The best indicator of the coming serious inflation

Apr 2, 2011

In this issue:
» An important event that went unnoticed
» US is now an emerging economy feels Marc Faber
» Raghuram Rajan against corporate houses in banking
» Oil prices could plunge in a month
» ...and more!

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Not many in India would be aware of Wal-Mart. But it surely is a household name in the US. Sitting right at the top in the Fortune 500 list, the firm, besides other things, is known for its size and its ruthless efficiency. Infact, it would be fair to say that no other firm has done as much to reduce inflation for the average US consumer as this firm. Time and again, it has taken advantage of its immense scale to bring down costs and pass on the benefits to its millions of customers across the globe.

Thus, what better source to know how inflation is creeping into the price of various goods and services than this retail giant. And if the comment of its CEO is anything to go by, things are not looking all that great on the inflation front. Moneynews reports that the one retailer prepared to cut costs to the bone to save money for consumers is now warning that the price will rise very soon. "We are seeing cost increases starting to come through at a pretty rapid rate," warned the CEO of the company, Bill Simon.

So, there it is. If one of the largest firms in the world and the one that is known for its almost manic obsession with cost control feels it will be helpless against forthcoming price increases, we better believe him than a certain Mr Bernanke. The US Fed Chairman continues to believe that inflation is not a threat as of now. But that is where he seems to be missing the plot. Inflation can lie dormant for a while. But once the heightened money supply starts entering the system, it can cause serious damage before the likes of Bernanke realise. And that is exactly what the Wal Mart CEO seems to be warning us about. Furthermore, with the Indian economy getting more and more integrated with the global economy, higher inflation in some form or other may also visit Indian shores.

So, have you taken any insurance against rising inflation yet? Let us know your views or comment on our our facebook page.

 Chart of the day
An important event happened last month that we believe did not get the attention it deserved. It was important because it marked the end of a 115 year reign. The end of US as the world's largest manufacturer that is. Yes, that's correct. The US is no longer the world's largest manufacturer. As today's chart of the day shows, China nosed ahead of the US in terms of manufacturing output in 2010. In fact, China's manufacturing output was greater than even the combined output of the six largest manufacturers after the US. Important to add that this is not the first time the dragon nation has emerged as the world's largest manufacturer. It enjoyed that status way back in the period between 1700 and 1850. Also interesting to add that another nation that gave China a tough fight a few centuries ago, was none other than our very own India. As of now though, India's output is just around 10%-12% of China's. Clearly, India does need to cover a lot of ground.

Source: Business Standard

Dr Doom aka Mark Faber presents a novel perspective. He says that the US has effectively become an emerging economy. Yes indeed, but a very bad one. He finds other emerging markets such as Thailand and Mexico much better.

And there are good reasons why he says that. The US market could be cheap; it could outperform other markets for a while; but not in the long run. There is hardly any growth in corporate profitability. Whereas, emerging economies that experienced problems in the 1980s and 90s have realised the merit of prudent fiscal and monetary policies.

Look at the Mexican economy. It's doing great and the inflation is really low. On the other hand, the US is going to bear some really serious consequences of monetary steroids that have been pumped into the economy.

If there is one government entity that has earned the respect and appreciation of experts across geographies it is the RBI. The Indian central bank has been very conservative when it comes to opening up the sensitive banking sector to complex products and players. But it has also taken very measured steps in ensuring that the banking system adapts to changes. However, for the first time in many years, the entity is in need of serious some advice on the way forward. And we believe that the same coming from the like of renowned economist Raghuram Rajan holds a lot of water.

