Its since one year we’ve started our web portal cum blog. Ajit Dayal, the founder of Equitymaster is one of  the Investment Genius I admire. I’ve given below his recent article on Dubai crisis.

” The rabbit is a restless and nervous animal.

And investors, like frightened rabbits, went scurrying to safer haven on news that Nakheel, a real estate development company owned by the government of Dubai, would seek a 6-month moratorium on the payment of their interest and debt. Monies due in December 2009 by Nakheel would now be paid after May 2010.

As the Thanksgiving weekend broke in USA, investors rushed back into the US Dollar and government bonds issued by “safe” countries like USA and Germany. The MSCI Emerging Market Index of stocks declined by -5%. It had gained about +65% so far this year.

Long praised for its spectacular growth, Dubai has proven itself to be just another wonder of the era of free money – without a game plan on what to do the day the era of free money would end.

The “growth-by-debt” junkies

In many ways, Dubai is like a Citibank – built on the illusion that being “large” is the solution to every possible risk.

Just as Citibank saw every global citizen as a potential customer, Dubai saw every grain of sand as the foundation of a new real estate development project.

Just as Citibank added customers and businesses to get a larger share of your wallet, Dubai was busy building the largest buildings, the largest man-made islands, and the largest indoor ski-slopes.

“Build and they shall come” is the policy that the Chinese followed in the late 1990’s. Eventually the Chinese got hit by the write-offs in their state controlled enterprises (like the PSU companies in India).

And don’t forget the dusty business plans of private banks like ICICI Bank and most of the real estate firms in India.Many of the private sector banks wanted to “acquire customers” so that they could increase market share and have a “large” loan book.

Maybe these Indian companies have learnt their lessons and will be more careful in the future. Maybe.

Those managements that built their businesses on excessive debt and weak risk assessment were under severe strain after the bankruptcy of Lehman Brothers in September 2008. Dubai is a minor – but necessary reminder – on how a failure in one corner of the geographical world can shut down global credit markets.And hurt companies that rely on sucking money from any corner of the world to fund their growth.

But Dubai is by no means the only place being built on dreams.

The real estate firms in India saw every square foot of agricultural land as a way to use their political connections to sell you 0.6 square feet of property at exorbitant prices – and charge you on a per square foot basis. The real estate robber barons lived off their unabashed use of debt and the art of pricing on a super built-up area.

The US consumer must also have been a role model for Dubai’s ambitious debt-fuelled plans. Every item in a store was a “must-own” on the shopping lists of US consumers. And the same Citibanks of the world were willing to lend the US consumers money for their insatiable demand. The financial geniuses at Lehman, Goldman, and Merrill only did what any good financial engineering firms would do – found ways to trade that debt and make fees on it. The rating agencies – blinded once again by glamour and the fees they get from the issuers of debt – were once again behind the curve. 

Why is it shocking?

 
Any visitor to Dubai knew that the end was near.

 There were the newspaper articles on how people were leaving their debt-financed cards and unpaid credit cards at the airports and flying away to safety.

I guess the fine for not repaying debt must be pretty severe in Dubai.

Businessmen in Dubai knew that business was slow.

The fact that the government of Dubai was in trouble was not new.

It was as public as could be without really being written about in the press.

 But the surprise may have been in the fact that Abu Dhabi, the energy and cash rich Emirate “allowed” Dubai to make its statement on debt restructuring.

Or, worse, is it possible that Abu Dhabi was not even aware that its neighbour was about to seek a debt rehabilitation package?

Over the past few years, Abu Dhabi has seen its glamorous neighbour build monuments to the gods. With no energy reserves to speak of, Dubai was keen on establishing itself as the financial capital and trading capital of the Middle East and Africa. It was also presenting itself as the gateway to Pakistan and India.

Not a bad objective.

But, because it was funded by debt, the business plan was susceptible to cracks in global financial markets and to the changing sands of lending policies of nervous rabbits.

And, like the US consumers buying 5,000 square feet atrocious Mac Mansions for a family of three people, Dubai’s grand sizing was probably a bit idiotic.

