan has been there for quite some time now. Raghuram Rajan used to say that demography is like gravity, you can’t escape it. Indian demography is positive. 2% of our GDP growth each year is on account of increase in productive hours. Also, we have we not committed to large benefit programs to the older generation. I don’t think that India needs an intergenerational wealth transfer and wouldn’t worry about it. Looking at pointers like India before 1991 where inflation was extremely high may not be helpful either.

(Yogesh Sane) #758

If reverse repo rate (or it’s equivalent) becomes negative, banks will be offering even lower rates to its depositors to maintain its spread. People will have a choice of keeping cash under the mattress (it will earn zero but better than -ve) or go up the risk ladder in search of high yields.

(vaibhav) #759

What I am suggesting is, they won’t resort to negative interest rates because general public will resist it.

Please tell what is the need for central banks to set rates? Let everything be market determined. But governments want some say (via central banks). I don’t think public pressure would let interest rates go negative (or meaningfully negative anyways).

(Yogesh Sane) #760

Central bank set rates to achieve balance between inflation and economic growth. High rates reduce inflation but it also reduces growth, low rates encourage growth but it also cause high inflation. By timing the rate changes a central bank hopes to achieve the delicate balance between inflation and growth. It does that by studying economic indicators like govt deficit, industrial production and utilization, growth and inflation etc to make the decision.

Markets can sometimes fail and produce disasters like great depression, great recession, booms and busts etc. Central banks tried this model also (of letting markets determine the rates or laissez faire economics). In fact, with the advent of interest rate futures etc, market is determining future interest rates and central banks try not to surprise the markets by setting the rates close to what the futures market has already priced in. Central banks use their commentary to influence the futures market and only in exceptional circumstances do central banks intervene and surprise the markets. So to a good extend central banks do let markets decide rates in normal circumstances. Moreover, central banks only set the overnight rates. Markets set the medium and long term rates. Here again, only on exceptional cases, central banks buy/sell long dated securities to influence long term rates (quantitative easing).

(Savishesh) #761

Positive demography is another misconception. If the young population is not gainfully employed the so called positive demography will turn against it. Somehow we are blinded with one sided view. Our education system needs complete overhaul to have people who are ready to be absorbed by industry and not like being trained by industry to make them useful.

(vaibhav) #762

Negative real rates and negative interest rates are different things.

Savers among General public will feel the heat when real rates are negative. But governments/central banks can/will absorb that pressure.

But public resistance would be too much against negative interest rates (even in a deflationary environment). Also, u would indirectly be promoting people to store paper money rather than digital money…

(Amit Jain) #763

Pre-2017 there were discussions of how PE 11 to 13 was an investors dream zone, which was not be expected or planned for, but if happens one would beg borrow or steal to invest. Once in a decade sort of a thing.

When it happened in 2008-09 and almost in 2013, discussions on forums and friends revolved around how PE is sure to go lower, due to poor industrial numbers and banking NPA. The news were so bad that any person investing in such a market was catching a falling knife.

This was not too long ago. But, now it is exactly the opposite. Discussion revolve around justifying how PE 27 is not only OK, but a bargain. Talks are doing rounds of how the Market and EPS are sure to go only one way and that is up. And any person not investing now is missing the proverbial bus. (Opposite of the falling knife).

This makes me think, can the core fundamentals of an economy of the largest democracy of the world, 1.2 Billion citizens, take a complete U-Turn in 2 years?

I am reading the same papers and visiting the same websites, and talking to the same demography of people. My sources have not change. But, the point of view is a stark contrast. Also, more number of people are now participating in meets and forums.

This makes me think, whether “They” are making us think what they want us to think?

(bharat.jain) #764

I have similar fallacies. Sometimes I think it’s easier to invest looking at choghadiya/almanac then reading forums etc. Just kidding. I think one of the key to investing is predicting cycles or identify businesses that have long term potential. This thread is about identify cycles based on PE ratio.


You have summed up the market behavior very well. And the participants of this forum are relatively better educated investors.

Disc. no offence to anyone, after all we are still humans.

(Kumar Saurabh) #766

I don’t think anyone is calling current market (market means overall ) a bargain, at least this group. I think more or less, we all agree that some correction is healthy. Quantum of correction is the core area of debate ( either time wise or movement wise ) which would make a generic market participation healthy .

(Amit Jain) #767

Current PE is 27, and Nifty 10500…
at PE 20 Nifty becomes 7800 (around 2017 lows)
at PE 17, 6600 (around 2016 lows)
at PE 15, 5800 (around 2014 lows)

Participants here don’t even consider PE 20 a possibility in 2018. If they do, then none has made a post about it. Lets just leave PE 17 and 15 aside for a discussion in another season.

(Kumar Saurabh) #768

Two suggestions

  1. There was discussion around wrongness of 27 PE due to standalone and consolidated data . So, do check if 27 is correct
  2. Last few quarters,due to demonetization and GST , a lower base has been created, so one must standardize the impact with reasonable assumptions .

Then , I think looking at numbers would be better and then comes various points highlighted by both parties.also I would suggest to take a forward looking 12 months PE with -10 percent to plus 10 percent EPS growth because when shift of underpefornance happens , TTM analysis creates a mirage. So, better to consider both under performance and performance scenarios with future 12 months view.

This quarter we may see some out of box results which may be pure low base effect of last year yoy…