Sunday, September 6, 2009

It’s all a matter of letters – U,V or W

It’s all a matter of letters – U,V or W!

How these letters – U,V, W or L are now part and parcel of any discussion on local and global economy now a days that one gets convinced and at times confused on the economic and financial implication of these English letters, which we learnt in our nursery days!!
There are numerous discussions and view points as to which of these letters will be a reality that future will only tell, but it still remains a mystery at this moment for us all.

The other dimension to this is that different countries and regions will experience and embrace these simple English alphabets of ‘U’, ‘W’, or ‘V’. For the financial and economic fraternity, this is of utmost importance, as to when and which countries of the world will go which way.

There is always a perception and a reality which is bound to happen, sometime in the next 2-3 quarters. The stock markets across the globe are betting on the letter ‘V’, and the price movements in the last 3-4 months bears testimony to that fact. The Indian markets are up almost 70% this year and the US markets are also up almost 50%. The markets seem to believe that the economic revival will be pretty steep and are pricing this to perfection. Historically it can be said with relative certainty, that anything priced to perfection on the future economic fundamentals and related assumption, runs the risk of a steep downturn from price perspective surely.

From the global standpoint, there is a liquidity flood that has been pushed by all the Central Banks and this is supporting the economies currently. It will be unfortunate, if we discover in hindsight that all it did was support stock and commodity markets, rather than supporting the needy people who require the most. It is surely supporting the commodity universe , stocks and real estate, but it remains to be seen how durable will be the economic support, which is the basic reason behind trillions of dollars thrown to the system.

From the Indian context the story line is the same as what is globally from Equity market perspective. We have our poor monsoon which is more of a localized reason in the global context of liquidity. As agriculture forms the back bone of our economy, from social perspective more and economic perspective less on a relative basis, it may not bring down the GDP growth rate much more. I guess we better leave the GDP growth rate discussion and surmise to the RBI and the politicians.

But what I find disturbing, purely from social context is that a large part of the population will be thoroughly exposed to miseries due to the monsoon failure and we will have ‘global’ fund managers making a mere mockery of the situation, in terms of how it has in terms of certain low % impact on the GDP growth. I guess the ground reality will be totally different.
The same applies to ‘inflation’ numbers, which is negative on the wholesale price index and double digit at retail price level. The most unfortunate part is that food inflation is at all time high, and this impacts the poor much more than the rich. How true was the saying – “Lies, damn lies and Statistics”

Coming back to the alphabets, which is of great interest across the world as regards the economic recovery part, a few hard facts needs to be understood. The US consume $9.7 trillion dollars of goods and services in 2008, compared to about $ 3 trillion of India and China combined. The US is in no position to grow currently, and if that is true then it will be really be almost a miracle if the saviors of the world – India and China can offset this. Going by the sheer figures it is a tall order for sure. The other big blocks of EU and Japan also are not in a position to negate the huge consumption shortfall of US.

I do not want to surmise as to which letter will be reality. The equity markets are clear in their verdict which is “V”, some of the economists are predicting ‘ U’ and ‘W’. As for me, I have a liking for ‘W’. The reason for my liking is just a couple of data – large unemployment in US and across the globe and secondly the Central Banks do not have the luxury to reduce the interest rates below zero now. So unemployment and inflation risks can kill the fragile recovery and we may again have an economic downturn lurking in the corner.

Sunday, January 25, 2009

Obama Mania

At last we have got a new American president who understands the issues and problems. The whole world is looking at him, as a panacea for all the financial excesses done for years!!
But Obama, is a person who is cut and dried for such a herculean job. He has pin pointed the exact problems of US, namely the housing market, auto and the health sector which is also in shambles. He understands the problems of the 'average' man, and is not only focussed on Wall Street.
But he can do, only as much as one can do humanly.... On monetary side, the interest rates are already made zero by Bush Administration, so he does not have much to do anyways!!
He only has the famous fiscal packages which reminds of the packages we typically have of a war ravaged country like Japan, and Germany after World War II. It only talks of one thing which is uppermost in his mind.. savings jobs by giving employment to build infrastructure in US!!
Housing and credit will fall in place if jobs are saved.
But one more thing I like is his emphasis on clean energy. There is going to be huge investment there and it will be good for the globe. But think about it in a political way.. if US has abundant clean energy in the years to come, they do not have to depend on Saudis and OPEC for oil!!! It will break the domination of Gulf countries.
The stone age did not end due to lack on stones, so may be the case with conventional fuels. Think about it, it can be a masterstoke for all future times.
Job creation and outsourcing does not go hand in hand. So the whole model, that India may gain out of US recession in the outsourcing world, seems to be flawed.
Two more things which comes out clearly for the next few years is that the world will have more and more regulations ( finanacial and otherwise) and the other is US will be be more protectionist than it has ever been.
Hope I am wrong in the latter, as that will be bad news for India and China.

