Time to take some lessons from Zimbabwe?

In this issue:
» Buffett's key lieutenants earn more bad press
» Another US$ 100 bn blow in the offing for Euro zone
» India Inc's credit quality at its peak
» Stronger signs of asset bubble in China
» ...and more!

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00:00

The very mention of Zimbabwe brings backs memories of hyperinflation. It reminds us of the ill famed trillion dollar Zimbabwean note introduced by the country's central bank in 2009. This was after the yearly price rises in the country had shot up from 32% to 11,200,000% within a decade. At that time, 100 trillion Zimbabwe dollars equaled around US$ 300! Two loaves of bread alone cost around 50 bn Zimbabwe dollars. Although these may sound fairy tale like, the facts that underlie these circumstances were real. And if other nations do not take home some lessons from this, they might as well be prepared to face nearly as humiliating circumstances soon.

Important to point out here that Zimbabwe's misery was kicked off by the country's central bankers' obsession with printing money. Even if that meant introducing currencies of ridiculous denominations. What later arrested the nation's economic fatality was the decision of a saner Finance Minister to allow use of more stable currencies like the US dollar and the Euro.

In February 2011, the annualised inflation in Zimbabwe stood merely at 3%. This is even as the nation's GDP growth is nearing 9% for the year. But more importantly, its inflation rate is now lower than that of US, UK, India and China. This is not to suggest that countries with higher inflation rates could see YoY price rises in 8 digits soon. But that money printing is not a solution to economic problems. On the contrary it can lead nations to precarious circumstances. For economies that have even the slightest hints of a currency crisis this is a wakeup call. Zimbabwe's solution of using more stable currencies could prove useful to safeguard their economic sovereignty. Meanwhile, investors would do well to hedge their risk with the currency that has upheld its stability for centuries i.e. gold.

Which currencies do you think could remain most stable in the long term? Let us know your views or post them on our facebook page.

01:20		Chart of the day

The importance of skilled labour to India's long term GDP growth cannot be emphasized enough. Education is therefore considered the cornerstone of the country's economic prosperity. Capital too continues to remain paramount to fulfill the country's investment needs. Particularly those in infrastructure. But it seems that amongst the two most populous countries in the world - India and China - labour and education will prove to be far more important to the former than the latter. A young and educated population will be a higher contributor to India's GDP growth than that of China's for the next 2 decades.

Data source: ADB

01:55

Warren Buffett may have forgiven his most trusted lieutenant David Sokol. But the jury is still not out on whether the man did actually cross his limits. In the meanwhile though, the controversy has pulled one more person into the ring. And he is none other than Berkshire Hathaway's Vice Chairman, Charlie Munger. Apparently, David Sokol used Charlie Munger's investment into the Chinese car company BYD as a precedent to justify his investment in Lubrizol Corp. It is worth adding that Buffett's investment in BYD also had a similar pattern to that of Lubrizol Corp. In other words, Munger had recommended the company to Buffett and at the same time had his personal net worth invested into the stock.

The similarities though end just here. Unlike Sokol, Munger's investment in BYD was many years old and he had also informed Buffett about the same. What further worked in favour of Munger was the fact that he played no part in Berkshire's discussion on the BYD deal. In light of all this, it seems fairly obvious that Munger did follow the protocol and in no way was seen pushing against the limits. Sokol, we believe has actually done more damage to his reputation rather than benefit from using Munger as a precedent.

02:35

The trouble in the European Union goes on. Portugal is going to face some dire financial needs next month. Investors are demanding record interest rates to buy the country's bonds. Though it has not asked for help so far, it is estimated that country may need in excess of US$ 100 bn to keep afloat. The country is struggling to restructure its economy that has lagged the rest of the euro zone. The Portuguese crisis is not the only dark cloud in the euro zone. Moody's investor service recently downgraded the credit ratings of 30 smaller Spanish banks. This is going to make raising capital more expensive for these banks. Additionally, Spanish banks are deeply exposed to Portugal's economy.

The ongoing banking crisis has engulfed the euro zone and has kept investors wary about the health of European banks. They are worried about the amounts that already indebted governments may spend to keep local financial institutions afloat. As a result, there are fears that existing bank and government bondholders could see the value of their investments slashed. So all in all, the crisis in Europe is far from over. It will take a while before the region can concentrate on boosting up its ailing economies.

03:15

Strong growth in India's GDP has not just enthused investors globally and in India but has rubbed off well on rating agencies too. In this regard, ratings agency Crisil opines that India Inc's credit quality is peaking as the number of upgrades outnumbered downgrades in FY11. Crisil upgraded the ratings of 605 companies and downgraded 269 last fiscal on a base of around 6,200 companies it rates. For this, the agency uses an indicator called the modified credit ratio (MCR) which indicates the relative frequency of upgrades and downgrades. This MCR had improved from 0.93 times in FY10 to 1.1 times in FY11. However, the million dollar question is whether this ratio will improve going forward as well.

Crisil does not expect this to happen since India's economy is being bogged down by a lot of pressure factors. This includes rising inflation which has led to a hike in interest rates and rise in commodity prices which has led to increased input costs for India Inc. Plus, the movement of oil prices in the wake of the revolutions in the Middle East will be another factor to watch out for. All in all, in the medium term at least India Inc. will have to brace itself for some challenges.

03:40

Water constitutes a major part of the earth's surface. But, only 3% of the earth's water supply is fresh. Further, a large percentage is frozen in either glaciers or polar ice caps. The Indian peninsula is also surrounded on water on three sides, and is known as the land of holy rivers. But, managing water resources is a major challenge we are facing. As per the latest census India's population stands at 1.2 billion people. However water resources have stayed stagnant over many years.

Without an increase in water supply, higher GDP levels may be impossible to reach. After Jim Rogers, this opinion has now come from Mr Ahluwalia, Deputy Chairman of the Planning Commission. You may be wondering what water has to do with GDP growth. But, the scarcity of water has huge ramifications. It is a necessary resource for agricultural outputs and various industrial uses. It is used in power plants, as a solvent in manufacturing plants and even in oil refineries. Pollution and inadequate sanitation have already contaminated India's water supply. Well, without serious remedy efforts on this front, it looks like India will be prone to more frequent water cuts, and water related diseases, damaging its growth prospects.

04:15

China raised its interest rates again recently. With this the government feels that it is nearing the end of the monetary tightening that it had embarked on. The steps were mainly to reign in the runaway inflation. However, even the government has come to terms that inflation would now hover around 4% levels. This is due to higher food inflation as well as higher labour wages that the country has now adjusted to.

However, the bigger question worrying global economists with regards to China is "What happens next?" As reported by a leading gaily, the Chinese government would no longer concentrate on monetary tightening once inflation comes down to 4% levels. As a result, it would start to relax the monetary measures. And this would lead to an influx of money in the system. With deposit rates as low as 3.25%, the people would start to put this money in alternate investment assets. And this would eventually lead to new asset bubbles in the economy.

04:40

The benchmark indices in Indian stock market barely managed to cross the dotted line and made inroads into the positive territory in the later hours. The BSE Sensex was trading 31 points (0.2%) higher at the time of writing this. Other Asian markets closed on a mixed note. The European markets have also opened flat to negative.

04:50

Today's investing mantra

"Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management, and limited exposure to hard times." - Warren Buffett