Overvaluation: Bulls call it good liquidity
Having a conversation with someone who is too bullish towards the markets always interests me. Sentiments, especially in the Indian Markets, where stocks are still purchased based on stars and zodiac play a vital role. Reading the investor sentiments these days just amuses me. Gold is trading at a level where retail investors will not try venture as they think it is too late, BSE is treading at highest levels, Interest rates are being increased by the RBI to maintain equilibrium and avoid any “Bubbly” situations. Amid all this, OECD and World Bank have issued warnings that there “might” be a possible bubble emanating in East Asia. The Austerity by Sovereigns is nothing but a farce, there is nothing being done to increase the interest rates by the west, just in the name of Fiscal Stimulus. This might be a god econometric tool to uplift and economy in the interim, however, one should also foresee that are there enough opportunities or capacity to sustain this level of expenditure or is it again finally falling in the same hands and leading to further concentration of income.
I cannot but compare this situation to World War One, when US entered the war in the end and funded all the nations’ viz. England, Germany, etc. While being heavy indebted, England was forced to reduce their interest rates and flush stimulus in the economy. As only US was supposedly performing at that particular point in time, with all the major European nations either going through Hyper Inflation or acute measures of Austerity (In France), it led to nothing but a bubble in US. With Auto industry booming and Real Estate to Stock markets zooming past anyone’s imagination. A well known persona then said - if everyone talks about or knows about the stock markets, its time to get out of it. The Banking system collapsed and almost half the bank in their systems went out business siphoning off savings of public at large.
Let’s compare this situation with what is happening today. Though there has been no war off late, however, the biggest economic crisis has overturned many an economy in Financial Turmoil. However, money has exchanged hands and has gone in the pockets of a few. We are talking about intelligent spending when Louis Vitton and Chanel do not have enough bags and shoes to sell in Paris (So much for Austerity)
Interest Rates in the US are on all time low just to encourage lending and spending. However, I fail to understand that when the jobs data is showing weak signs of improvement and no one is ready to lend the lower rated companies, then isn’t the money going in fewer pockets of Highly Rated companies (who in-turn are global conglomerates) and who are channeling their energies towards emerging markets, hence, in India and China so as to boost their earnings and impress their shareholders. Aren’t these countries providing too much of Free lunches in their economy and setting wrong examples. In my view these countries are being plagued by low retention of money in their economies. This is turn is causing too much capital inflow in emerging markets like India, who again are having trouble controlling their currency appreciation which again is hampering its Balance of trade (due to lower exports) and is funneling Stock Market, Real Estate and Gold prices boom.
What happened in the US in the past post World War One era can and shall repeat again if not enough measures are taken (though the level of extremity of such a situation is impossible as there are more sophisticated economic tools and methodologies practiced now). It’s the FII’s in India which are taking long positions in Stocks and Gold, and now Indian and Chinese banks have also taken positions to Hedge against Dollar. However, my question is that it’s a double edged sword now, as the Chinese on one hand do not want Dollar to appreciate further, however, rest of the World is Denouncing the Green Back and Euro and switching to Gold. If USD appreciates from its current levels, won’t the Sovereign and Bank’s Exposure at such levels in Gold cause another painful turmoil?
As investment in these assets is a Zero Sum game. If I sell it at a particular level it will be someone else’s loss and because its non retail investors who are majorly invested in these assets, there sure will be some distress to some investors. Either they stay at where they are or we move towards medieval era when only Kings had access to Gold (which is highly unlikely) or these levels should be and will be corrected.
Wednesday, October 20, 2010
Monday, June 28, 2010
Rise and Shine or is it temporary.....
When the deposit rate of banks touches an all time low, it might be a positive signal that there is ample credit available in the economy. However, if the spreads for banks increase drastically on the back on increase in lending rate it’s a sign that the government and banks are wary of another asset bubble and hence discourage any form of lending. One reason can be high inflation, which the government wants to keep in check. Though deregulation of Gas prices is a move in the right direction and was long due in Indian scenario and gas being one of the major vote bank for the government, the deregulation of which might cause some stiff opposition from the left. But more than that it is the consolidation of free flow of credit and regulation of prices that has been a major cause of spiraling Real estate and stock market valuations.
Though the FII’s might give it thumbs up and the government might reduce its public debt owing to reduction in losses of the state owned oil companies (The major Oil co’s increased by 15% each with this announcement), this move might increase the inflation and put further pressure on household expenditure. More than the Petrol it’s the diesel price rise (which still is regulated) which might hurt the inflation figures as this will lead to rise in logistics cost and hence might bite into the bottom-line of companies which will force them to increase the final price of the goods.
Also, it was time since Congress rose to the fact that India cannot be called or shine as an International economy where its hoi polloi are still spoon fed and not let to fend on their own (with reference to heavy subsidies). The Gas prices in the short term will be higher than previous levels which will help the oil co’s in reducing their losses, but more than that it will put India on the map of OPEC who will take into account India’s requirement while determining the price. Its in a stark contrast to the recent past where any price would have to be accepted by the companies as the government was cushioning the consumers through heavy regulation. But are these companies prepared? There should be a move away from the “Babu” culture if they want any kind of profitability in the long run, it won’t be an easy ride for sure.