As author Jim Krane noted on CNN, the tall buildings meant that every time someone on the top floor flushed the toilet, the water pumps had to send water half a mile up to refill the tanks for the next flush. A few tall buildings and a Palm complex, Krane noted, could use as much electricity as an entire city.Not very efficient for a country short of energy.

Should we sell Indian stocks?

Dubai is geographically closer to India than Lehman Brothers was.And we have more business links to Dubai than to Lehman.

Millions of Indians work and live in the Middle East and send their money back home. Indian banks lend money to some of these India-connected businesses. And Non-Resident Indians deposit their money in NRO and NRE accounts.

Yes, Dubai is more real and closer to us than Lehman was.

And will have more of an impact on the Indian economy.

But the negative fallout will be minimal.

Here is an extract from a comprehensive report in Economic Times: “Over 5 lakh Indians have returned from Dubai since September 2008, of which two lakh are Malayalees. Almost 60% of these people are technical or non-technical skills professionals. ‘Over 50 lakh Indians work in the Middle East of which 20 lakh are from Kerala. We do not expect large number of returnees now,’ K V Mohankumar, CEO of Kerala NRI group, Non Resident Keralites’ Affairs (Norka).”

Kerala has an estimated 20% of the total Middle-East exposure in terms of remittances. So there could be some localised problems in that state.

And there will be company specific problems: banks with loans to the sheikhdoms and companies with projects in the Middle East will declare their potential exposures in the next few days.

But the Dubai debt issue pales when compared to the Lehman bankruptcy. Lehman shocked global markets – the Dubai bankruptcy will re-price risk for companies in emerging markets. That is the big difference in the financial aspect of things. Lehman’s bankruptcy made all the rabbits around the world run for cover – they refused to lend money to anyone. The Dubai bankruptcy will make the rabbits search for patches of grass where they can eat their carrots in peace. India will be one such patch of grass where they will continue to chew away.

So, don’t sell Indian stocks because of what happens in Dubai.

And gold?

Gold will have a 2-way pull.

The flight to safety will move people towards gold.

But the flight to safety will also move people towards the US Dollar and weaken other currencies like the Indian Rupee.
So, while the price of gold in dollars may decline its value in Indian Rupee may stay the same

Well, the sheikhs have caused quite a stir.

Dubai’s government-controlled Nakheel went out to build the famous Palm Islands. Abu Dhabi – whether it likes it or not – will have to help build a Calm Island.

Moral: a mirage, built on debt, is still a mirage.
And a bunch of nervous rabbits looking for carrots in a mirage is a recipe for disaster.”

There is a rise of another credit crisis, to be precise credit card crisis in China and India. The change of our mindset towards savings, consumption and defaulting in payments is giving rise to this new crisis, the impact of which cannot be underestimated. Can you believe that now one out of every five Indians default in payment of credit card dues, raising the NPA Levels to as high as 20%? Please read on to know more about this next credit crisis.

The Chinese have been traditionally considered as the thrifty lot who save for the future. And the wild western economies had a notorious reputation of being the ones that splurge. In short, while the Chinese saved over 40% of their income, Americans were happily binging on more than 90% of their income. But this was before the global economic meltdown. The trend is now seems to reversing. And we smell another crisis looming around the corner.

While the credit meltdown was most severely felt in the US; the rest of the world did feel the aftershocks. But the Chinese seemed to have missed the lesson riding on the pace of economic recovery there. While the US consumers have at least started trying to reverse their gigantic credit card debt, credit card issuance has risen by more than 32% over last year in China. The unemployed Chinese youth is piling up huge amount of debt on multiple credit cards. Guess on what? In order to spend on food and fun. And the poor Chinese parents are now being chased by recovery agents.

This is surely a bad news for China as well as the rest of the world. China is the biggest foreign owner of US treasuries and held around US$ 801 billion of that in September 2009. The figure was around US $ 1 trillion in March 2009. But now China is off-loading its dollar reserves. We agree that the dwindling significance of the dollar is one reason for this. But one cannot ignore the huge credit card debt that the Chinese are racking up. If China has to worry about its own debt, we wonder who will bail out the US?

