Inflation has just spoiled the party

"It has always been said that money talks, but I rather think it is beginning to talk too loudly."
James Agate

We all have got fat and lazy and rich. We all want to get steak every day for lunch, and eat foie grass with Puligny-Montrachet (never mind if the two don't mix) every evening. We have been getting fabulous raises (commanding, through the sheer effortlessness of having made people money, buying ICICI and BHEL). We have got rich getting an easy 20 per cent carry, keeping Infosys as our top holding (as a savvy hedge fund manager recently told us). The bull market has made us look sharp. We are the New India.

Trouble is: we also have got a trifle soft in the head - and in the body. We have stopped analysing and have thumped the table on real estate IPOs - not taking into account its interest rate sensitivity. We have stopped looking at inflation. We remain wedded to the notion that interest rates will remain stable. The same clutch of commercial bank chiefs, who four months back were swimming in a sea of easy money, are now holding out SOS placards.

We have stopped looking at corporate balance sheets to see if grandiose acquisitions of the past have been made to pay for themselves, before newer deals are attempted.

We have convinced ourselves that India will become the promised land of terrific fiscal and monetary policy-making: Super high growth with little or no inflation.

Trouble is: We are Nuts. And we are in trouble

Rates are headed up significantly, as the government clamps down on liquidity to curb inflation. General elections are about two years away, and inflation is a non-negotiable issue with voters.

Banks will hurt big time. It's time to short them, state-run banks anyway. Cement and capital goods are beginning to develop wrinkles around the eyes, and Botox is bad in the long term. Let them age gracefully. Let's dump the old set: cement and capital goods and banks. They have outdone themselves, done us proud, made us more money (than we are deserving of). Let's give them a break. Construction and real estate remain shorts.

We have remained concerned about market breadth...or the lack of it. The last two weeks have shown us market breadth on The First Global Brea(d)thalyser (FG-BA)(tm), which is the same as the market breadth between January 11, 2000 to February 20, 2000. May or may not mean much, but ignore this only your peril.

This is it, guys. Does it become like May 2006? The signs are ominous. Long bets? IT services, wireless, refiners, media, Reliance (a sector in its own right!), power utilities, select consumers.

For now, the quote below is perhaps most relevant: The safest way to double your money is to fold it over once and put it in your pocket.