A Bomb scare of different kind and the ’short’ of the Century

On the eve of the auspicious Vijayadasami day, which is supposed to be good for starting any new initiative or activity, I start this article in an auspicious way I know- by providing a nugget of wisdom from Buffett

“Speculation is most dangerous when it looks easiest.”

All the stock market traders whom I’ve been in touch with regularly are now saying that the time is ripe for speculation and make some quick money. Please read the above quote and ‘let the buyer be beware’!

We’ve been a kind of doom’s day prophet as far as the Financial future of U.S. is concerned. We’ve written in the past how mounting public debts is making U.S., an emperor of debt and how it may end up being a Banana Republic and a Bankrupt country.

However we honestly wish that the above should not happen, U.S. being one of the world’s best liberal democracies which encourage talent from worldwide, a technology leader and has created a great country by encouraging immigration and making it a multi ethnic and multi cultural state. Collapse of U.S. may also mean collapse of various good institutions and collapse of liberal values and Freedom.

Despite our wish, the way U.S. economy and Financial system is moving, it looks like U.S. may end up either disastrously or create enormous problem for world countries (it’s so called enemies with whom it always wages ‘war to end all wars’) through its military might.

I’ve given below opinions from two great brains as to how a bomb scare of different kind is tickling in U.S. and how ultimately its financial system would have a complete break down.

‘Bomb scares from terrorists have unfortunately become ubiquitous in recent times. But according to Russell Napier, strategist at CLSA Asia-Pacific, mankind is now faced with a bomb scare of a different kind – that of the ‘public debt bomb’. He believes that within the timeframe of a decade, the public debt bomb in the US will explode and push the US government into bankruptcy, thus forcing it to impose capital controls to prevent a ‘flight of capital’ to Asia. This is because Asia will be one of the few places in the world where currencies and asset prices will appreciate even during this time.

By flight of capital, he means that private capital may cease to be willing to finance US government debt, and may even stop wanting to hold currencies of the Western countries, rather preferring to hold currencies of Eastern countries like India and China. To put a check on such a flight of capital, he expects the US government to go to the extent of imposing capital controls. While economic forecasts are usually quite unreliable, what does seem plausible in his argument is the unnerving fact that credit in the US is today bigger than what it was when the recession began. Public debt is thus certainly a hazardous bomb set to explode!’

‘The US has launched a massive offensive in Latin America and has bombed its key cities’. Well, this might be a figment of our imagination right now but if veteran investor Marc Faber is to be believed, the event could actually play out in reality in few years. Speaking to a leading daily, Faber, the author of the Gloom, Doom & Boom newsletter believes that the fiscal and monetary responses in the US and elsewhere have solved nothing and postponed everything. And hence, when the moment of truth will finally arrive, there will be a total breakdown of the financial system. But before that, it is highly likely that Governments will continue to print more money, leading to high inflation rates, lowering of standards of living and eventually, wars. Faber heaped further criticism on the US dollar and believes that it is a doomed currency and is in fact, the ’short’ of the century.

However, people staying in Asia especially in countries of China and India have little or no reason to fear as he believes that these countries are living in exciting economic times and these regions could see continued prosperity for years to come. Of course, as he very rightly pointed out, Asians should learn to grow from within the region rather than through exports to sick countries.’

(with inputs from Equitymaster)

We need Trillion Dollars- How much you are Saving and Investing?

It is not surprising for us to find that the per capita consumption for Indian households in almost every category of consumables is amongst the lowest in the world. While one might think that this is because of our colossal population, let us assure you that is not the whole truth. This is because even as a percentage of GDP our consumption expenditure has fallen from 77% in FY02 to 67% in FY09 (source: CMIE). This is because Indians have been more inclined towards saving. So much so, that we are today amongst the highest per capita savers in the world. And now, we are expected to save even more! A trillion dollars over the next ten years to be precise.

As per the latest Goldman Sachs report, India will require US$ 1.7 trillion in financing over the next decade to meet its infrastructure needs. This estimate tops both Goldman Sachs’ earlier estimate of US$ 620 billion as well as our government’s 11th Five-Year Plan (2007-2012) infrastructure spending of US$ 500 billion. Even if the financing for the 11th Plan have been accounted for, we will need at least a trillion dollars more to execute the investments required.

