Should we be optimistic or alarmed?

The Dow Jones index plunged by 531 points yesterday, the biggest fall since 2011. Investors are worried about the Chinese economy, a steep fall in commodity prices, especially oil, and uncertainty about whether the Federal Reserve will raise interest rate in September. Markets hate uncertainty, hence the fall. We have the advantage of ignorance, unlike fund managers and brokers, who study markets 24/7. So, we predict that the Fed will raise interest rate by 25 basis points to keep right wing Republicans off its back, although the leading Republican candidate, Donald Trump is into real estate and may prefer rates to remain at 0.25% for as long as possible. However, the forward guidance by the Fed will promise no more rises till well into next year to calm stock and currency markets. Experts predict that commodity prices will remain suppressed for sometime to come. Rapid global economic growth, fueled by very low interest rates, and supply disruptions due to various wars following 9/11 resulted in a boom in commodity prices. These pressures have now largely receded and the Iran nuclear deal will allow Iran to increase its oil production. No one knows why OPEC is pumping oil while prices keep dropping. It maybe nothing to do with the US or Russia. Saudi Arabia is a bitter enemy of Iran and bringing down oil prices is one way of keeping economic pressure on Iran. What about China? A Chinese thinks that the devaluation of the yuan was a courageous move designed to align the currency with the market rate. China wants the yuan to become a part of the Special Drawing Rights of the IMF so the devaluation was a move in the right direction. Not so, say the critics. Growth in China was due to massive investments, fueled by debts, which are giving less returns so China has to shift its economy to consumption, which will take time. Meanwhile it tried to reduce debts of public sector units by encouraging people to invest in A shares with borrowed money. When that bubble popped the government panicked, just as it did when the yuan fell more than it bargained for. Growth in China is much less than 7%, fiscal deficit is 10% of GDP and debt is 300% of the GDP. Monetary policies cannot work any more so devaluing the currency is the only hope of stimulating economic growth by increasing exports. Slowing growth in China means less demand for commodities so prices are falling. We should be dancing in India. Low commodity prices reduce cost for our companies and bring down inflation. The Finance Minister never stops pushing the RBI to reduce interest rate. Already the Sensex and the rupee have fallen and reducing interest rate will cause the rupee to fall further. Foreign investors will flee and the Sensex and the rupee will collapse. The good thing is that China has a long way to fall whereas we are already near the bottom.