After tulip and dotcom mania, here come 'Bitcoins'!

Apr 8, 2013

In this issue:
» Is gold no longer a safe haven?
» Why Indian banking needs an overhaul
» Equity bull markets imminently visible: Mobius
» PSU banks compete with private for retaining talent
» ...and more!

------------------------------------- It's Not Just About Picking The Right Stocks... -------------------------------------

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In 1593, tulips were brought from Turkey and introduced to the Dutch. By 1634, the tulip bulbs were not mere flowers. So intrigued were the Dutch by the new floral variety that it became an obsession. Soon, prices were rising so fast and so high that people were trading their land, life savings, and anything else for tulip bulb futures. At the peak of the market, a person could trade a single tulip for an entire estate. It seems not much has changed in speculative tendency over the past 400 odd years. Between the Tulip bubble burst in 1637 and the subprime bubble burst in 2007, several novel and sought after commodities have been victims of speculation. The latest to join the ranks seems to a 4-year-old virtual currency called 'Bitcoins'.

As per Wikipedia, Bitcoin is a digital decentralized currency based on peer to peer internet protocol. Introduced by Satoshi Nakamoto in 2009, Bitcoin is different from normal fiat currencies. It is not underwritten by any central bank. Instead, the money supply is automated and given to servers or 'bitcoin miners' that add them to an archived transaction log. Today, Bitcoin is the most widely used alternative currency. It is accepted by merchants and services internationally. In fact, the monetary base of Bitcoins was over US$1 bn at the end of March 2013. This itself suggests one needs to look into it more seriously.

An article in Forbes offers some interesting facts about the tenacity of the currency that has no official backing. The value of Bitcoins fell from US$ 32 in June 2011 to US$ 2 in November 2011. Then the price started going up again, rising to US$ 7 in January 2012. Undeterred by this volatility, Bitcoin speculators were prepared to pour in millions to back the digital currency. As number of Bitcoin transactions rose from 1,000 per day to 50,000 per day over the past two years, the value of each currency rose to US$ 140! That makes it a rise of 2000% in 2 years. The mini bank run in Cyprus has made the digital currency even more endearing. So much so that experts are debating whether Bitcoins can be an alternative to fiat currencies and gold.

According to us, a currency that has zero collateral cannot stay far from corrupted interests. It is hard to predict when and how will the Bitcoin bubble end. But whether or not excessive money printing makes paper currencies worthless, speculating in such fads can be a recipe to disaster.

Do you think Bitcoins could be an alternative to paper currencies? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
While each tax payer pays an education cess of 2%, the central government has provided about Rs 1.6 trillion in funding education projects over the past decade. As shown in the chart, data from World Bank suggests that spending on education varies widely across states in India. States like Kerala having higher literacy rates in fact spend much lower than UP and Bihar. On an average states spend about 13% of their budget on education. The 12th 5 year plan has pegged the outlay in implementing Right To Education Act at Rs 2.3 trillion. However, with no clarity on how the money should be spent and no consensus amongst states on policy matters, this could be yet another billion dollar goof up by the government.

Data source: World Bank

Gold's recent slide has come as a surprise to a lot of gold bugs. After all, with so much turmoil around, the yellow metal should be headed higher and not lower. So what seems to be causing this 'contrary to the expectations' movement in gold prices? Ace investor George Soros has attempted to give an answer to this dilemma. In an interview with a leading Chinese daily, Soros opined that gold has disappointed the public. He further reasoned that when Euro was close to collapsing last year, gold actually went down. This was because if people needed to sell something, they sold gold. And hence, it went down together with everything else. Therefore, gold was destroyed as a safe haven as per Soros and actually turned out to be unsafe. However, he is not expecting gold to go down a lot because of the buying by central banks.

Soros has certainly given an interesting point of view. But those who've been following his investment philosophy closely know how quickly he can change his view. And the long term history of the yellow metal as the ultimate safe haven does run contrary to Soros' beliefs. Thus, we won't be surprised if Soros changes his view on this one and comes to the realisation that gold is indeed a safe haven. Therefore, it makes immense sense to let it remain a small part of your portfolio.

Money laundering. Black money. What do these terms bring to mind? For many, the first thought may be Swiss bank accounts and offshore tax havens. But the recently reported sting operations by online magazine on major Indian banks appear to be redefining the dialogue on black money. They seem to be hinting at a big black money racket inside the country's banking system.

As per an article in Livemint, the RBI has completed its first round of investigations. The findings, as per the financial journal, point at widespread irregularities and suspicious dealing by front-desk employees. For instance, high-value insurance policies and substantial quantum of gold are sold without abiding by the know-your-customer (KYC) norms.

But this is just one thing. There are far murkier transactions being carried out by cooperative banks. It has been found that cooperative banks have been exploiting the loopholes in the system to help customers evade tax. You may be aware that any transaction above Rs 50,000 requires tax reporting. The central bank has found instances where money was deposited in certain accounts through countless demand drafts within months. Surprisingly, these demand drafts were all between Rs 49,500 and Rs 49,900!