Now coming back to the Interest rates, though the deposit rates are poor as of now and credit expensive and inflation higher, it can only lead to reduction in the consumption rates. So does this mean that the economy is expected to shrink a little? Is the stock market rising without a base? There is ample money available in the market (read the corporates) and with the FII who are flooded with money after the bail out packages announced in their countries, they have nowhere but India to invest. Reason being that China has been regulating its economy with letting Yuan off the hook (well not wholly, as favorable exchange rates is their cash cow), which is expected to consolidate or correct China's excessive boom. China, hence, in the long run is expected to lose some business to other growth nations while at the same time leading to rise in prices in the developed economies. Also, US markets have risen substantially and investors who are still not confident enough in European markets given the debt conditions, are left with only few asset classes to invest in. Gold, that’s the reason is touching newer highs day after day, Crude on the other hand cannot be trusted upon as week after week the cues from US and UK unemployment and housing markets are keeping ‘it’ leashed. China on the other hand (a major consumer of Crude) is expected to consolidate. The only way out for investors is to keep clinging on to Dollar and Gold. However, we should not rejoice as India is one of the only havens for investment but be cautious, as any positive cue from UK or China or USD correction will lead to withdrawal of funds from the Indian market and diversifying them. This can be seen from the fact that the market still is range bound and is not really willing to touch new highs. Time to time US, UK or China sneezes and India feels the chill, which is what is keeping retail investors at Bay.
Regulation of Gas though is a step in the right direction, when the government has let the economy find its own feet, it still is to be seen if investors give India its long due prominence.
Though the FII’s might give it thumbs up and the government might reduce its public debt owing to reduction in losses of the state owned oil companies (The major Oil co’s increased by 15% each with this announcement), this move might increase the inflation and put further pressure on household expenditure. More than the Petrol it’s the diesel price rise (which still is regulated) which might hurt the inflation figures as this will lead to rise in logistics cost and hence might bite into the bottom-line of companies which will force them to increase the final price of the goods.
Also, it was time since Congress rose to the fact that India cannot be called or shine as an International economy where its hoi polloi are still spoon fed and not let to fend on their own (with reference to heavy subsidies). The Gas prices in the short term will be higher than previous levels which will help the oil co’s in reducing their losses, but more than that it will put India on the map of OPEC who will take into account India’s requirement while determining the price. Its in a stark contrast to the recent past where any price would have to be accepted by the companies as the government was cushioning the consumers through heavy regulation. But are these companies prepared? There should be a move away from the “Babu” culture if they want any kind of profitability in the long run, it won’t be an easy ride for sure.
Now coming back to the Interest rates, though the deposit rates are poor as of now and credit expensive and inflation higher, it can only lead to reduction in the consumption rates. So does this mean that the economy is expected to shrink a little? Is the stock market rising without a base? There is ample money available in the market (read the corporates) and with the FII who are flooded with money after the bail out packages announced in their countries, they have nowhere but India to invest. Reason being that China has been regulating its economy with letting Yuan off the hook (well not wholly, as favorable exchange rates is their cash cow), which is expected to consolidate or correct China's excessive boom. China, hence, in the long run is expected to lose some business to other growth nations while at the same time leading to rise in prices in the developed economies. Also, US markets have risen substantially and investors who are still not confident enough in European markets given the debt conditions, are left with only few asset classes to invest in. Gold, that’s the reason is touching newer highs day after day, Crude on the other hand cannot be trusted upon as week after week the cues from US and UK unemployment and housing markets are keeping ‘it’ leashed. China on the other hand (a major consumer of Crude) is expected to consolidate. The only way out for investors is to keep clinging on to Dollar and Gold. However, we should not rejoice as India is one of the only havens for investment but be cautious, as any positive cue from UK or China or USD correction will lead to withdrawal of funds from the Indian market and diversifying them. This can be seen from the fact that the market still is range bound and is not really willing to touch new highs. Time to time US, UK or China sneezes and India feels the chill, which is what is keeping retail investors at Bay.
Regulation of Gas though is a step in the right direction, when the government has let the economy find its own feet, it still is to be seen if investors give India its long due prominence.
Thursday, June 3, 2010
Saare Jahan se Acha - Hindustan Hamara
A line written so many decades ago still proves vital and true.
In continuance of my article written on May 24th 2010, where I supported the Indian Rupee and correction of USD, there is speculation that India might outshine the other economies with help from EU’s deteriorated position. The interest rates worldwide are being kept artificially lower by the government, even though the inflation is rising, majorly due to mindless bail out packages from governments worldwide so as to honor the banks commitments and stopping from the collapse in the ‘confidence’, as happened in 2008. This low interest rate environment is kept for companies to borrow and cover their losses (if any) by investing in ‘safe’ and ‘growth markets’ ventures worldwide. The private sector as explained in my other articles (Read my Blog on Is Inflation good for the government and private sector) stand to benefit not only because the value of their previous loans is eroded due to falling value of money and on the other hand they are getting cheaper credit to invest in growth markets.
However, this window of opportunity is short lived and will make the rich richer, whereas its far from any equilibrium state of the economy.
Coming back to the India story, the markets are set to rally, though not without some hiccups. The biggest reason being International news and sentiments. The FII’s will withdraw on two counts: Firstly, on any negative news to safeguard their money, e.g. US oil spill, EU crisis, Japan political instability, etc. Secondly, at every new level breached, i.e. profit booking in anticipation of negative cues or demonstrating a cautious approach.
India is the blue eyed child of most international investors and sovereign funds, given India’s safe policies and stringent financial structure. Though, this has been ingrained in us and most countries find it difficult to follow our policies and structure, it’s the very innate conservative nature that has been a cause for out sustained survival for a long time.
However, this is a major cause of volatility in the Indian markets and the investor especially the retail investors should be vary as the sharp volatilities might lead to some capital erosion, hence, staggered investment strategy should be adopted.
