A Side-Effect of India-U.S. Tensions

 | Jan 07, 2014 | 6:00 PM EST
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As my short bio here at Real Money states, I deal with macro issues of political, economic and social systems. In this forum, I try to limit my commentary to issues that pertain to the economy and financial markets, but from time to time I consider the political and social issues that are evident in current events.

About three weeks ago, I wrote about being cautious with respect to the viability of Indian equities as an investment vehicle for foreigners, now that political and social tensions between India and the U.S. are rising.

As a separate and distinct concern, the unwinding of the dollar carry trades could cause foreign hot money in India to exit, regardless of the current political and social issues, as I said last week.

The immediate prudent course of action for investors who are interested in India is to hold off and wait to see how these issues play out over the next several months.

However, although the political and social tensions between India and the U.S. have risen, there has been little change in either Indian equity indices or sovereign bond yields as a result, and that is very positive for that country's markets. The lack of a  deeper selloff may indicate that a bottom is near and that investors are now more concerned with the expected positive potential for Indian equities and the economy if the elections this May go as currently anticipated.

The past three years have been brutal for Indian equities though: Big-cap ETFs are down 25% to 50%, and small-caps down as much as two-thirds!

A few ETFs to watch for long-term entry points are the Wisdom Tree India Earnings ETF (EPI) and the Market Vectors India Small Cap ETF (SCIF).

Having said all of that, my primary concern in this column is with the political and social issues being evidenced in the U.S. as a result of the controversy concerning the alleged arrest and strip-search of the Indian diplomat Devyani Khobragade.

About a week ago, someone released a video on the Internet purporting to show the strip-search of Mrs. Khobragade. The video contains two clips of women being abused by police.

Neither of the women shown in the video are Mrs. Khobragade, and the U.S. State Department has called the video a hoax, a fake and a fabrication.

The video does not depict a strip-search of the Indian diplomat, but the video is not a fake.

The two women shown being abused by police in the video are U.S. citizens Ashleigh Davis and Hope Steffey.

Ashleigh Davis, the first woman shown in the video, was arrested for being drunk and disorderly in Florida in 2012 and then held naked from the waist up at a police station by male officers. She has filed a civil suit that is scheduled to be heard later this year.

Hope Steffey, the second woman shown in the video, was arrested in Ohio in 2006, and when she was taken to the station, she was subsequently stripped naked by male police officers. Criminal charges against the police were dropped, but she won a civil suit with damages paid of about $475,000.

The specifics of neither case are germane to this column. But what is important is that the U.S. State Department in its response to the video implies by omission that the contents do not depict real events. More important is that no U.S. media outlet of any kind has yet to point out that the contents of the video, although not of Mrs. Khobragade, are indeed real events.

The U.S. State Department's active intent to misrepresent the situation is unfortunate, but the failure of the private-sector media to make note of this and clarify what actually is in the video is disturbing.

At the signing of the Intermediate Range Nuclear Forces Treaty (INF) in 1987, between the Soviet Union and the U.S., President Ronald Reagan famously quoted an old Russian proverb, "Trust but verify".

Although he was discussing the relationship between countries, it is important to be mindful that the same should be applied by citizens with respect to what their own government tells them. And it applies to investors with respect to what the media tell them.

Even more succinctly, as Karl Marx famously noted, "Question everything". 

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