Another prediction by the man who coined BRIC

Jan 13, 2011

In this issue:
» iphone maker is world's second most valued company
» Gold run could last another decade
» Infosys disappoints the street
» Spain could be a flashpoint for the Euro
» ...and more!!

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Jim O'Neill. The famous Goldman Sachs economist who coined the famous acronym BRIC is back with another prediction. He believes that the year 2011 will be the year of the comeback of the US economy. In fact, he has stuck his neck out not just for this prediction but he also believes that the world's largest economy will not suffer a Japan style lost decade.

Writing for the FT, Jim argues that the US has a few things going for it. Its savings rate that is inching closer to the 5%-6% mark and its relatively more favourable demographics being the top two on the list. He further adds that the strength of the US labour dynamics is the key reason why the comparison with Japan is completely unjust.

Well, we are not sure whether this is a copy written to increase trading revenues for Goldman Sachs or a realistic assessment of the situation. We say this because the article lacks the necessary caveats, which unfortunately, seem to be getting bigger by the day.

Mr Jim has made it sound so easy. When an economy gets overleveraged, it should be followed by a period of deleveraging for few years and voila, we are back to the original growth path. In the real world though, things are rather difficult. Apparently, the US banking system is sitting on a huge pile of money. And when this money will enter the economy, chances are that there will be strong inflation before the recovery takes shape.

Furthermore, on account of Fed's money printing, dollar can crack too much too soon and not give the US the time to make a shift from being imported dependent to becoming export driven. Then there is the huge debt that is sitting on the Government's balance sheet. All of these factors make a smooth recovery a very difficult proposition for the US economy. For us, volatility could well be the order of the day.

Looks like the man behind the term BRIC may well be wrong with his next prediction.

Let us know your views. You can also comment on our Facebook page.

 Chart of the day
Jan 4, 2011. A watershed day in the history of Apple Inc, that famous maker of the iphone and the ipad. For the first time in its history, Apple's market value went past the US$ 300 bn mark, making it the second most valued company in the world. Today's chart of the day takes this new pecking order into account and shows the world's biggest companies in terms of market cap. Two technology and two energy giants dominate the list. Reliance, our own homegrown energy giant, has a lot of catching up to do we believe.

Source: (Market cap data as on Jan 5, 2011)

The Indian mutual fund industry has had a rebirth of sorts in the past 24 months. The industry has been known for bringing in millions of fresh retail investor money into Indian stock markets. However, over the past few months, a ban on the distribution model and regulation on launch of new funds has dried up the inflows for mutual funds. Turns out that the distribution model of paying heavy commissions to banks and brokers was the reason for the strong inflows into the industry. Ideally there should have been another cause for the incremental investments. That of higher retail investor appetite to build long term wealth in Indian stocks. But most large players have been ruing about how the collapse of the distribution model has been the death knell for the industry. SEBI chief Mr Bhave however stands to his verdict. In a recent meet he asserted that the industry is not in dire straits. And alternative distribution models that are in the investors' interest should be adopted by all players.

We completely agree with Mr Bhave's judgement. It is just a matter of investors being educated about the benefits of investing in mutual funds through the alternative means. If done well, it could work wonders for all players, including the larger ones. Especially because it would help them in tapping the vast under-penetrated retail investor base in the country.

A popular concern these days: Is gold in bubble territory? It is natural to be worried given the price of the precious metal has multiplied 5 times since 1999. Critics continue to yell out doom from their roof-tops. They think gold is a speculation and the rally has been an extended aberration. Time will tell how right they are. Or wrong. But one thing is clear. People can go any extent to prove their point.

In the meanwhile, gold prices may continue to rally. Maybe for another decade. Let us share our reasons. Do not compare gold with stocks. Many, who do including Buffett, end up concluding that it has no intrinsic value. But think about gold as an insurance against paper currency. Take for instance, a log of wood that floats on top of a river. If the water level rises, the log will rise too and continue to float atop. Ditto for gold and currencies. As long as the quantum of paper money continues to rises, gold will continue to float atop.

So when we're saying gold is in a structural bull market, it also means a bad time for paper currencies. And this is not a new thing. Consider this fact for instance. The value of the US dollar has eroded by about 97% in the past century. Currencies lose their value fastest when a nation cannot grow its way out of its debt burden. Governments of developed countries were already hugely indebted. After the global crisis, their debts have soared even further. On the other hand, their economies continue to struggle. So these economies will continue to monetize more debt and print more money. So with the river in flood, the best way to save yourself is to hold on to a log of wood. You get the hint, right?

The result season began on a tepid note for the IT sector. IT major Infosys reported a 3% QoQ growth in their net income for 3QFY11. The 2% QoQ growth in sales was lackluster as well. The tepid results were on the back of the uncertainty that continues to surround the global markets. While volumes and billing rates have increased marginally, the management continues to be cautious on the macro outlook. Infosys added 40 new clients during the quarter.