Euro on the other hand is breathing heavily even as the bail out package have been adopted as Germany which is a major supporter is facing a stiff resistance at home for the same reason that Taxpayers are unhappy to support a defaulting nation of their hard earned money. However, the banks in the EU have become astonishingly attractive due to 12% slide in the markets. This might be a time when investors might gun for some ‘buying’. However, this will again be volatile in the next 4-6 months, but will give a lot of respite to the struggling Euro and Sterling. Currently trading at $1.23 (±5%), once the investors find a stable international platform will start investing the banks. This will stabilize the Euro - Dollar imbalances; however, the confidence of strong monetary policies should be instilled amongst the investors.
China on the other hand, is set to revalue or reform its monetary condition in the next 22 months. China’s monetary policy and weak system is out in the open and its artificial currency exchange rate which was hampering the World economics is being pressurized to be revalued by the powerhouse (the US). Not that the vested interest of US in it. Revaluing the loans would cause a slight reduction in its public debt (a whopping $895bn. borrowed from China alone).
However, all of this is just favoring India more and more each passing day. China is doing what France did post World War I, that is to hoard loads of Gold (then the system of financial currency worked on Gold Standard) by keeping the currency artificially lower, as with the interest rates. However, one should always remember, that there is a thin line between Power of Creditor and Debtor. Beyond a certain limit the authority shifts towards the Debtor as the risk involved in defaulting poses a big threat to the Creditor and restructuring in today’s scenario is not a viable option.
Hence, India is a safe bet for all investors, as money kept in banks is a depreciable asset, owing to high inflation in world economy, unless the economy is being deflated as with some of the PIIGS.
The Rupee dollar exchange rate as of today stands at 46.72 to a dollar (± 5%). This according to my previous articles is again short term and will correct in coming months (2-3 months at the max). The stability of Rupee will come from foreign inflows due to India being a safe haven with respectable returns, this coupled with slight respite in the EU region and China being overvalued. EU’s improvement will only strengthen the sentiments and will lead to some stability in the international scenario, again leading to further inflows in India and retention of funds.
Crude on the other hand has stabilized on the news of fall in US stockpiles. However, I still fail to be bullish on crude unless situation in EU stabilizes; the housing market has collapsed so as the demand from China (which is expected to deteriorate in the near future). The demand largely in the US is based on the interest rate environment and the housing market, as in China its based on the exports and the industrial development.
I am bullish on India growth story, though some stocks still remain overvalued the mid cap boom is to set off again. However, a lot depends on how EU and structure their financial policies.
In continuance of my article written on May 24th 2010, where I supported the Indian Rupee and correction of USD, there is speculation that India might outshine the other economies with help from EU’s deteriorated position. The interest rates worldwide are being kept artificially lower by the government, even though the inflation is rising, majorly due to mindless bail out packages from governments worldwide so as to honor the banks commitments and stopping from the collapse in the ‘confidence’, as happened in 2008. This low interest rate environment is kept for companies to borrow and cover their losses (if any) by investing in ‘safe’ and ‘growth markets’ ventures worldwide. The private sector as explained in my other articles (Read my Blog on Is Inflation good for the government and private sector) stand to benefit not only because the value of their previous loans is eroded due to falling value of money and on the other hand they are getting cheaper credit to invest in growth markets.
However, this window of opportunity is short lived and will make the rich richer, whereas its far from any equilibrium state of the economy.
Coming back to the India story, the markets are set to rally, though not without some hiccups. The biggest reason being International news and sentiments. The FII’s will withdraw on two counts: Firstly, on any negative news to safeguard their money, e.g. US oil spill, EU crisis, Japan political instability, etc. Secondly, at every new level breached, i.e. profit booking in anticipation of negative cues or demonstrating a cautious approach.
India is the blue eyed child of most international investors and sovereign funds, given India’s safe policies and stringent financial structure. Though, this has been ingrained in us and most countries find it difficult to follow our policies and structure, it’s the very innate conservative nature that has been a cause for out sustained survival for a long time.
However, this is a major cause of volatility in the Indian markets and the investor especially the retail investors should be vary as the sharp volatilities might lead to some capital erosion, hence, staggered investment strategy should be adopted.
Euro on the other hand is breathing heavily even as the bail out package have been adopted as Germany which is a major supporter is facing a stiff resistance at home for the same reason that Taxpayers are unhappy to support a defaulting nation of their hard earned money. However, the banks in the EU have become astonishingly attractive due to 12% slide in the markets. This might be a time when investors might gun for some ‘buying’. However, this will again be volatile in the next 4-6 months, but will give a lot of respite to the struggling Euro and Sterling. Currently trading at $1.23 (±5%), once the investors find a stable international platform will start investing the banks. This will stabilize the Euro - Dollar imbalances; however, the confidence of strong monetary policies should be instilled amongst the investors.
China on the other hand, is set to revalue or reform its monetary condition in the next 22 months. China’s monetary policy and weak system is out in the open and its artificial currency exchange rate which was hampering the World economics is being pressurized to be revalued by the powerhouse (the US). Not that the vested interest of US in it. Revaluing the loans would cause a slight reduction in its public debt (a whopping $895bn. borrowed from China alone).
However, all of this is just favoring India more and more each passing day. China is doing what France did post World War I, that is to hoard loads of Gold (then the system of financial currency worked on Gold Standard) by keeping the currency artificially lower, as with the interest rates. However, one should always remember, that there is a thin line between Power of Creditor and Debtor. Beyond a certain limit the authority shifts towards the Debtor as the risk involved in defaulting poses a big threat to the Creditor and restructuring in today’s scenario is not a viable option.
