Money and It's Effects

Will China pay the price for fast growth?

Nischaiy — Fri, 11 Sep 2009 14:12:00 +0000

As per reports coming out of China, the country’s industrial production and investment growth has gained pace. Easy money, and a flush of that is what we believe is leading to a strong performance of the Chinese economy. And this doesn’t seem sustainable given that consumption growth in the world’s third largest economy country hasn’t picked up much pace. It’s only that the country seems to be fast-forwarding its infrastructure investments by building today what it would have built tomorrow, thereby raising doubts whether all this is really sustainable.

We wonder if global investors are confusing the Chinese fast growth (now based on aggressive lending) with sustainable growth. We have already realised from the US experience that forced lending is bad lending. And like the US is paying the price now,China will have its share of agony in the years to come. The only question is – when and how much. We have no answer to that!

Years of Bull Market Ahead of Us

Nischaiy — Fri, 11 Sep 2009 14:10:00 +0000

Ken Fisher, one of the longest running Forbes columnists and bestselling author of books like ‘The Only Three Questions That Count’ is in no mood to pull the plug on the recent stock market rally and believes that it still has a long way to go. In a wide ranging interview to Moneynews, Fisher, who is also the son of the famous growth investing guru Philip Fisher, opined that bull markets go longer than most people think they can and keep running. Quite a bold statement we should say. However, this isn’t where his boldness ended. He had more to offer.

On hyperinflation, Fisher feels that it isn’t too much of a worry right now because investors are thinking about it a lot these days and hence, what gets lots of mind space already gets priced into securities. Interestingly, Fisher mostly took a psychological view of things and very rarely spoke anything about stuff like valuations and fundamentals.

Indeed, if it were a self reinforcing rally where optimism fed on itself and led to more optimism, he perhaps would have been right. But the fact remains that the strong bull market of the past few months has not done anything to change things on the ground. There has been no significant improvement seen in things like consumer spending, business hiring and the like. And unless they show visible signs of improvement, the rally may peter out and could also lead to pessimism feeding on more pessimism, leading to a bigger than expected fall. Things are indeed fragile at the moment.

Bharti Airtel has sweetened its bid for the South African based MTN

Nischaiy — Fri, 11 Sep 2009 10:18:00 +0000

Looks like Indian telecom major Bharti Airtel has sweetened its bid for the South African based MTN as the two companies appear to have reached a US$ 24 bn prelimanry accord to buy each other’s shares, which is the first step in a planned merger. Interestingly, Bharti’s founder Sunil Mittal has denied that such a pact has been reached and has reiterated that talks between the two are still going on. Already the deadline has been extended twice since July 31 and what seems to have stalled the process are some administration issues and trying to work towards an arrangement which is acceptable to all parties concerned. Should this cross-border deal finally go through, it will create a mobile-phone carrier with annual sales of US$ 20 bn and 200 m wireless subscribers. In our view, while there will be short term pressures, the long term advantages of entering a wider market and gaining synergy benefits are expected to be meaningful for Bharti, especially when growth in the Indian market slows down.

US Fed: The recession is over

Nischaiy — Fri, 11 Sep 2009 10:16:00 +0000

In a recent issue, we had discussed how the club of rich industrialised nations, Organisation for Economic Co-operation and Development (OECD) says that the global recession is coming to an end faster than thought a few months ago and may in fact already be over.

The US central bank now has joined in the chorus. The US Federal Reserve has come out with a survey that confirms that the US economy has turned around a corner based on reports from regional banks. This survey precedes the monetary policy meeting, to be held in two weeks. If indeed the US Fed accepts at the meeting that the recession is over; then it is likely to increase interest rates, currently pegged at zero.

We continue to be of the opinion that investors should not get too optimistic. Several noted investors including Wilbur Ross and David Dreman have also sounded a note of caution. In fact, Warren Buffett has recently warned that we will have to deal with the side effect of the enormous dosages of monetary medicine that continue to be administered.

Lehman Brothers’ obituary

Nischaiy — Wed, 09 Sep 2009 11:23:00 +0000

The month of September marks an anniversary that markets would love to forget. The bankruptcy of Lehman Brothers that snowballed into a global financial catastrophe had several lessons to teach.

Almost years after this crisis, the US and most large economies in Europe have managed to recover from recession. Global and particularly emerging markets have again limped back to optimism. But does this mean that we have left behind the risks that surfaced a year ago? While the massive correction in real estate prices has certainly tempered greed, there is a collective opinion amongst bankers that bailing out large entities at the cost of taxpayer money is not in the best interest of the nation. The G-20 finance misters have a clear resolve to ensure that entities that put the interest of the economy at risk for their vested interests will be brought to task.

Is it time to change the idiom from ‘Too Big To Fail’ to ‘Too Big May Fail’?

Warren Buffett is fearful. Are you?