A caveat in these results is that the third quarter usually sees tepid results due to lower number of billing days during the time period. Nevertheless the performance of Infosys has not been very encouraging. The IT sector has seen a reversal of fortunes since last year. The companies were witnessing an increase in demand and deal pipelines were turning fat and robust. Would other IT companies mirror Infosys' performance? We think that while results would be impacted by the lower number of days, they would not be so lackluster. The results would receive a boost from the tail effect of the deals that the companies have signed in recent times.

If this domino falls, it will set off a huge chain reaction. The entire European Union (EU) as we know it may just collapse. Spain plans to auction EUR 2-3 bn in 5 year government bonds tomorrow, but this is only a small portion of its overall financing needs for the year. It needs to roll over more than EUR 65 bn in sovereign bonds before the end of 2011. Nobel Prize-winning economist Christopher Pissarides states that if it collapses, the move could very well spell the end of the Euro as a common currency.

Small fry like Greece and Ireland were easily bailed out. To rescue Spain, the quantum of funds needed would sink the entire eurozone. The country is the fourth largest economy in the region. But, it has been plagued by high fiscal deficits, a sluggish economy and unemployment rates of around 20%. Stronger nations like Germany, France would not be willing to put their neck on the line to save the flamboyant Spanish. Well, this Spanish Armada has its work cut out to stay afloat.

Meanwhile, a below par performance from Infosys and continued high inflation contributed in a big way towards the dismal performance by Indian stocks today. The BSE-Sensex was trading lower by more than 350 points at the time of writing. This, as strength was seen in most Asian indices with the European indices trading a mixed bag.

 Today's investing mantra
"I've seen more people fail because of liquor and leverage - leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing." - Warren Buffett

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7 Responses to "Another prediction by the man who coined BRIC"


Jan 14, 2011

I think US will bounce back. Even Warren Buffet said so. The immediate challenge for India or US - Governments are not able to have the right policies in right time, not just in popular perception, but also in terms of recent performance be it controlling inflation or raising employment respectively. One has to wait for the lag effect or the effect of time eventually correcting these. However, there are many underlying strengths for both, if only they can be tapped.


Adi Daruwalla

Jan 14, 2011

In connection with Infosys, its not only the business model and the organic business that is going to show growth that is going to affect the CMP. The stock holding pattern is not going to be favourable to maintain the CMP in these times. The promotesr have always held almost 16%, FII's have 38%, Others another 36% and DII's 7 - 10%. FII's can wreck havoc in the price of Infy if they went on a selling spree and that I think has just happened.


Adi Daruwalla

Jan 14, 2011

Mr. Bhave is the right man in front to control the Mutual Funds and their activities and modreate and bring an equilibrium in their operations. We need to see good returns for invetors, not depletion of investor capital. There are four groups of people in today's world that need supervision, 1) Children -- Parental Supervision, 2) Thieves -- Police Supervision, 3) Politicians -- Emotional and Spiritual Supervision and the most required 4) Mutual Fund Managers --- SEBI's supervision.



Jan 13, 2011

Chindia is burdened with the responsibility of being the 21st century's world growth engine. As we enter 2011 the headlines are not looking good. Climate change is disrupting food production. Where will Chindia's growing food demand come from. Will there be a disposable surplus in the pockets of the target middle class group that is supposed to generate demand and hence economic growth?


shine abraham

Jan 13, 2011

In most probabality, Mr. Jim will turn out to be wrong, all indicators with common sense shows that US is an irrecoverable state, to retain Past glory it may take a century or two atleast


Anupam Garg

Jan 13, 2011

time zones change while coverin US 4m 1 place 2 another.& we xpect it 2 recover in 1 yr? though wht is surprisin is the fact that its currency is depreciatin at an alarmin rate. Already AUD and CAD are priced higher. This may b good news for controllin current account deficit. An increase in savings rate will further support investments...the only worryin factor is the rate of infusin money & hence inflation, but if it pulls back the giant back on its feet, then isn't it worth the risk?



Jan 13, 2011

I fully agree with your views on the US economy as those are based on hard facts and time-tested economic principles. There could be temporary distortions that the likes of Greenspans & Bernankes of the world may create to postpone rather than tackle the core problems headon. But ultimately these irresponsible quickfix solutions lead to economic problems of much greater magnitude.
And as far as Goldman Sachs is concerned...does anybody take them seriously anymore? Words like "financial criminals", "lying machine", "insiders", "market manipulators", "unethical" have often been used for them by none other than some of the most renouned and credible US journalists, editors and authors. In their lust for wealth, some people just don't realize the dangerous path they tred......Forgive them Oh Lord!! For they do not know what they do.


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