Hence, India is a safe bet for all investors, as money kept in banks is a depreciable asset, owing to high inflation in world economy, unless the economy is being deflated as with some of the PIIGS.
The Rupee dollar exchange rate as of today stands at 46.72 to a dollar (± 5%). This according to my previous articles is again short term and will correct in coming months (2-3 months at the max). The stability of Rupee will come from foreign inflows due to India being a safe haven with respectable returns, this coupled with slight respite in the EU region and China being overvalued. EU’s improvement will only strengthen the sentiments and will lead to some stability in the international scenario, again leading to further inflows in India and retention of funds.
Crude on the other hand has stabilized on the news of fall in US stockpiles. However, I still fail to be bullish on crude unless situation in EU stabilizes; the housing market has collapsed so as the demand from China (which is expected to deteriorate in the near future). The demand largely in the US is based on the interest rate environment and the housing market, as in China its based on the exports and the industrial development.
I am bullish on India growth story, though some stocks still remain overvalued the mid cap boom is to set off again. However, a lot depends on how EU and structure their financial policies.
Monday, May 24, 2010
Towards Sanity
So China has finally agreed to revalue its currency. Not without creating much hue and cry. Politics and Finance have been closely linked since Gold started to trade as a standard currency worldwide.
The revaluation though was much awaited, not only will it help in stabilizing the world trade where China was being given unfair advantage through undervalued Yuan, but will give respite to other PIIGS who are struggling to find their feet. It might cause some loss of trade to China and devaluation of its loans given to US, however, this is essential to settle the world economy.
The inflation might rise in the US and Europe (currently the biggest markets for Chinese goods) as most of the imported goods will become dearer. It will be a cause of concern in the EU where government in some countries is putting in austerity measures, however, this will require them to ease the interest rates for the economies to breathe. However, this might lead to further devaluation of EU currencies as easing interest rates will lead to rise in inflation to a certain extent. It remains to be seem what will be their measures going forward.
As for the US, its in a win win situation as its loans repayment was becoming expensive due to its currency gaining stance against other nations.
In the short term by revaluing Yuan, China might face some political tensions at home, but this is a step in the right direction to look inwards and propel internal consumption a Mantra which its neighbor India has been following successfully for some time now. This will lead to infrastructure development and advanced medical facilities to be available, which invariable would attract inflow of FII's thereby balancing its deficit of Dollar outflow in the current scenario. However, this is a painful process as the outside world should be comfortable in investing, therefore helping the government to weed out the shortcomings in the economy.
Also, its a more structured approach as it leads to internal development thereby making the domestic economy more competitive. Also, this would need more investment in the Chinese economy by US, thereby reducing their bilateral trade deficit which stood at $226.8bn. in 2009 and is pegged at around $51bn. as of March 2010. The revaluation would help China in balancing its currency to more realistic terms and open up the world economy to competition yet again.
China holds about $895.2bn. of US Public Debt, which dwarfs the nearest competitor Japan, another biggest holder (read exporter) of US debt by a whopping $111bn.
This might be a major reason for China to have $2.4tr. in reserves. However, revaluation will help China as most of the ‘so called’ developed countries are in dire straits of lending to any other country for modest returns. As they have announced huge bail out packages, which are like a heart surgery and does not come without side effects with one of them being inflation as there are no more industries to be built with most of the products being manufactured in China and services in India. By lending it to a country for development they can not only generate some modest returns but also help their economy not inflate.
India is another such destination wherein they can invest, as its considered to be economically and financially stable; however, the capacity to absorb the world inflows is still not yet up to mark. China, on the other hand with its fantastic bilateral ties with the two of the biggest economies of the world namely the US and the UK, will be in a better position. This would not only help it in balancing its Debt holding in the US, but will essentially ensure that none of the economies dishonor their agreement.
This process might throw some people out of employment as the revaluation might need contraction in supply. It might also affect the stock bourses and real estate industry, which many think is overvalued. However, this effect is only short term, wherein correction though painful is an essential process to stop further refueling of inflation and asset bubble.
The revaluation though was much awaited, not only will it help in stabilizing the world trade where China was being given unfair advantage through undervalued Yuan, but will give respite to other PIIGS who are struggling to find their feet. It might cause some loss of trade to China and devaluation of its loans given to US, however, this is essential to settle the world economy.
The inflation might rise in the US and Europe (currently the biggest markets for Chinese goods) as most of the imported goods will become dearer. It will be a cause of concern in the EU where government in some countries is putting in austerity measures, however, this will require them to ease the interest rates for the economies to breathe. However, this might lead to further devaluation of EU currencies as easing interest rates will lead to rise in inflation to a certain extent. It remains to be seem what will be their measures going forward.
As for the US, its in a win win situation as its loans repayment was becoming expensive due to its currency gaining stance against other nations.
In the short term by revaluing Yuan, China might face some political tensions at home, but this is a step in the right direction to look inwards and propel internal consumption a Mantra which its neighbor India has been following successfully for some time now. This will lead to infrastructure development and advanced medical facilities to be available, which invariable would attract inflow of FII's thereby balancing its deficit of Dollar outflow in the current scenario. However, this is a painful process as the outside world should be comfortable in investing, therefore helping the government to weed out the shortcomings in the economy.
Also, its a more structured approach as it leads to internal development thereby making the domestic economy more competitive. Also, this would need more investment in the Chinese economy by US, thereby reducing their bilateral trade deficit which stood at $226.8bn. in 2009 and is pegged at around $51bn. as of March 2010. The revaluation would help China in balancing its currency to more realistic terms and open up the world economy to competition yet again.