All this means that India's banking system needs a thorough scrutiny. There is a strong need to fix loopholes that are exploited to evade tax. Will India win its war against black money? It seems we still have a long way to go.

Investors interested in how the stock markets are expected to perform in the coming years will certainly be interested in what Mark Mobius has to say. He believes that there are 'tremendous bull runs ahead'. The reason for this is simple. Most governments in the developed world have gone on a money printing spree since the crisis began. With so much money sloshing around, global investors are looking for attractive investment avenues. The fixed income market is a damp squib since interest rates are so low. Indeed, the actual real yield has been below zero. So most want to capitalise on the opportunity the stock market represents.

Of course, here again, the emerging markets look to be the more attractive. These markets have been growing at a faster pace than the developed world. And hence the potential to earn good returns from emerging markets including India is certainly higher. Mobius opines that people would initially be sluggish when it comes to shifting money into equities. But once the trend catches on, bull markets will be eminently visible. We are not sure about the possibility of bull runs taking place in the future. But we believe that there will always be the potential to earn healthy returns from equities provided you buy into the right companies at the right price.

The old must make way for the new. That's the natural law of evolution and progression. With large number of retirements due over next few years, there is a need of new hiring and promotions in public sector banking. To facilitate this, the Finance Ministry plans to relax the promotion criteria in the segment for the current financial year.

However, the challenge of public banks is not just limited to fill vacancies thus created. As Reserve Bank of India plans to issue new licenses to private banks, there is a risk public banks might lose their employees to private banks. With huge segment of youth in want of job, filling posts might be easy for public banks. However, that will not compensate for the loss of talented and experienced people. Hence, public banks need to give enough scope of career growth to its employees to make sure they don't lose the talent to the private banks.

That said, with critical criteria like annual appraisal and experience used for promotions, the tweaking should not happen to an extent where the quality of service offered to the customers takes a backseat. Or the transparency in promotions gets compromised. After all these issues will have serious impact on the quality of growth in the banks' business. To conclude, while the need to bring in some flexibility is valid, steps should be taken to make sure it doesn't promote inefficiency.

The Indian bond market is highly illiquid and underdeveloped. Development of bond market is very important for any economy. Bonds offer more transparent, traded alternatives to debts made in the form of traditional loans. So, it is puzzling why, despite so many committees and regulatory focus, India has had such difficulty in deepening its bond markets. Corporate bonds account for only about 4% of the country's GDP. Compare this with 70% in the US or 49% in South Korea. Moreover, there is hardly any secondary market.

In order to rectify this situation, the Finance Ministry, Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have come up with an initiative to activate the dormant corporate bond market. For the first time, India's top banks, insurance companies, pension funds, mutual funds and small investors will be allowed to trade in corporate bonds and government securities (G-Sec). This will be done under a dedicated debt segment to be launched by the stock exchanges shortly. Till now, retail investors were clueless about where to buy G-Sec. This facility will help to solve that problem. This is easily one of the biggest initiatives taken by Indian financial regulators to develop the bond market. We certainly hope for the timely implementation of this initiative. It will go a long way in deepening the bond market in the country.

Profit booking in tech, engineering and banking heavyweights have kept the benchmark indices volatile throughout the session today. Backed by weak cues across Asian stock markets, the key indices in Indian equity markets oscillated to either side of Friday's closing levels. The BSE Sensex was trading lower by around 15 points at the time of writing. Other major Asian markets closed lower while markets in Europe opened flat to positive.

 Today's investing mantra
"The inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an "investor's misery index". When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity." - Warren Buffett

  • Warren Buffett - The Value Investor

    Editor's note: We are pleased to inform you that we have introduced a new section called 'What We're Reading'. Here, you can access some interesting articles across the web that we liked reading.

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    2 Responses to "After tulip and dotcom mania, here come 'Bitcoins'!"


    Apr 8, 2013

    According to us (is "us" EM or USA), a currency that has zero collateral cannot stay far from corrupted interests. It is hard to predict when and how will the Bitcoin bubble end. But whether or not excessive money printing makes paper currencies worthless, speculating in such fads can be a recipe to disaster. "then what about paper currencies" that gov. can just print @ their wimps & fancy.

    Like (2)

    joseph oommen

    Apr 8, 2013

    regarding activating bond market the real issue is why should a retail invester buy bonds in stock mkts all over the world when the mkt goes down the invester chooses to sell shares and buy bonds, in india the retail invester doesnot have such option even if iut becomes available in the future retail will not because of the risks involved unlike in west fixed deposit in bank has soveerign guarantee and the last time a bank was allowed toliquisdate was in 1959. so there is no need for any retail invester to buy bond the interest on FD with principal guarnatteed by govt is more than enough

    Like (1)
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