With which Benjamin you agree? Graham or Bernanke

Apr 6, 2011

In this issue:
» What's driving the commodity rally?
» Oil could touch as much as US$ 300
» Realty companies don't have a good 'Gudi Padwa'
» Asian recovery faces inflation threat, says ADB
» ...and more!

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Recently, our attention was called towards an interesting article in The Wall Street Journal. The sheer irony of the write up hit us instantly. It talked about how the current US Fed Chairman shares his first name with another finance luminary. And yet, how their philosophies are poles apart. We are indeed referring to Ben Bernanke and the value investing legend Ben Graham.

Bernanke is the quintessential Keynesian. And to add to it, he is also a keen student of The Great Depression. Needless to say, he favours Government intervention and easing up of credit whenever the economy begins to lose steam. He argues that financial asset prices are always correct and they reflect the true state of the economy. The reverse is also true as per Bernanke. This is to say that financial assets such as stocks should be made to go higher in price by printing money. The higher price will then lead to improvement in economy as per Bernanke. To sum it up, the Fed Chairman does not believe in the concept of intrinsic value. He is of the view that intrinsic value is an annoyance and it is the price of the asset that matters the most.

At the opposite end of the spectrum is the father of value investing, Benjamin Graham. He, as we all know, places the concept of intrinsic value above all else. Unlike Bernanke, he did not believe in the efficient market theory and argued that prices always keep fluctuating and seldom reflect intrinsic value. In other words, the true state of an economy or a stock is reflected by its fundamentals and not its price.

So, there you are. Two finance experts and two Benjamins but with polar opposite view points. Long time readers of this newsletter would have no problems understanding which Benjamin we agree with. It is indeed Ben Graham. According to us, it is not the printing press and the quantity of money in the economy that matters. What matters is the underlying earning power of the company. Of course, printing money can take the stock higher and take the price away from true fundamentals. But over the long term, it is the fundamentals that will prevail we believe.

What about you? Which Benjamin do you agree with? Graham or Bernanke? Let us know your views or comment on our facebook page.

 Chart of the day
Rising prices of commodities such as agricultural items and industrial metals is creeping into the inflation numbers of nations across the world, causing the same to rise to record levels. It is not uncommon to see inflation in the range of 20%-30% in some of the underdeveloped and closed economies. Today's chart of the day makes an attempt to highlight countries with the highest inflation numbers. Leading the pack is oil rich Venezuela, where inflation has touched as much as 30%. What this indicates is that just to break even in real terms, an investor will have to invest in assets that yield close to 30% returns. A tall order indeed. While India's inflation is substantially less than the top five countries, it still is amongst the highest amongst emerging nations and that in itself is a challenge for the country's policymakers.

Source: Rediff.com

Sticking to commodity prices, there has been a massive surge in the same over the last few quarters. Some of the main causes of this have been widely discussed already. The chief trigger has been the substantial increase in the global money supply. Money printing exercises by various central banks, especially the US Fed are the prime culprits. The developed economies in turn have put the blame on the rising consumption in fast-growing emerging economies.

But there is one more pertinent reason that also shares quite some credit for the storm in commodity prices - the 'financialisation' of commodity markets. Let us explain what that means. There has been a growing presence of financial investors in commodity markets. This has significantly altered the dynamics of the global commodity prices. Global commodity markets have become more sensitive to portfolio rebalancing by financial investors. This has made commodity markets more correlated with other asset markets, including major equity markets.

It is not at all surprising that rising commodity prices have allured quite many investors. Of course, there are valid reasons for the price rise. But soon, we could be witnessing a crazy euphoria, when price rises alone would propel further price rises. And then, alike most previous commodity cycles, this bull rally too would end painfully.

'Make hay as the sun shines'. The Saudi Prime Minister understands the meaning of this adage very well. As the world still deals with crude oil crisis on account of MENA unrest, he has come up with a crude oil price forecast of US$ 300 per barrel if it spreads to Saudi Arabia. Saudi Arabia is the only OPEC member with crucial spare capacities. While there is nothing to lose from this statement, it can help him to make most of the current oil price volatility.

We choose to discount this statement as a mere speculation. And the reason is that we don't see the possibility of such political crisis in Saudi Arabia. While some unrest does exist, we believe that a culture that bans people to go to street and talk will keep the Saudi time bomb diffused for a long period of time. And by then, the increase in non OPEC and natural gas supplies will be enough to reduce reliance on OPEC supplies for such predictions to come true.

Asia is seated on the driver's seat for the world's path to recovery. The growth in the developing economies of Asia is slated to grow at an average rate of 7-8%. And this would help the global economy in getting back on its feet. However, there is one evil that has raised its ugly head and threatens to be an obstacle for Asia. And as per the Asian Development Bank, that is none other than inflation. Most of Asia's emerging economies like China, India, etc are reeling under the pressure of higher inflation. Unfortunately most of these countries have found it difficult to reel in inflation without hampering their growth rates. Raising interest rates and restricting capital inflows have been the two most prominent measures that have been taken. Both threaten to restrict the countries' economic growth rate. As a result, the countries face a tough choice between continued rapid-fire growth and facing higher inflation. Or to use restrictive measures which would bring inflation under control but threaten their growth rates.