China holds about $895.2bn. of US Public Debt, which dwarfs the nearest competitor Japan, another biggest holder (read exporter) of US debt by a whopping $111bn.
This might be a major reason for China to have $2.4tr. in reserves. However, revaluation will help China as most of the ‘so called’ developed countries are in dire straits of lending to any other country for modest returns. As they have announced huge bail out packages, which are like a heart surgery and does not come without side effects with one of them being inflation as there are no more industries to be built with most of the products being manufactured in China and services in India. By lending it to a country for development they can not only generate some modest returns but also help their economy not inflate.
India is another such destination wherein they can invest, as its considered to be economically and financially stable; however, the capacity to absorb the world inflows is still not yet up to mark. China, on the other hand with its fantastic bilateral ties with the two of the biggest economies of the world namely the US and the UK, will be in a better position. This would not only help it in balancing its Debt holding in the US, but will essentially ensure that none of the economies dishonor their agreement.
This process might throw some people out of employment as the revaluation might need contraction in supply. It might also affect the stock bourses and real estate industry, which many think is overvalued. However, this effect is only short term, wherein correction though painful is an essential process to stop further refueling of inflation and asset bubble.
Wednesday, May 19, 2010
Flying again to fall...
Dollar has yet again done it. Our DD (Delicate darling) is again up on the cues of Germany banning naked short selling and Spain following its suite on certain securities and government bonds and further weakening of Euro. This has sparked a row amongst the global markets again on sentiments and trust factor. Naked short selling refers to selling of securities without borrowing in anticipation of buying them at cheaper rate in future. So its like I sell in future, 10 shares of Company A @ Rs. 10 while the current prevailing market price is Rs. 12, thereby betting on the future fall in price. It’s an agreement to sell company A stock @ Rs. 10 at a future specified date, no matter what the prevailing market price be at that particular point in time. Therefore, if the prevailing market price at a future specified date is below Rs. 10, I make a profit, and if its above Rs. 10 I intake a loss (however, this is done without borrowing the shares so in effect it’s a useful market manipulative tool to drag down the prices)
In effect, the partially convertible rupee was at 45.97/98 per dollar after hitting 46.01, its weakest since March 2 and below Tuesday's close of 45.60/61. This was majorly due to short covering of positions on Dollar by India traders. This event though short term, will give some respite to the exporters, who were sobbing away at the rate at which rupee was appreciating. The Major indices in the Asia Pacific region were all in the Red.
Some think this as a resurrection of Dollar, some think of this as weakening of global indices based on EU. Euro has lost its sheen and is trading at its all time low of four years (though comparing today’s time with the economic situation 4 years ago will be a little unfair). Yuan is on the other hand set to be revalued. There are different policies being reviewed by China to cool down their economy, wherein not only the inflation is high, but the amount of US dollars being bought from the market to keep Yuan artificially low is hurting other economies as well. Also by keeping price artificially down for the exports, China is inadvertently keeping the Inflation for countries like US and UK artificially lower. This is just like a volcano preparing to erupt again.
The Chinese markets corrected by almost 5% in the past few days. On one hand the dollar is again the favorite of investors as Gold is becoming overvalued (again a limited resource, short in supply) and Euro is rock bottom. However, once China revalues its currency, it will be forced to sell Dollar in the market thus forcing Dollar to correct in value. Once this starts, the Inflation will begin to rise slowly in US and the UK, thereby adding to their financial woes. Its speculated that Greece and other countries of PIIGS will become competitive. However, am wondering what they produce that they will become competitive. I’m not sure if any major companies in the world would like to set up their plants in countries where some asset markets have crashed by more than 80%.
With Dollar being available in the market and losing its value, investors might want to offload the currency and sit on cash. Rupee in the mean time is likely to gain and become competitive; though this is expected in 3-4 weeks to come.
While the dollar value is expected to go down in the coming few days so is the value of Crude (which is currently trading at $69 -$70). As US has stocked its Oil warehouses, which is the primary reason for the fall in Crude prices accompanied by slow demand from the EU. In addition we can expect with the Rise in Yuan, the demand for Oil which is the major contributing factor for inflation worldwide to slow down (As China is one of the biggest consumer of Oil). As China revalues the currency thereby leading to rise in inflation in its country as well, economic measures might slow down the demand for some time before catching up again with rise in its internal consumption.
Rupee will fall as dollar is withdrawn from the market, however, it will start rising as soon as Dollar is sold in the market and will command a premium over other currencies for some time i.e. till the economies are cooled down. Inflation will be controlled in India as crude is expected to fall and be range bound around $69 - $75 (according to IOC estimates). The markets are expected to correct in near future, however, it will mostly be due to FII’s pulling out in the short term. I expect the dollar inflows to start soon after Yuan is revalued, as investors will run for safer havens. Hence, the rise of Dollar as of now should not be viewed as strengthening of that currency and at the same time the fall of Rupee should not be viewed as a negative sign.
The growth is intact and the economic policies rock solid.
However, one thing still is unanswered, what will EU do with $1.4 trillion, where will it invest? Answers anyone….
In effect, the partially convertible rupee was at 45.97/98 per dollar after hitting 46.01, its weakest since March 2 and below Tuesday's close of 45.60/61. This was majorly due to short covering of positions on Dollar by India traders. This event though short term, will give some respite to the exporters, who were sobbing away at the rate at which rupee was appreciating. The Major indices in the Asia Pacific region were all in the Red.