Mr Rajan believes that the RBI's attempts of making the banking sector more efficient and price competitive are misplaced. He rejects the proposal of issuing bank licenses to corporate houses. His opinion is based on the heightened chances of vested interests in corporate running banks. If allowed to do so he warns the RBI of tighter supervision on inter-group lending. More importantly, he believes that instead of other corporates, the NBFCs and micro lending institutions have better prospects with bank licenses. In fact, they would be the ones to facilitate financial inclusion rather than large corporate. We could not have agreed more with him. The RBI should avoid being blinded by the higher doses of capital that the large corporate have to offer. It would be better off paying more attention to systemic risks. After all, when all is going well, we would not want to land up with a messy banking sector like in the US or China.

Oil has been on the boil for the past few months, especially since the tensions broke out in the Middle East. Experts are however predicting a fall in oil prices in the short run. This is given that inventory levels in the US are running at high levels, and the country is now running out of storage capacity. The concerns in the Middle East have led to the US build up high inventory of crude oil, mainly due to the ‘what if' scenarios given that Saudi Arabia became a legitimate concern. Now since things have calmed down a bit, and the US inventories running high, there are great chances that oil may be in for a fall in the near term.

After registering healthy gains during the previous week, the global stock markets continue to extend their winning streak. Amongst global indices, the US stock markets were up by 1.3% during the week in light of encouraging unemployment data reported by the US labor department. As per the data from the US labor department, unemployment rate in the world's largest economy has fallen to 8.8% in March from about 8.9% in February 2011. This boosted optimism in the US stock markets. As far as the Indian stock market indices are concerned, the BSE Sensex registered a gain of 3.2% during the week due to rising fund flows and improved global cues. Despite higher crude prices and inflation, it was a bit surprising to see the markets rallying for the second week in a row. Now, it will be interesting to see whether this relief rally has legs to cross the psychological 20,000 mark in the coming week.

Amongst the other world markets, Germany was up 3.4% while Hong Kong was up 2.8%. Brazil and France were relatively flat during the week registering a gain of 2.2% and 2.1% respectively. Even Japan was able to carry forward the gains registered in the previous week and was up by about 1.8%. China was the only market to have closed the week in the red.

Source: Yahoo finance, Kitco, CNN money

 Weekend investing mantra
"Not everything that can be counted counts and not everything that counts can be counted." - Albert Einstein

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6 Responses to "The best indicator of the coming serious inflation"


Jul 14, 2011

iNDIAN inflation is 9% so if we buy the stock of an Indian company the
profits of which have increased by 5% in the last 12 months then we have
invested in a company whose earnings are decreasing. If we buy the stock
of a company whose annual earnings are the same as the previous year
then the profits of that company are decreasing by 9% etc. A good company has earnings which are increasing by at least a nominal 20%.



Apr 6, 2011

i would like to know what are the advantages,disadvantages and meaning of inflation in india


Harpreet Singh

Apr 4, 2011

i would like to know what are the ways to benefit from high Inflation.


Srinivas K

Apr 3, 2011

Reg the manufacturing data, it is an eye-opener. However one should also keep in mind that the order of the day is "consuming economy" rather than a "producing economy". The world is seeing how countries like Japan, US and several European economies struggling with high manufacturing capacities lying idle resulting in job losses. India doesn't need to worry on this front atleast, not only in the short term but also in the long term as there is a very large gap between what we consume and and what we produce.


Ganesh K

Apr 3, 2011

The Subprime problem started in USA because the financial salesmen did not understand the COMPLEX PRODUCTS they sell and were still less understood by some decision makers in Banks.This resulted in banks holding Toxic Assets and had to be bailed out by US govt by electronically printing dollars and exporting inflation all over the world. RBI should never ever open Indian Banking sector to sell complex products here in India. It will be a disaster. India is already facing high inflation in essential commodities due to derivatives(sofisticated word for 'speculation'). Complex products which nobody unstand will ruin Indian economy.


shome suvra chakraborty

Apr 2, 2011

Wal-Mart has the low cost- low price advantage through the extensive use of information technology in every aspect of supply chain in U.S. In India if we are aware of the cost-push inflation the main bottleneck is poor infrastructure which could have developed the Purchasing Manager Index.

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