The picture is not all that rosy in India as well. The 8% plus GDP growth rate, emergence of fancy salaries and fancier malls to spend them had made Indians quite a spend-thrift. Indians have collectively amassed over 25 million of credit cards by end of FY09. Average spending by an Indian on credit card has increased to Rs. 2,400 per month from Rs. 1800 per month in the last 2 years. According to Indian Cards Council (ICC), the non-performing assets (NPA) on these credit cards have grown four folds. They stood at 20% this year as compared to 5%-6% last year. Though the frequency of usage and the purchasing power of Indian credit card holders are lower as compared to international standards, the annual credit losses on cards in India were about Rs. 3,420 per active card while the same were Rs 3,070 per active card in FY09. Moreover, India also had a larger percentage (over 44%) of inactive cards as compared to economies like Australia (20%) and Singapore (25%).

No doubt, the situation is getting worrisome. The credit card companies are wary about the same. They earlier aimed at garnering maximum market-share by offering free credit cards but are now going slowly on new issuances. They are blocking inactive cards to reduce the costs of communication and billing. They are also restarting to charge an annual fee for such cards as this will ensure higher number of active cards. It is expected to trigger more usage only by credit worthy consumers. Blocking all the cards of multi-card defaulters is a welcome move to curb NPAs. Banks are also tying up with employers to deduct dues at the source for employees who have defaulted on credit card payments. We believe these steps will go a long way in nipping at the bud any credit card bubble that could evolve. Let us hope that we learn the lesson before it is too late.

(with inputs from Equitymaster)

November 22′nd was my 5th wedding anniversary and wanted to share with you the last article in the series of ‘The Tao of Warren Buffett’ on that day. As I could not find time on that day (you may know why!), I woke up at 4 am today for writing this blog.

I received lot of feedback that the wisdom nuggets from the great master were highly enjoyable. Here is the last set in the above series of articles. Please do read and share your feedback.

It so happened that the month of November happened to be a month of ‘Money Mantras’.

Enjoy the current ride in stock market with caution and make some good money.

Now the Master Speaks…

1) There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of the bed in the morning. I think you are out of your mind if you keep taking jobs that you don’t like because you think it will look good on your resume. Isn’t it that a little like saving up sex for your old age?

2) Wouldn’t be great if we could buy love for $1 Million. But the only way to be loved is be lovable. You always get back more than you give away. If you don’t give any, you won’t get any. There’s nobody I know who commands the love of others who doesn’t feel like a success. And I can’t imagine people who aren’t loved feel very successful.

3) When ideas fail, words come in very handy.

4) I’m a better investor because I am a businessman and a better businessman because I am an investor.

5) When a chief executive officer is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It’s not a push he needs.

6) The reaction of weak management to weak operations is often weak accounting.

7) With each investment you make, you should have the courage and conviction to place atleast 10% of your networth in that stock.

My idea of a group decision is to look in the mirror.

9) It is impossible to unsign a contract, so do all your thinking before you sign.

10) The great personal fortunes in this country weren’t built on a portfolio of fifty companies. They were built by someone who identified one wonderful business.

(Courtesy: The Tao of Warren Buffett by Mary Buffett & David Clark)

Thank you so much for your birthday wishes and positive appreciation for 20 new quotes from the great master, Warren Buffett.

I wish to share some more interesting gems from the master in this article. Source- The Tao of Warren Buffett by Mary Buffett & David Clark.

1) Accounting is the language of business.

2) Anything that can’t go on forever will end.

3) It is not necessary to do extraordinary things to get extraordinary results.

4) The chain of habit are too light to be felt until they are too heavy to be broken.

5) Marrying for money is probably a bad idea under any circumstances, but it is absolutely nuts if you are already rich.

6) Wall Street is the only place that people ride in a Rolls-Royce to get advice from those who take the subway.