Some think this as a resurrection of Dollar, some think of this as weakening of global indices based on EU. Euro has lost its sheen and is trading at its all time low of four years (though comparing today’s time with the economic situation 4 years ago will be a little unfair). Yuan is on the other hand set to be revalued. There are different policies being reviewed by China to cool down their economy, wherein not only the inflation is high, but the amount of US dollars being bought from the market to keep Yuan artificially low is hurting other economies as well. Also by keeping price artificially down for the exports, China is inadvertently keeping the Inflation for countries like US and UK artificially lower. This is just like a volcano preparing to erupt again.
The Chinese markets corrected by almost 5% in the past few days. On one hand the dollar is again the favorite of investors as Gold is becoming overvalued (again a limited resource, short in supply) and Euro is rock bottom. However, once China revalues its currency, it will be forced to sell Dollar in the market thus forcing Dollar to correct in value. Once this starts, the Inflation will begin to rise slowly in US and the UK, thereby adding to their financial woes. Its speculated that Greece and other countries of PIIGS will become competitive. However, am wondering what they produce that they will become competitive. I’m not sure if any major companies in the world would like to set up their plants in countries where some asset markets have crashed by more than 80%.
With Dollar being available in the market and losing its value, investors might want to offload the currency and sit on cash. Rupee in the mean time is likely to gain and become competitive; though this is expected in 3-4 weeks to come.
While the dollar value is expected to go down in the coming few days so is the value of Crude (which is currently trading at $69 -$70). As US has stocked its Oil warehouses, which is the primary reason for the fall in Crude prices accompanied by slow demand from the EU. In addition we can expect with the Rise in Yuan, the demand for Oil which is the major contributing factor for inflation worldwide to slow down (As China is one of the biggest consumer of Oil). As China revalues the currency thereby leading to rise in inflation in its country as well, economic measures might slow down the demand for some time before catching up again with rise in its internal consumption.
Rupee will fall as dollar is withdrawn from the market, however, it will start rising as soon as Dollar is sold in the market and will command a premium over other currencies for some time i.e. till the economies are cooled down. Inflation will be controlled in India as crude is expected to fall and be range bound around $69 - $75 (according to IOC estimates). The markets are expected to correct in near future, however, it will mostly be due to FII’s pulling out in the short term. I expect the dollar inflows to start soon after Yuan is revalued, as investors will run for safer havens. Hence, the rise of Dollar as of now should not be viewed as strengthening of that currency and at the same time the fall of Rupee should not be viewed as a negative sign.
The growth is intact and the economic policies rock solid.
However, one thing still is unanswered, what will EU do with $1.4 trillion, where will it invest? Answers anyone….
Sunday, May 16, 2010
Vinaash Kaale Vipreet Buddhi
With the EU in accomplice with IMF has come up with a bailout package of approximately $1 trillion, with rhetoric expression of saving the EURO, I cannot be more amused. High on sentiments (which is self explanatory) given the nations involved, this news has given some respite to the markets - the Eurofirst 300 rallied 6.7 per cent with the FTSE 100 up 4.4 per cent, sending the UK stock market index almost back into positive territory for the year to date. Banks led the gainers, with European financials up 12.8 per cent and France’s Société Générale, the continent’s third highest riser among large cap stocks, up 22.2 per cent (Source: FT.com)
In the
The government has also agreed to issue Currency swaps for stopping this plague. However, in doing so, they are acting like a doting parent trying to pamper its children even though children have made a cardinal mistake.
INR depreciated by almost 60p over a period of few days as the demand for Dollar increased on the back of recovery. However, am sure this is temporary, it’ll be back to normal very soon, with investors running for safer havens.
But, I still fail to believe why is government financing or rather more politically correct statement would be ready to finance the already bleeding institutes. The money financed has already been pocketed by a few vested bodies probably closely knitted with policy making. Why is the government greasing the (over)greased economies. They are giving banks money to honor their commitment on their borrowings to engage trust in the system; however, as the wheels are round, the banks will start lending to the same people again. What they need to understand is that, more than instilling confidence in the system a much larger problem which persists is instilling responsible borrowing amongst the borrowers. These borrowers will return under different companies, under pseudo names to be given credit to. This would obviously give dollar a boost, however, a much larger problem lays ahead in term of handling the Greenback from falling further. We can be rest assured that the markets will rally now, especially with the banks invested in Bonds of EU who would be expecting their money back, will have more credit on their hands. Expect the interest rates to fall in the coming few weeks. The mood is upbeat for some time to come, especially for US and Crude prices, both of which are like a DD these days (delicate darling). They shake with any news, be it the ash cloud over
However, as this news subsides over the next few days, I am expecting focus to come back and look east again over the undervalued Yuan and Yen. I expect
The corporate(s) in order to make their shareholders happy are lobbying to keep all economic numbers satisfactory. Well I think most happy right now is private businessman, who does not have to impress anyone or give out any results. By not parting with their businesses for a couple of extra bucks, most of which is loitered away in needless luxury acquisitions like private jets or yachts or behind the scene corporate parties. While I agree that some real value is also created, but nowadays like we witnessed in IPL, the name at the back of the jersey and the wants of those names is becoming more important than the vision and mission of the name printed on the front.
The people handling the biggest banks and financial institutions are not responsible enough. To make a few extra bucks, loans are issued through handshakes. Countries are being financed aimlessly just to save pride and not reputation. Money is being thrown in already monetized markets. The question is there are no more weapons to be bought, no more roads to be built in these countries or no more industries to be developed. Hence, where will all this money be absorbed? The question still remains unanswered….
Wednesday, May 12, 2010
Is inflation good for the government and private sector?
Why is it that after a sustained period of inflation, the corporate sector witnesses healthy growth in profitability?
