Technology, Venture Capital, Private Equity

Like everyone else in the finance world (and actually elsewhere as well), I have been watching with obvious interest, the unfolding of events in the past few weeks. And needless to say, they have been quite discomforting. While I don’t have anything particularly positive or negative to say about the actions that the US Fed or other central bankers have been undertaking to mitigate the crisis (most of them were actually Hobson’s choices), I do however feel that this may be a case of postponing rather than solving the issues unless we are favored with some generous doses of luck.
Ever since the financial crisis began to unfurl, a few things have been happening. To begin with, there has been a flight of capital to safe assets, which has squeezed out all liquidity and credit in the system. This has led to a bizzare situation where from the threat of inflation a few weeks ago, the US is now staring at a sudden deflation in the economy. So, what has the fed done? – it has started pumping up money supply and inflating the economy to maintain the liquidity and keep the economic wheels turning. But there are a few things which will really work against this strategy in the long run.
First is the overhang of credit that the US carries from the past. The credit expansion in the recent past has been unprecedented and the total estimated debt in the US, which includes national and private debt is $53 trillion (thats nearly four times its GDP). With all the bad debts that the financial institutions are burdened with and with economic prospects looking dimmer and not brighter (which in turn will affect the repayment capacity of borrowers), banks and financial institutions are not going to start lending in a hurry. So, the credit unwinding process would be a long and gradual one and its not clear how the central banks can continue to shore up liquidity till then.
Second, the record capital account deficits that the US has been running already put the greenback on a weak turf and unleashing ever increasing amounts of dollars will most likely cause a precipitous drop in value of the dollar (both against other currencies and/or intrinsically) sooner or later. So, it is possible that we could see a sudden and steep rise in inflation at some point in time.
And finally, we have the worldwide commodity crunch and the ever increasing demand for resources that we are witnessing, which puts immense pressure on its prices. I realize that there have been various analyses floated on this topic, and I don’t claim to have researched this topic to any degree of rigour, but from all the reading I have done so far, its clear that the absolute demand for resources is growing at a far greater pace than the matching supply. This to me is really what could be the steepest hurdle in any path to recovery. If this were not the case the monetary measures that the central banks have been undertaking could have aided the healing process in which with increased liquidity and falling prices, demand would shore up and economy brought back on track. However, with the large nations/populations in the developing world (China, India, Middle East) consuming ever increasing amounts of resources, this process may not follow the same pattern that it has in the past, when the predominant consumers were only to be found in the developed world.
Therefore, I am not so convinced that the long term equities story still remains in tact (be it in India or elsewhere) and that, with every dip we should be buying equities. In fact, I’ll say that in the medium term, on account of the above mentioned factors, the underlying story for commodities is what looks extremely strong and if I were a hedge fund manager today, thats where I’d be putting my money especially in case there are dips in their prices. The only things that could impact that reasoning would be – technological advances like clean energy etc, which would ease the demand for resources or, massive discoveries of new sources of resources. Else, in the medium term (i.e. 5 year horizon) my recommendation would be – short equities & long commodities.