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Interest Rates Up, Markets Down, Crude Down


So RBI’s hiked interest rates up to 9%. This almost surely means a hike in auto, home loan and personal loans – and probably, an increase in default rates. RBI has made it pretty clear that they don’t want credit to grow over 17% this year. This is bad for banks; and also bad for anyone who wants big credit. Retail will get hit the worst – property prices are going to drop further due to lack of loans now, and so will other assets that require borrowing (stock market financing, personal loans, auto). The RBI is determined to break the back of inflation – too late and perhaps the worst way possible – by increasing rates to the point when inflation has no choice but to come back to the sub 6% levels.

A good development is that crude is down over 2.7% as I speak, to $121 per barrel. Heck, what else would happen, after reports that people in the US are driving far lesser, and overall Chinese and Indian slowdowns post Olympics and our interest rate hikes respectively.

Crude must now influence inflation positively, but not in the short term. Politics may ensure easing of fuel prices sometime in December or Jan (the parties are likely to want the best memory for their voters when elections are due in May 09). And inflation is much harder to control when it runs away as it has – and will require further and harder rate increases. So brace yourself for more – but not much more.

Markets have taken it on the chin – down 3% or so. Obviously the biggest to go were banks, auto and real estate.

Our systems took us short four banks – practically a second after the RBI policy announcement. We don’t ask why – I found out after the trades went through that the rate hike was 50 bps and people were surprised. (Why? Wasn’t it expected? I would not be surprised if they decided to hike another 50 bps tomorrow, because 11% is bloody ridiculous)

Very interesting day – we won some, we lost some; and now we’re up 6% over two months. It’s been incredibly educating – learning how to deal with drawdowns, how you can model risk and how models are phenomenally stupid to rely on, how it can emotionally drain you unless you become a monkey and don’t care. It’s difficult not to care about money. It’s crazy to see a system that works very well on paper be completely unexecutable in reality – we’ve discarded so many fabulous systems that way! But the results seem good. One system has made an unleveraged return of 21% since June 9, trading purely intra-day. Another “failed” i.e. couldn’t handle the volatility and lost us a fair bit. A third one is struggling but staying above water.
In a few days we will have one more system online; and hopefully, we’ll have a good track record to demonstrate at some point.

Ok, that was me rambling. Predictions for tomorrow: “Hahahaha”. (I will laugh tomorrow. At least that much I can predict, guaranteed.)


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