Rising Inflation in India is a boon to the corporate(s), whereby their roll over loans or term loans is getting an advantage. As with rising inflation, more than the levels in which they took loan at, the value of their debts is reducing, while they are earning more on the assets created through the loans.
To simplify the above mentioned statement, few restructured loans at a higher interest rates, would fetch more benefits than they would enjoy by leveraging in the current situation.
The fact that rupee in 2008 would fetch lower in 2010 if the inflation is showing an upward trend, similarly a loan taken in 2008 would be worth less value in 2010 as compared to the revenue being generated from it. Hence, what the company has to pay for in the current scenario is less than what it had to had the inflation been constant.
So, if I say that rising inflation is helping the government I am not totally wrong. Here are the reasons:
1)The middle class or the serviced professionals are already paying direct taxes.
2)With high inflation, the prices of goods and services rise and so does the profitability of the private industry.
3)The reduced value of corporate loans due to depreciating value of INR is helping private industry improve their profitability.
4)Increased profitability leads to increased taxes from the private industry. One might contest that the value of raw materials rises, however that particular value is passed on the consumers, as can be seen from the fact that prices of Cars, Refrigerators, etc. are rising with the rise in input costs.
Hence, both the government and the corporate sector stand benefited from Inflation. It is not only the private sector, but every debtor who has borrowed INR stands to gain (I am not including the consumable debt for depreciating assets like car loans and personal loans unless any monetary benefit is derived out of it). Therefore, even if the debtor targets at defaulting or paying higher interim interest on the borrowed money, in the short term they will stand to gain. Whereas on the other hand, the creditors who have lent out their money stand to lose.
The biggest borrower is the corporate sector in India and of course with fueling inflation they stand to gain at this point in time, whereby they have to pay less for what they borrowed, however they earn more from their investment off borrowings.
Whereas the banks are losing out with their loans stuck. It’s a catch 22 situation for them, as not only their value of loans is depreciating, but also the government might tighten the monetary condition, thereby tightening the supply of credit and hence leaving the banks with further pressure on their bottom-line. Nevertheless, this will lead to strengthening of rupee; hence this is the right time when the corporate sector should be looking towards paying off their loans.
What I fail to understand is that what if the government or few vested bodies are keeping inflation artificially high?, so that the effect of their borrowings impacting their investments (read Real Estate) reduced and the demand for it kept artificially high thereby fetching them good prices. With the Pound Sterling and Euro on the brink of collapse, investors will run for safer havens for investments with India on the top of the list due to rising concerns over Chinese asset bubble. This might further appreciate the rupee in turn adding fuel to fire (read inflation). The government, at this point cannot contract the supply due to numerous political and economic reasons. The rupee is set to appreciate further, thereby making export of its services more expensive. But at the same time giving the cash rich companies more leverage to go in for cross border acquisition.
Though the stimulus package of Indian government was minuscule as compared to that of the US or UK in the current scenario, then what is the reason for such high inflation? Either, we don’t have the capacity to absorb the amount of capital inflow due to which the money is getting channeled to same asset classes and thereby making it over valued. Or it’s the government, which is keeping inflation artificially higher to reduce the debt exposure and discourage the common man to leverage his/her position further, till the worldwide crisis does not mellow down. This is a common methodology being followed since ages to cool down the economy.
The suffering here is of the Middle class. Its an irony; an economy like India boasts of its burgeoning middle class and attracts Investors, however, when it comes to taking care of its interests - all is lost.
Though the inflation has risen and the value of debt to be repaid by the private sector reduced as their value of debt is reducing, while the prices of goods or services they sell are swelling. However, in the past two years, given the worldwide crisis the private sector refused to increase the income of the middle class or people in the service sector to increase their provisions to cover the bizarre era of losses. Hence, though our income has not increased, but the value to maintain our lifestyles has. Therefore, we are the one’s cushioning the private sector and minimizing their losses. But nevertheless we cannot reduce the losses we bear in our real incomes.
The value of Real estate is rising on speculation. The government and banks are getting fooled by the ghost buyers on the real estate developers’ properties, thereby funding them further. The crude is at $75 a barrel as I write this article, however, still we’ll see negligible effect on the Inflation figures, while the government claims crude to be the deterring factor for rising inflation.
Are we caught in the vicious circle of a government and private sector lobby wherein we are far from reforms, wherein though each government plays cards of development and piles up its vote bank, while at the same time leaves the common man wondering - What am I doing wrong?
Rising Inflation in India is a boon to the corporate(s), whereby their roll over loans or term loans is getting an advantage. As with rising inflation, more than the levels in which they took loan at, the value of their debts is reducing, while they are earning more on the assets created through the loans.
To simplify the above mentioned statement, few restructured loans at a higher interest rates, would fetch more benefits than they would enjoy by leveraging in the current situation.
The fact that rupee in 2008 would fetch lower in 2010 if the inflation is showing an upward trend, similarly a loan taken in 2008 would be worth less value in 2010 as compared to the revenue being generated from it. Hence, what the company has to pay for in the current scenario is less than what it had to had the inflation been constant.
So, if I say that rising inflation is helping the government I am not totally wrong. Here are the reasons:
1)The middle class or the serviced professionals are already paying direct taxes.
2)With high inflation, the prices of goods and services rise and so does the profitability of the private industry.
3)The reduced value of corporate loans due to depreciating value of INR is helping private industry improve their profitability.
4)Increased profitability leads to increased taxes from the private industry. One might contest that the value of raw materials rises, however that particular value is passed on the consumers, as can be seen from the fact that prices of Cars, Refrigerators, etc. are rising with the rise in input costs.