Nischaiy — Wed, 09 Sep 2009 11:23:00 +0000

Warren Buffett often says, “Be fearful when others are greedy and greedy when others are fearful“. He has lived this statement several times during his career. The latest instance being the recent credit crisis. At the height of the meltdown, Warren Buffett advised investors to buy and he certainly bought himself. Now that there is a chorus from several quarters that we are out of the woods, he is realigning his bets. As per the New York Times, Berkshire Hathaway (Buffett’s company) is now selling more stocks than it is buying, and is in fact buying corporate and government debt.

It may be noted that Buffett has become far more vocal with his investment advice than he has ever been. Observers believe it is because he wants the twilight of his career to be as spectacular as the rest of it has been. Reaching a wider audience helps his legacy. Whatever be the reason, we are not complaining.

TBTF spreading wings again

Nischaiy — Sat, 05 Sep 2009 10:46:00 +0000

Looks like investment banks are on the prowl again. These ‘too big to fail’ institutions, who were the architects of the global financial crisis that unraveled in late 2007, laid low for a while as some prominent names in the industry collapsed. But now they are resurfacing and are moving to increase headcount in China and India anticipation of rising deal flows fuelled by strong growth rates in Asia’s largest developing economies.

With capital markets weakening and merger activity being reduced to a trickle in 2008, investment banks at that time resorted to scaling back. This trend has now started reversing as India and China are expected to post strong growth rates in comparison to the developed world.

As reported in Financial Times, corporate equity and debt issuance in India has soared to US$ 26.6 bn with the massive rally in the markets also acting as a catalyst. Investment banks may be back in the game but we just hope that they have learnt a hard lesson and do not resort to ambiguous ‘financial engineering’ which perplexed the world and brought the global financial system down on its knees.

World economic order set to change

Nischaiy — Sat, 05 Sep 2009 10:42:00 +0000

The global financial meltdown has left little doubt that there is a change in the world economic order. And this fact is about to get official.

The Group of 20 (G-20) industrialised and developing nations is debating how to reshape international institutions that still reflects the world order of over six decades ago. As per The Wall Street Journal, the US is pressing the traditional European powers to reduce their role at the International Monetary Fund in favour of China and India. Basically, the US wants Europe to hold lesser number of seats at the IMF than before. In our opinion, even if the US does not manage to get this proposal through, it will get brownie points from China and India whose support it increasingly needs at various international forums, including the G-20.

IMF to now recognise economic strength

Countries	Ownership	Share of world
	share in IMF (%)	GDP (2008, %)
US	17.1	20.4
China	3.7	11.3
Japan	6.1	6.3
Russia	2.7	3.3
Brazil	1.4	2.8
India	1.9	4.9
EU total	32.4	21.9

Source: The Wall Street Journal

Buffett Is Having Sleepless Nights. Here’s Why.

Nischaiy — Sat, 05 Sep 2009 10:40:00 +0000

Warren Buffett, in his traditional simple and homespun style, wrote recently an article in The New York Times explaining how the policies the US government is currently using to tackle the crisis can affect the country over the long run. Call it a u-turn from the world’s second richest individual to what he had believed in October 2008 when he said, “Buy American. I am,” the fact is that US government’s and central bank’s policies are now seemingly giving sleepless nights to this legendary investor.

Despite the fact that the US economy appears to be on a slow path to recovery, the cause for Buffett’s concern is the enormous dosages of ‘monetary medicine’ that continues to be administered, which is creating an annual deficit in the US of alarming high levels. While most of the effects of these actions are still invisible, their threat can be as disastrous as that posed by the financial crisis itself.

Buffett suggests that to avert such a disaster, the US government must end the rise in the debt-to-GDP ratio and bring the country’s growth in debt back in line with the growth in its resources. If not, Buffett warns that the US runs the risk of becoming a ‘banana republic’, a term that is used to describe a country that is politically unstable and whose economy is dominated by foreign companies and depends completely on one export (such as bananas) for its livelihood.

Buffett’s last article – Buy American. I Am written during the peak of the credit crisis last year where he advised that buying stocks was the best bet at the time, rested on this very faith – that the US government will show the restraint and wisdom necessary to exit this monetary and fiscal extravagance at the appropriate time. But it didn’t. And now that is making Buffett scared.

Is India really an emerging superpower when…

Nischaiy — Sat, 05 Sep 2009 10:38:00 +0000

More people in India’s rural areas are poor than thought earlier. So far it was believed that about 29% of the rural India is poor. Apparently, the revised number is around 42%. As per a leading business daily, this worrying fact has been reported by the expert group appointed by the Planning Commission and chaired by a former chairman of the National Statistical Commission.

The revision is due to the change in the outdated assumptions and benchmarks used to measure poverty. If the report is accepted by the government next month, it will put a greater strain on government finances than it already is. Moreover, the financial relationships between the centre and the states will change as states with a larger number of rural poor will have a larger claim to resources.

We believe, there is an important subtext to these findings. When the benchmarks for poverty were originally set in the 1970s, it was assumed that a poor person won’t be able to break out from his poverty. The proper government response was to prevent starvation. That assumption now has been dropped. The government is expected to respond with healthcare and education to bring a person out of poverty. Rightly so, in our opinion. As a thriving democracy with economic ambitions to boot, it is high time India defined the basic standard of living of a citizen beyond mere food.