7) You should invest like a catholic marries- for life.

Never be afraid to ask for too much when selling or too little when buying.

9) It is easier to stay out of trouble than it is to get out of trouble.

10) Managing your career is like investing- the degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.

Today (3′rd November) is my birthday and I want to begin the day by sharing with you ‘ The Tao of Warren Buffett’.

October’09 has not been a great month for my blogging. I just posted one article. This is my primarily due to 2 reasons.

1) My inconsistent health

2) Yahoo rejecting my bulk mails repeatedly as Spam thereby preventing me to send mails to you. My Wisewealthadvisors domain (from Indiatimes) does not allow me to send to more than 20 mail ids at a time. Considering the volume of people who read my mails, this was also not possible due to the limited energy levels and patience I have. If Yahoo route does not work, I’ll resort to the above model, though it is time consuming because I enjoy immensely sharing the knowledge with you. What I’m today is because of all of you and this is one of the small way of showing my gratitude.

There is a book called ‘The Tao of Warren Buffett’ written by Mary Buffett & David Clark. I read this book recently and wanted to share on my birthday some gems from my master, which I’ve not shared previously. This becomes the Money Mantras series…(16).

As my birthday gift to you all, I’ve given below 20 quotes instead of usual 10, all new ones.

1) You don’t have to make money back the same way you lost it.

2) Someone is sitting in the shade today because someone planted a tree a long time ago.

3) You pay a very high price in the stock market for a cheery consensus.

4) You want to learn from experience, but you want to learn from other people’s experience when you can.

5) We enjoy the processes far more than proceeds, though I have learned to live with those also.

6) If calculus or algebra were required to be a great investor, I would have to go back to delivering newspapers.

7) It’s hard to teach a young dog old tricks.

Can you really explain to a fish what it is like to walk on land? One day on land is worth a thousand years talking about it, and one day running a business has exactly the same kind of value.

9) If you hit a hole in one on every hole, you wouldn’t play golf for very long.

10) A friend of mine spent twenty years looking for the perfect woman; unfortunately when he found her, he discovered that she was looking for the perfect man.

11) Forecasts usually tell us more of the forecaster than of the forecast.

12) The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.

13) In the search of companies to acquire, we adopt the same attitude one might find appropriate in looking for a spouse: It pays to be active, interested and open-minded but it does not pay to be in a hurry.

14) When you combine ignorance and borrowed money, the consequences can get interesting.

15) The most important thing to do if you find yourself in a hole is to stop digging.

16) If you don’t make mistakes, you can’t make decisions.

17) Any business craving of the leader, however foolish, will be quickly supported by studies prepared by his troops.

18) I’m very suspect of the person who is very good at one business-it could also be a good athlete or good entertainer- who starts thinking they should tell the world on how to behave on everything. For us to think that just because we made a lot of money, we’re going to be better at giving advice on every subject- well, that’s just crazy.

19) The smartest side to take in a bidding war is the losing side.

20) No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.

It’s good to be back after a gap of 2 weeks. I was down with viral fever for last 2 weeks and hence this gap.

I am pleased to start this month article with Money Mantras, timeless wisdom from Masters.

Please read and enjoy the wit, wisdom and insights.

1) Value investing ideas seem so simple and commonplace. It seems like a waste to go to school and get a Ph.D. in economics. It’s a little like spending eight years in divinity school and having someone tell you the Ten Commandments are all that matter.- Warren Buffett

2) You can’t see the future through a rear view mirror.- Peter Lynch

3) The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. – Warren Buffett

4) The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. – Warren Buffett

5) In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond – Warren Buffett

6) In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor. – Warren Buffett

7) First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen. – Warren Buffett

If the misery of the poor be caused not by the laws of nature, but by our institutions, great is our sin. – Charles Darwin

9) There are people in the world so hungry, that God cannot appear to them except in the form of bread. -Mahatma Gandhi

10) Fate often puts all the material for happiness and prosperity into a man’s hands just to see how miserable he can make himself with them. -Don Marquis

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)

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