Hence, both the government and the corporate sector stand benefited from Inflation. It is not only the private sector, but every debtor who has borrowed INR stands to gain (I am not including the consumable debt for depreciating assets like car loans and personal loans unless any monetary benefit is derived out of it). Therefore, even if the debtor targets at defaulting or paying higher interim interest on the borrowed money, in the short term they will stand to gain. Whereas on the other hand, the creditors who have lent out their money stand to lose.
The biggest borrower is the corporate sector in India and of course with fueling inflation they stand to gain at this point in time, whereby they have to pay less for what they borrowed, however they earn more from their investment off borrowings.
Whereas the banks are losing out with their loans stuck. It’s a catch 22 situation for them, as not only their value of loans is depreciating, but also the government might tighten the monetary condition, thereby tightening the supply of credit and hence leaving the banks with further pressure on their bottom-line. Nevertheless, this will lead to strengthening of rupee; hence this is the right time when the corporate sector should be looking towards paying off their loans.
What I fail to understand is that what if the government or few vested bodies are keeping inflation artificially high?, so that the effect of their borrowings impacting their investments (read Real Estate) reduced and the demand for it kept artificially high thereby fetching them good prices. With the Pound Sterling and Euro on the brink of collapse, investors will run for safer havens for investments with India on the top of the list due to rising concerns over Chinese asset bubble. This might further appreciate the rupee in turn adding fuel to fire (read inflation). The government, at this point cannot contract the supply due to numerous political and economic reasons. The rupee is set to appreciate further, thereby making export of its services more expensive. But at the same time giving the cash rich companies more leverage to go in for cross border acquisition.
Though the stimulus package of Indian government was minuscule as compared to that of the US or UK in the current scenario, then what is the reason for such high inflation? Either, we don’t have the capacity to absorb the amount of capital inflow due to which the money is getting channeled to same asset classes and thereby making it over valued. Or it’s the government, which is keeping inflation artificially higher to reduce the debt exposure and discourage the common man to leverage his/her position further, till the worldwide crisis does not mellow down. This is a common methodology being followed since ages to cool down the economy.
The suffering here is of the Middle class. Its an irony; an economy like India boasts of its burgeoning middle class and attracts Investors, however, when it comes to taking care of its interests - all is lost.
Though the inflation has risen and the value of debt to be repaid by the private sector reduced as their value of debt is reducing, while the prices of goods or services they sell are swelling. However, in the past two years, given the worldwide crisis the private sector refused to increase the income of the middle class or people in the service sector to increase their provisions to cover the bizarre era of losses. Hence, though our income has not increased, but the value to maintain our lifestyles has. Therefore, we are the one’s cushioning the private sector and minimizing their losses. But nevertheless we cannot reduce the losses we bear in our real incomes.
The value of Real estate is rising on speculation. The government and banks are getting fooled by the ghost buyers on the real estate developers’ properties, thereby funding them further. The crude is at $75 a barrel as I write this article, however, still we’ll see negligible effect on the Inflation figures, while the government claims crude to be the deterring factor for rising inflation.
Are we caught in the vicious circle of a government and private sector lobby wherein we are far from reforms, wherein though each government plays cards of development and piles up its vote bank, while at the same time leaves the common man wondering - What am I doing wrong?
Monday, May 10, 2010
Will the Dragon's failure be the Elephants gain
In accordance to the famous investment analyst and entrepreneur Marc Faber, the Chinese economy is set to crash in the next 9 – 12 months. I cannot but agree with him fully.
With 60% of the country’s GDP pegged at Construction, it already looks under pressure with the fall of commodity prices. The government has already banned loans for purchase of third homes in
The negativity is being felt by the fact that though the property prices have spiraled to an unparalleled growth of 11.8% since March 2010 (the highest since 2005, which was the golden boom period) and the economy grew by almost 12% in the first quarter of 2010, however, the banking stocks of the major banks in China like ICBC, BoC and CCB are at their lowest valuation figures as the investors despite the rising profits are vary of bad loans.
Under a stress test conducted by the
The Chinese composite index has declined by almost 12% since the starting of the year, and the stock market as slated by the investors is almost fully sold or fully priced, thereby leaving no scope of further investment for good valuations. Hence, Chinese investors are speculated to become active Gold Traders.
Investment Activity of
Also, there is yet another source which is slowly and silently investing in other avenues, which are deemed important from the future perspective.
The China Investment Corporation is discreetly buying out stakes in majority of companies, especially in the
The two largest holdings as of Dec. 31 included $1.77 billion in Morgan Stanley (NYSE: MS) and holdings valued at $3.54 billion in
Other investments include big names like Citigroup, Visa, Bank of America Corp., Coca Cola, Apple Inc., etc.
What if…?
Known to be a discreet investor and opaque in the functioning,
Known to be the back bone of the
If we see the Chinese market defaulting on its loans, which is highly likely in the wake of rising concerns over its asset bubble and aforementioned facts, the investors will surely run for cover thereby liquidating their positions leading to a catastrophic crash. As the assets will see a fall in value, it will lead to an increase in default rates of banks, which might force Chinese government to restructure loans and bail out in a similar manner that their
The Investments of CIC (China Investment Corporation) in the major companies of US and others worldwide might see liquidation, leading to another crash in the
However, can
Firstly, the exports will become less lucrative as Indian rupee would be stable as compared to the
The cash rich Indian companies with stable currency, can or will be in a position to increase their cross border takeovers of the capital hungry companies’ at cheap rates, thereby expanding their portfolio and reach.
However, still its to be seen if the crash really happens or not, and if or not India gets an opportunity again with its ‘Smart’ economic policies to overtake China as the next Superpower.
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