Forget “Death By Stereotype”

If you’ve tuned in to pretty much any of the news organizations lately, you’ve heard about how we’re recovering in the United States.

You’ve heard about green shoots. You’ve seen all the newly promising data. You’ve heard a President, Fed Chief and Treasury Secretary trying to convince you about how sturdy the financial ground is.

Indeed, it seems that the world is buying this growth story here in the United States. Right or wrong, that’s what matters at present.

You see, sentiment is a huge driver in the currency markets. How people “feel” about the market actually influences currencies. So, if enough people believe a trend will happen, it tends to happen – at least for a while.

So let’s begin by saying: I’m definitely not fighting the trend here. I’m riding the growth story while it lasts here in the United States.

But I’m keeping my trades on a VERY short leash. I’m also clearing a pathway to the exits just in case reality hits home anytime soon.
The “W” Recovery: Why Reality Hasn’t Sunk In Yet

If I was a speculator, I would be betting on a “W” recovery for the U.S. with a second leg down coming soon. And I tie that to the continuing as well as upcoming crisis in the housing markets.

By the way, my colleague Sean yesterday gave you three currencies to buy for the long-term. I agree with his choices, but like him, I also think there are going to be pullbacks and reversals in the short-term. The next BIG reversal is exactly what I’m talking about here.

Why do I say a reversal is coming? Let’s start with the not so positive data for a moment.

If you believe that we have seen the worst in the housing sector, think again. Remember those pesky adjustable rate mortgages (ARM)? Well, the largest majority of them are up for resets in 2011. Till we are past that hump, no meaningful recovery should be expected. And if we see one, like now, it will most likely not last.
Where I’d Put My Money Instead…

So let’s set the U.S. aside for a moment.

On the other side of the pond, in India the meaningful recovery story just continues to grow. As I have written earlier, the Indian growth story has been tainted by its dominance in the IT and Outsourcing sectors.

Lots of traders have trouble accepting any recovery anywhere else if the U.S. is still suffering. Indeed, many seem to have the “Death by Stereotype” idea. They’re skeptical of any growth story in emerging markets like India because they don’t believe India can grow without the U.S. recovering first.

Let put that idea to rest right now. The internal consumption story in India is well documented. In fact, it’s been India’s saving grace in this global downturn. It has helped India keep its head above the rest of the world as far as growth is concerned, albeit at a lower rate.

Need proof? Just check out some of the data coming out of India…

* The Industrial Production Index (IPI) blasted past what economists expected and grew 7.8% year-over-year in June.
* June IPI growth was the highest since February 2008.
* There were huge increases in the Capital Goods Index (CGI).
* On a yearly basis, the CGI grew by 11.8% year-over-year after three months of contraction.
* Yearly growth in the production of consumer goods was strong at 4% year-over-year with a 15.5% year-over-year increase in consumer durables.

Rain or Shine, This Nation Will Rise

As I have mentioned earlier, India is still heavily dependent on the monsoon (rainy season) for Agriculture, which is an important part of the GDP. And so far, the monsoons have been below average.

However, it seems like the uptick in the industrial activity will likely mitigate the negative impact of poor rains. Several indicators of consumption and investment demand such as the Purchasing Manager’s Index (PMI) and motor vehicle sales have been showing significant upticks for several months now.
No Longer Necessary in India…

All of this economic data in the past few weeks have made me more bullish on India. I am beginning to sense that India’s GDP growth in the next few quarters will blow past the world’s estimate of 6.6% growth for FY 2010.

While this may lag its main rival China’s 8%, I expect Indian GDP growth to come in around 7.5%. Not too shabby! That’s my prediction based on the improved investment outlook in infrastructure and capital goods. Both of these are indicators of laying foundations for an extended and long-term growth story from India.

I also expect tightening interest rates to help slow down the economy and avoid bubble like growth situations.

Unlike the Federal Reserve, which has pledged low interest rates for ‘extended’ periods of time, the Indian Reserve Bank is already signaling that the low interest rate days may be over soon. We may see as much as 200-300 basis points increase in Indian core interest rates in the coming six months. And this will be tremendously positive for the Indian Rupee.