Goldman Sachs expects most of the infrastructure investment to be funded by India’s domestic savings without significant recourse to external borrowings. This belief stems from the trend of rising domestic savings rate and robust balance sheets of private sector companies. Goldman Sachs has pegged the gross savings rate in Asia’s third largest economy to rise to 40% of GDP by 2016 (from 38% in FY09) and remain at high levels for well over a decade. These savings will be pertinent to fund public private partnership (PPP) projects that are estimated to fund 30% to 50% of the total infrastructure investment in the next decade.

While there is no denying the fact that India’s favourable demographics has the potential to deliver the savings required, whether the same will be optimally utilized is the question. Doubling the country’s electricity generation capacity and the length of paved roads besides adding substantially to our railway, irrigation, port and airport networks in 10 years seem uphill tasks given our poor track record. However, as per Goldman, these are all required to achieve better GDP growth rates in the next decade.

What is even more important to note is that for this plan to fructify, India’s household savings must be intermediated through the financial sector (pension funds and the like) to the government, which then spends on infrastructure. India’s infrastructure build up and financing thus presents enormous opportunities, not just for producers of capital goods, developers and raw material providers, but also for financial intermediaries. However, in the same breath we need to mention that red-tapism and corruption could erode plenty of these savings. Quoting an earlier Goldman report “Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7% of the value of their sales due to power outages”.

The conflux of the increased infrastructure spending requirements and the burgeoning fiscal deficit leaves India with only one viable option to meet its forecasted growth – substantially stimulate the private sector’s participation in infrastructure. The PPP route is being touted as the best bet at leveraging private sector participation into the sector.

So, how much are you saving and investing?

(Courtesy: Equitymaster)

Global Financial System needs more Failures & How Good Regulations saved us!

It’s been a year since the demise of Lehman Brothers, a catastrophic event that deepened the credit crisis, sent the financial markets into a tailspin, froze credit and caused governments across the world to bail out big institutions that were hitherto deemed ‘too big to fail’. What is more, since then a debate has raged worldwide whether preventing Lehman Brothers from bankruptcy would have alleviated the crisis that ensued.

As reported in the Economist, while from a purely economic point of view the failure of Lehman hit global economies very badly, from a political point of view bailing out financial institutions then drew considerable criticism as it created moral hazard. Infact, the Economist further reported that at some point political pressures would have required a big firm to go bust. After all, it was only after the Lehman incident that global governments got into damage control mode.

Interestingly, investment guru Jim Rogers believes that the global financial system needs more failures like Lehman Brothers to restore a functioning free market. This is what he said, “Market fundamentals are that failures should collapse and be replaced by creative new forces rather than being propped up as zombies. Financial institutions have been failing for centuries and the world has survived.” We believe that bailing out the financial system was inevitable given the enormous pain that would have followed. Having said that, mechanisms will have to be built into the system that will ensure that such a financial blunder is not repeated in the future.

Good regulation is what saved the Indian banking sector from throwing up the likes of Citibank after the global subprime crisis. While the formal Fed chief Mr. Alan Greenspan has criticised the excessive regulation in countries like India, we also have credible voices supporting our cause. Mr. Raghuram Rajan, the former chief economist of the International Monetary Fund (IMF) who also chaired a committee on financial sector reforms in India, believes that all India needs is ‘clever’ regulations. The economist who was amongst the few to predict the financial bubble in the West, has in an interview to a business daily, said that the global economic damage was largely inevitable due to the underlying rot already present in the system.

According to Mr. Rajan while government intervention, particularly in Western economies has helped quell the panic, the same was not without having long term impact on fiscal balances. Further, Mr Rajan has advocated RBI’s focus on expanding access to financial services like savings and insurance rather than pushing credit down the throats of the poor. His views certainly hold significance in the light of financial sector reforms required for the evolution of Indian banking sector.

Also please refer to the article I wrote in October’08, how RBI, particularly the then RBI Governor Dr.Y.V.Reddy saved our banking system from collapse, when world over Financial institutions were crumbling. This article was appreciated by many and I’ve given the link below, if you are interested in reading the same.

http://wisewealthadvisors.wordpress.com/2008/11/29/thank-you-drreddy/

(with inputs from Equitymaster)