Sputnik'srise,GoldfallandChesterton'sFence

The markets are a constant struggle between hope and despair. At one corner is the hope trade fuelled by the rise of Sputnik. No, it is not a rocket carrying some human in space but it is the name of the Covid vaccine which the Russian government has approved for wide public use. This makes it the first vaccine available for the general public. The efficacy of the vaccine will be tested in coming months but the markets would start factoring in the possibility that other vaccine efforts will come to fruition earlier rather than later. In a curious development, Philippines President Robert Duterte has offered to be injected with the vaccine to show that it is safe.

On the other side are the still unresolved differences between the Republicans and Democrats which are leading to a delay in the second pandemic relief package for the US public. President Trump had signed executive orders on Saturday to move ahead with some measures of relief but side stepping the Congress in such a measure is fraught with legal ramifications.

As for the markets, the Dow Jones ended 104 points in the red at yesterday’s close. The US treasuries went up with 10 year bond trading at 0.64% currently. But the big news was from gold which suffered its biggest daily fall in seven years to trade at 1890$/oz currently. It was trading around 2040$/oz on Monday. Now the fall in gold can be seen from two perspectives. One can relate it to a profit booking after a relentless rise and the other can be that the safe haven appeal is now dimmed with a vaccine becoming available. To us the latter reading is a bit premature as the primary argument of rise in fiat money creation still continues unabated.

Domestically, yesterday we saw the release of Industrial Production data for the month of June which showed a negative 16% YOY. But the number was better than the consensus estimate of -21% on Bloomberg. Among the various components, only the consumer non-durable goods showed a 14% rise YOY.

Today we will see the release of CPI inflation for July. Expectation is around 6.27%. Last week when we had made arguments regarding the jettisoning of the inflation targeting regime, one reader called back and introduced us to the concept “Chesterton Fence”. The concept relates to a second order thinking tool which says that you should not remove any regulation unless you are very sure of its origins or why it is there in the first place. The originator of the heuristic author GK Chesterton writes that fences don’t grow by themselves - someone at some point of time in the past has made the effort to construct it. That reason might not be visible or relevant right now, but if we remove that fence without knowing that reason, it could lead to unintended consequences. Basically the reader exhorted us to study the reasoning for the inflation targeting regime in greater detail before giving a war cry for its abandonment.

The 10 year bond GS 5.79 2030 trades at 5.92 currently and rupee at 74.80.