Saturday, November 22, 2008

Bailout Mania

It has been quite sometime, since I last wrote and a lot has happened since then in the financial markets. Oil fallen by 70%, Dow has hit 5 year low, Indian market has reached 8000 levels, Obama is now the President elect.

There are a couple of things, which I thought is getting the maximum attention, at least in the media recently. One is the daily talk on interest rates and the other is the bailout packages. I think the latter has become more of a rhetoric and is becoming increasingly fashionable now a days. US was the first to start the 'package mania' and as usual the whole world followed it. Our FM will soon become an outcaste in the global scenerio, if we also do not have a 'package' soon.
The problem lies not on the package but its clarity in direction and implementation. After the US package was announced, the Dow still hit it's low and markets are getting from bad to worse.

The problem I see with all these bailout packages across the globe, is that it primarily focuses on financial institutions and banks, and not on the real economy. Example is that US bailout was meant to help the housing sector, by buying the problem mortgages, so that banking capital gets freed up, and they are able to extend credit to the common man. But in reality what happened was that the Fed ended up buying equity of these banks!! So instead of doing what was intended, it landed up having more ownership of banks, in this falling market conditions. What a waste of money to help certain banks once again.

The other thing we see in the media is the hype that if interest rates comes down, demand for housing and cars will shoot up. What a wrong conclusion !! Demand is driven out of economic fundermentals, capacity shortages, increasing income. Neither of these are prevelant now. Interest rates are only a catalyst to growth and cannot be the only factor.
The need of the hour is incresed government spending and infrastructure project spending. This will increase demand for steel, cement, labour. Rest will follow.

The problem is that State govt in india is bankrupt and all depends on Govt of India for this funding.

Given the forthcoming elections, the Govt. will hopefully focus on increased spending to improve the growth...Let's wait and watch!

Wednesday, September 17, 2008

Nobody is too big to fail ( NTBF)!!!

The world financial market has undergone huge turbulence during the last few days... the biggest names of Investment banking- Lehman and ML exists no more.. The biggest insurance Company in the world AIG, has been nationalised for all practical purpose.. it is an institution with $ 1 trillion in assets and is one of the largest financial institutions in the world. So institutions which grew and and prospered for centuries had failed.. if we take the India equivalent it is something like LIC and SBI failing.

This brings out the moot question..what is the sort of regulation, risk management they have in the US? They are worse than any third world nation in terms of regulation.. US, the biggest economy and the most developed nation, has the control mechanism, which is shameful, to say the least. How can AAA rated papers by S&P, Moody turn into junk overnight? There will never be any answers.
I guess entire financial community is to be blamed - brokers, banks, rating agencies. The Dow is in bear market zone, which will have a huge impact on the real economy. India will also suffer, without any fault. The US Financials have successfully put the entire world at risk. The 1929 Great Depression started with the Wall Street crash.. This current mess will lead to job losses, and economic depression.
Hopefully, India will be able to avert the depression. But one can never say, as history shows that Dow levels and depression are greatly interlinked.

Thursday, September 11, 2008

Greed and Fear

  1. Back after a long hiatus.....
    The world has changed in the last quarter itself. Oil is back to sub $100 again, gold is back to 12 month's low, the commodity cycle is ending.
    Equity as an asset class, has underperformed during this period. Dow is close to bear market territory.
    The big boys of finance - Lehman Brothers, Freddie and Fannie have failed. It just goes to prove that no institution, how big and powerful it may be, is invincible.
    So greed is the cause of all failures in the world of finance.
    One point I want to make is that in US, "Losses are public and gains are private". I think this is a sheer desperate way to protect the 'interested' influential people in Wall Street.
    There is gloom and prediction of doom all around...
    So where do we go from here?
    My take is - if the world is to survive this credit crisis, which I am sure it will, Equity will again deliver. It may take time over the next 1-2 quarters. We will again have some storyline, just like films, and like the Pied Piper, all the mortal folks will flock back to equity.
    Let's wait and watch....
    Like-minded people please respond and share your viewpoints too!!!

Saturday, June 14, 2008

Oil and Tale

Continuing the analyis on oil, which seems to be the hot topic of the world today, I thought of an old story of the farmer and the hen who laid golden eggs. The farmer got greedy and wanted to become rich overnight. He wanted all the gold eggs in one day. So as the story goes, he killed the hen and found that there is only one golden egg. The moral of the story - do not kill the customer on whom your existence depends.
It applies to oil as well. The farmer in this case are the OPEC countries ( Saudi, Iraq etc), the hen, no doubt is the US. High oil prices will kill the US, as recession steps in. So the farmer will also perish then.
The 'farmers' of the world know this very well. They will ensure prices comes down, so that they have jolly good lives, as well ...till eternity I suppose!!!