Holding cash will be a disaster

Apr 24, 2010

In this issue:
» Indian cities need massive investment
» IMD predicts normal monsoons
» First signs of higher interest rates
» Greece has nowhere to hide
» ...and more!

Here's a very basic question. Given a choice, who would you rather want to be? A debtor or a creditor. In other words, would you want to be loan taker or a loan giver? Even the most mathematically challenged will have no problems answering that one. Certainly, almost all of us would want to be a creditor. A person who gives out loans to his less fortunate buddies. But wait. What if we tell you that there is an institution out there that has turned this apparently simple logic completely on its head.

An institution that is known around the world as the Government. Yes, you've read that right. By turning on their printing presses, the Governments, especially in the developed world, are printing so much money that people are better off becoming a debtor than a creditor. This is because the value of the money goes down very fast in such a system. The creditor will find that the money he has lent out will buy very little of the same stuff few years down the line than it did today. Thus, it is a huge loss of value for the creditor and a gain for the debtor.

Little wonder, there are gurus like Marc Faber who are advising people not to hold cash. Instead, one should invest in something that grows in value faster than the rate at which the Government is destroying currency. This could be anything. It could be stocks where the underlying business generates tremendous return on capital year after year. It could also be gold and real estate. However, please do not remain in cash for a long period of time. And this does hold true for Indian investors as well. Infact, it holds true wherever Governments run huge deficits and then print money or issue bonds to plug the gap.

 Chart of the day
India's already overworked cities are going to get further overworked. That is if you believe in today's chart of the day. It highlights the fact that India is likely to add another 250 m people to its urban cities. A leading business daily estimates that this calls for a massive expansion in urban infrastructure and Indian cities would need a whopping US$ 1.2 trillion dollars to cope with the situation. Or else, the Indian cities risk lowering the quality of life further. Not that it is too great currently! Clearly, infrastructure is proving to be India's biggest bottleneck.

Source: LiveMint

Sub PLR lending is not yet a thing of the past. Banks certainly are resisting the RBI's request to lend at or above their respective benchmark rates. But what banks cannot do is offer a huge discount to even their best borrowers. The trend of sub PLR lending still exists for most loan segments. But the interest costs are definitely north bound. The first signs of an upward trend in interest rates are being seen in the short term lending to corporate. As per a business daily, some banks have revised their short term rates higher by as much as 3% to 4%. But their rates continue to remain below PLR. We believe it is only a matter of time before the interest rates catch up for retail loans as well.

If you felt like offering condolences to those who lost their bonuses after Lehman collapse in 2008, this piece of news is for you. The economic crises brought 53 m people to below poverty line. This means it deprived them of basic food and medical facilities. It also contributed to the death of 1.2 m children. As per the World Bank, one in six people on the planet will be living without sufficient food. This includes the number of people living on less than US$ 1.25 a day, the definition of extreme poverty. We wonder to what extent the United Nations will be successful in its Millennium Development Goal. That of halving 1990 rates of extreme poverty by 2015. We sincerely hope these targets do not remain on paper!

Greece is making headlines yet again. As per reports, the ratings agencies have downgraded the country's sovereign rating. The fact that it has not been able to meet its 2009 budget has made matters worse for the country. Not surprisingly, it has appealed to the Euro nations as well as to the IMF to provide it with the funds to keep it afloat. However, the support does not seem to be very forthcoming. Other European nations are scared that a bailout will cut into their own sovereign capital, thus making it difficult for them to raise loans. Not a good sign especially in the current troubled times. However, these countries cannot let Greece default. For that would mean losses at European banks that hold Greek debt. Clearly, once one takes on too much debt, there are very few places to hide.

The IMD is predicting normal monsoons in 2010. But should one put faith in this prediction? Take 2009 for instance. The Met department had predicted that monsoons will be 96% of the long period average (LPA). The reality was that rainfall last year was a paltry 77% of the LPA. This led to draughts in several parts of India. In 2010, the Met department expects rainfall to be normal at 98% of LPA subject to an error of (+/- 5%).

So will the IMD be right this time? What makes a case for it is that most international weather organisations have also predicted normal monsoon for India in 2010. Further, the IMD has made its projections after taking into account the predictions made by a large number of national and international weather organizations. The El Nino phenomenon has also been closely watched by the IMD. So, one can only hope that the IMD stands vindicated as India cannot afford to suffer from poor monsoons for a second consecutive year.

The biggest petrochemical company in India, Reliance Industries reported a quarterly profit growth of 30%. But this was not enough to please Dalal Street. The reason? Dalal Street expected profits to be at least 4% higher than what the company reported. While the petrochemicals did well, performance of the refining business failed to live up to expectations. Also, the twin effects of a sluggish global industrial growth and low demand for some of its products did hamper performance to some extent. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.

The past week was a mixed one for the global markets as the western markets ended on a positive note, while their Asian peers recorded losses. Selling pressure in China was witnessed on account of various reasons varying from worries related to the Greece debt crisis, the Chinese government taking measures to cool the rising property rates as well as the suit against Goldman Sachs. However, the Indian markets were the sole gainers amongst Asia this week, with the country's benchmark index, the BSE-Sensex ending higher by 0.6%.

Amongst the key global markets, US led the pack of gainers this week with the Dow closing higher by about 2%. Germany followed suit with gains of about 1%. Brazil ended marginally higher, while UK ended marginally lower. China led the pack of losers with losses of about 5%, followed by Hong Kong, which closed down by about 3%. Japan and France ended lower by about 2% and 1% respectively.

Data Source: Yahoo Finance, Kitco

 Weekend investing mantra
"We simply attempt to be fearful when others are greedy and greedy when others are fearful." - Warren Buffett

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3 Responses to "Holding cash will be a disaster"

Munish Agarwal

Apr 26, 2010

I see, all the form of money as assets. Be it Rs, land,
gold, shares or other currencies.

Although I agree, In the past, Rs has depreciated faster than other assets like gold,land etc.

But in today's situation, I would like to keep my money in two assets:
1. Cash

I believe, all other assets are over valued.

Shares are low due to the uncertainity of global financial recovery and has good appreciation possibilities.

Rs will be stregthen due to our jouney towards a
"developed nation".



Apr 25, 2010

The elucidation provided by you after posing the pertinent question whether a person would like to be a debtor or a creditor was interesting. It should help in enlightening many. As the purchasing power of money dwindles year after year, making timely investments in Gold, land or good stocks will always be the wisest option.


venkateswara rao kaatha

Apr 24, 2010

Holding cash a disaster " is true ". Since age old it is the cash which depreciates every day that it last. The right best thing is to keep the cash limited to our comforts and the balance of surplus amount kept on gold or land/house (which apreciates good , better, best when compared to inflation/currency depreciation.It is proved already and will ever be prooved in future too is my expectation. There is no alternate than to materialise the surplus money.
Thank u all.

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