Everything is a cycle – Are we there yet?
It was June 2005, and Nifty had made a new high, crossing the 2000 peak after 5 years. Jim Rogers' book ‘Hot Commodities’ was a bestseller. Commodity prices were rallying.
I was managing a long-short fund with a UK-based hedge fund manager. I wanted to participate in this trend. I went to meet the promoter-CEO of a small steel company to evaluate whether we should be buying the stock.
He started the meeting by asking me a question. He said, “Dhiraj, all fund managers are sounding excited about the market on business channels this morning, after the Nifty has more than doubled! Where were you people 2 years ago?” I replied politely, “I can explain if you can tell me, why you are expanding capacity today when steel prices have already doubled from lows seen 2 years ago. Shouldn’t you have expanded then, and sold steel today and made profits”.
The answer for both is the same.
It is the flow of money. The business cycle theory developed by the Austrian school of economics believes all economic cycles are caused by money supply. But that is a discussion for another time.
When steel prices were 300$/T in 2002 no one wanted to finance a steel project. At 700$/T in 2005, funding was available. Equity funds were seeing inflows in 2005 vs outflows in 2002-03!
Business cycles and markets are not linear — but like a wave — a bit like the sine curve! As Howard Marks says, “Cycles’ clout is heightened by the inability of the investors to remember the past.”
One of the best bull cycles India has seen, was over 2002-2007.