Gudi Padwa, the Maharashtrain New Year which passed by recently is deemed to be an auspicious occasion for launching new business ventures. However, it seems that the real estate industry decided to give Gudi Padwa a miss this time around. Traditionally, many new projects are launched on this particular day. However, due to declining demand, many real estate developers refrained from launching new projects this time around. Industry sources believe that the new launches dipped by about 40-80%. Considering that the real estate developers are not keen on lowering prices, demand is likely to remain muted. This will further hurt new launches in the upcoming quarters.

However, it will be interesting to see for how long the real estate developers are able to hold on to the sky high prices. Their cash flow situation is worse and liquidity from banks has dried up. In such a scenario, lowering the prices is the most viable alternative for the developers. However, when is that going to happen is a moot question right now.

Meanwhile, the Indian benchmark Sensex was trading in the negative at the time of writing after opening the day on a positive note. The index was down by about 30 points. Heavyweights like ITC and Wipro were seen adding the maximum pressure. Other Asian indices closed the day on a mixed note whereas Europe is also trading mixed currently.

 Today's investing mantra
"A government big enough to give you everything you want is strong enough to take everything you have." - Thomas Jefferson

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12 Responses to "With which Benjamin you agree? Graham or Bernanke"

shome suvra chakraborty

Apr 9, 2011

The old concept of margin of safety can't be discarded. Overvalued market may lead to bubble. Speculation is not bad and drives the market forward though reckless speculation has its negative effects.



Apr 7, 2011

On Real estate prices:
If one has real estate it may grow long term...how ever if one is in real estate investment with big name companies please look at how and in what way you are supporting them by keeping the prices high...
I really doubt the value an investment does currently when one invests in these big name company debt instruments they are promising annual interest rates like 10 to 11%. They are giving the most compared to any out there ...that means they need everything GREED GREED....And retail investors are running to invest in such... I cannot comment beyond this. Hands down they have MORE guts and i hope more responsibilities (Financially)...
Can this big name real estate companies can go belly up?.....ohh yeaaahhh...Even after 1) lobbying the govt to keep the interest low for quite a long time so that to keep the prices high. 2)For banks to finance beyond their mean historical repo crr ratios. 3) then through the mutual fund F..D.I route..(i dont know how one can name it FDI when it is through mutual fund and majority lobbyist are from Real estate Mr. Pranabji) 4) now the debt instruments ....

NO DOUBT these guys are going for a KILLLlll...Hello....



Apr 7, 2011



Ambrose Thayalan

Apr 6, 2011

Bernanke's method is measurable and more dependable than Benjamin Graham's.


Gopal Kalpathi

Apr 6, 2011

Any layman can understand that when the supply is more the value is less and vis-a-versa. So by increasing the supply of money, its value is going to go down, if not immediately certainly over a period of time, but then, Bernanke (or for that matter the whole of US gov) does not believe in conventional wisdom. So be it. It may perhaps dawn on the US only when a civil war such as that in the MENA region starts. That is a little time away. Till then the D party can party.


Emmanuel K J

Apr 6, 2011

I agree with Benjamin Graham. Asset prices in the short term are subject to irrational valuations.It is only in the longterm that they tend to correct and reach equilibrium prices.That equilibrium prices is of only a very short duration, after which disequilibrium and price fluctuations of day to day starts. This we call and haloows it as - market mechanism of vibrant capitalism!
Emmanuel K J


Manoj Kumar

Apr 6, 2011

Of Course Graham.


joseph thomas

Apr 6, 2011

With Graham ofcourse.Icarus flew but he fell.It seems there is a planned approach from the Feds to recover from the slump by bringing down the healthier economies.What better way than printing away money?


Anupam garg

Apr 6, 2011

In an ideal world, Mr. Graham would hav been the ideal choice. In the real world, Mr. Bernanke's words don't sound tht irrelevant. How on earth can any1 decipher intrinsic value of a financial asset with so much information asymmetry? The person knowing the least is bound to get attracted / repelled to an asset causing its undue appreciation or depreciation. In such a scenario, do real world prices hold a meaning?

& in times of financial crisis, is 1 supposed to sit back and say that the prices will re-adjust as per fundamentals? well, the very fundamentals must have been wrong in the first place which caused the crisis (at least the system was corrupt enuff to tamper the fundamentals).

But then hopefully, over a very long long time, Mr. Bernanke wld b proven right (if ideal theories still exist in material world). thr's a dire need for a 3rd Ben who wld provide an equatorial theory between these 2polar ones.



Apr 6, 2011

Respected EQ.Matser Team,
I am not at all an economist !without any proven credentials to comment!! especially on both the Bens who are poles apart in their approach and attitude?
As an ordinary person I am nevertheless prompted to

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