“When the world is falling apart, nobody's view matters, because nobody knows," says Jamal Mecklai, an ace risk manager.
Mecklai, who is continuously on the lookout for events that may point to a turn in a market cycle, is the Founder and CEO of Mecklai Financial, a consulting company exclusively focused on treasury risk management. With offices at five locations across India, his company delivers customised solutions, backed by its proprietary risk management approach, high-quality market research and robust technology processes.
An alumnus of the Indian Institute of Technology (Mumbai), he had stood first in the all-India entrance exam (1967). He then graduated in chemical engineering (1972). For higher studies, he went to Rice University, Houston, Texas and completed his doctoral research in biomedical engineering (1972-75).
In an insightful interaction with Dominic Rebello and RN Bhaskar, both from the Free Press Journal, Mecklai discusses the current turmoil in the market, his views on the rupee-dollar situation and the taxation system. His advice to investors…
The markets are in turmoil and the global scenario is grim. Your views on commodities, foreign exchange and gold?
Markets are their own creature and trying to assess the direction at any time, let alone once-in-a-lifetime is madness. Let me tell you a story. Way back in October 1987, when the US markets crashed—Black Monday, as they called it. I was, relatively speaking, fresh on the boat; I had started my advisory business the previous year. I had even built something of a following and when the news of the US market crash came in, the phones didn’t stop ringing.
People were asking what would happen to the rupee; and, when I said I didn’t know, they asked what about the dollar. I tried to explain that when you are in a first-time-ever situation, it is impossible for anyone to know what would happen. But they didn’t stop calling.
The pressure from the phones was immense so I went downstairs for a smoke. As I smoked away wondering what the hell was going to happen, the chanawala (seller of peanuts and roasted pulses) on the pavement came across and said, “Sir, please give me Rs 50.” As I had too much on my mind and I shooed him away. Then, after another cigarette, I called him over and asked him, “Dollar upar jaane wala hai ya neeche?” (loosely translated, will the dollar go up or down). He looked at me in utter disbelief, “Saheb mujhe kya pata?” (How would I know?)
I said, “Pachaas rupye chahiye?” (Do you want the fifty rupees?) He nodded and told me something—I don’t even remember what he said. I went upstairs and told all my clients and callers that (the chanawala’s prediction) was what would happen. That was my earliest learning about markets, particularly in the midst of unprecedented events, like we are suffering right now.
When the world is falling apart, nobody's view matters because nobody knows. You understand things, but you can never know the market. Today I am not on media very much because everyone asks the same question what's going to happen? And my standard reply is I don't know.
Your comments on the present situation…
Currently, I feel that there are two forces working. One is the Ukraine-Russia war and the other is inflation and they are related. I may be wrong, but, I think the sort of market impact of the Ukraine invasion is more or less done. The dollar has strengthened and the Euro got very weak, etc., etc. It had almost come to the point where it was threatening parity, but not quite there. And it is sort of just started turning now, my sense is that the dollar strength may have run its course for now. Look at gold, it had gone down to $1815 from $1880. But the other force, inflation is the driver of why the rupee and everything else is going through a bad phase.
So I actually started worrying about inflation over a year ago, or rather 18 months ago. When inflation gets ahead of you, it is virtually impossible to bring it back. I think they are talking about seeing inflation at 7%- 8%. The Fed’s funds rate is 3%. With this, you start negative interest rates and negative real rates. So, I think it's going to be a long haul. And I think that's what markets are spooked by. I think markets will stop falling when they believe that the Fed has acknowledged it. And for the Fed to acknowledge this is an impossible task.
Another important question is when will the market turn? Nobody knows. Markets, of course, are amoral and ultimately dance to their own tune, and all prices move in cycles albeit with varying (and indeterminate) frequencies and amplitudes. A classic market cliché is that the market will turn only when there is nobody left who believes it is going to stop falling. But now the markets are falling and then recovering indicating that there are some people who are still buying the dips. So as long as there are people in there who still think that there's it can go up from now the market is going to be like this. It is the market’s job to make the smartest people look like fools. So don't ever say anything about the market.
So, it's a tough situation and I think that India is better off than many, partly because we have our domestic investors who are sitting there.
Critical issues?
The real and critical issues are more importantly about distribution. A few months ago, Elizabeth Warren and her friends were making noise about, “We got to tax assets.” I have been saying this for about two years. India is a different story altogether. Suppose you change fiscal policy completely, where I will have zero tax on any kind of income, salaries, consulting fees and no corporate tax then that would give a huge boost to growth.
The other problem is that some $12 trillion to $15 trillion of capital is earning negative interest rates. So, it means that there's too much capital. And the reason for that is because, since 1980 capital has not been properly taxed. You just have to balance it. India is a small fragment of the global cycle.
My wife has an art gallery and recently at art auctions people were buying high-value paintings. People have so much money to burn and yet there are people who are really suffering. Ultimately, the resolution has to come through politics.
Do you think that alternative forms of investment have become attractive due to the market turmoil? Cryptocurrencies or gold.
For years people get into this thing on gold. It is not a big enough market. Crypto came on and I tried to figure it out, but I couldn't hit the ball. I can't understand it, so leave me out... But I think what has happened really, if you look over the last 10-15 years, there is so much private money. The private equity guys, venture capitalists and this because there were no returns. There is a lot of private money out there. I think that these sorts of assets need to be taxed.
So you can't predict at the moment where exactly which class of assets is going to go.
I have been around too long and too often heard about the demise of the dollar. I don't buy it. America is still big and strong and there is something about it. It is still the driver of capital. I don't think the dollar is going to weaken substantially. In terms of assets, I feel they are all overheated. Beyond the fear, there is a real collapse. While each crisis has its own genesis, we need to pray that this one is not as terrible as the last two— in 2008, the Dow fell by more than 50% and it took over 4 years for the market to reach its earlier peak; in 2020 (Covid), the Dow fell by over a third, but it recovered its earlier peak in under a year. Basically, unless you are flush with funds you shouldn't be close to the market as it is not the place to go now.
In other words, we're going to be in uncertain territory for some time?
Yes. I don't think there's any doubt. I think that's the one thing you can be sure of. What is interesting to me is that volatility is not through the roof yet and there is a huge amount of uncertainty. I wonder what the markets are telling you. They are hinting at something, but I don't know what.
