Equity market is
a set of balloons (sector-wise) tied to the bedrock of debt. Debt
should be flowing easily enough for the balloons to distend a bit
more. That is debt should pay from the economy’s cashflows. Debt
can choke on itself and clog the economy if it crosses sustainable
limit and if it is not paid from the economy’s cashflows. Rarely do
analysts believe debt to exist beyond individual balance sheets. But
debt exists everywhere and one needs to knock off the excess above
the sustainable limits against the entirety of market capitalisation.
(If measurement of debt is a problem, banks can be asked to declare
the total debt originated and outstanding against each unlisted /
listed company and within conglomerates against each individual
business. This is a measure that will help banks to become
self-prudential.)
To carry the
argument to the sectors, even consumption is backed by (government
and private) debt although the individual FMCG company balance sheets
and automobile corporate balance sheets are mostly free of debt. The
lenders and the stock market have a right to know the financial
performance of all players in a sector. And they should knock of the
excess debt above sustainable levels against the sector’s
performance. This penalises the sector where the new entrants are
creating the competitive stress by taking on unwarranted debt, and
rightly so. The Hindu Shastras say that individual’s tragedy,
stress and unhappiness has to be shared socially and so it should be
logically carried into the sector’s performance. Then
determination of multiples is a matter of regression. Cannot say what
McKinsey thinks on this kind of valuation. Probably if they would
concur, they would give us adjustment of capital flows in the
economy.
The strangeness
of this theory surfaces when we apply it to the banks. They originate
the debt, and due to competitive pressure of selling debt are most
vulnerable. The central bank should calculate and note the
sustainable level of corporate debt in each sector and not allow
banks to go beyond it. The market cap of housing sector finance
should be adjusted for the excessive mortgage debt, and it is here
that the maximum impact is likely to be found. Currently some people
think that the banks need to be breaking up, but there is no need if
we agree that the exposure can be capped sector wise.
The stock market
has a distant / volatile wealth effect compared to the real estate
for those who can afford to own it. Especially both stock market and
real estate are dependent on the level of debt in the economy. Most
likely the sector will end up having zero market cap. So the listing
of real estate corporates on the stock market affords some bit of
ridicule at the expense of the stock market.
When we read the
theorists of the credit market they are heavily dependent on
statistics and lightly dependent on the macro-prudential framework.
They pretend like the five blind men of Hindoostan feeling an
elephant because they are directly / indirectly paid by the banks
themselves. When the central banks are targeting inflation and
inflation is seen helping loosen/ shrink the millstones of debt, the
fact is that they are know about the macro-prudential theory in
private but do not bring it out in public domain.
The banks have
too much access to data for any non-bank to compete effectively.
Hence the banks have to be banned from the stock market. One with
stricter moral standards can even ask the banks to de-list because
listing of debt originators is tantamount to having your cake and
eating it too.
In developing
countries, governments have there are two liabilities, infrastructure
and pensions. Infrastructure is something that can be mostly done by
the state government and local government provided the population has
an appetite for it. Technically pensions is part of government’s
debt and hence has to be knocked off the total market cap in case it
is above the sustainable level.
No comments:
Post a Comment