Rising every year for 9 years and still not a bubble!

May 13, 2010

In this issue:
» This asset is far from being a bubble just yet
» One of the world's most successful investor praises China's communism
» India to revolutionise green technology
» Bailout is final nail in the coffin for Euro, says Jim Rogers
» ...and more!

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Let us the break the suspense right here. We are indeed referring to the yellow metal gold. Yesterday, it surged to its new all time high of US$ 1,244 per ounce and looks in better shape than ever for an even bigger up move. Important to add that Gold has been rising every year for nine years now. And if the recent trends are any indication, even the 10 year barrier looks well within reach.

So far, so good. However, the nearly decade long bull run of the precious metal has also spawned a hugely important question. If an asset class keeps going up for so long like gold has, does it not make the asset under consideration, a prime candidate for a bubble? While this could be true for a lot of other asset classes, we don't think gold has become a bubble mainly for two reasons. First, bubbles are typically characterized by a break off from the previous high in real terms. And gold may have surged to all time highs in nominal terms. However, when adjusted for inflation, it is still significantly below its all time highs.

Secondly, a bubble also takes shape in an asset class when there are artificial stimuli or money supply being pumped into the asset class like the case with US Treasuries and mortgage securities. But there is no money being pumped into gold by the Governments. Thus, gold's bull run seems to be driven purely by its demand supply dynamics. This makes it a true bull run and the one that has a strong chance of sustaining itself. So, while gold may have an excellent run so far, it looks far from finished just yet.

 Chart of the day
Today's chart of the day is one of the reasons why India's central bank has set its eyes firmly on long-term capital inflows. As the chart highlights, the movement of the Indian rupee against the US dollar has been extremely volatile in the past, driven mainly by short term capital flows. Not only have these flows led to volatile prices of assets such as stocks and real estate, it has also caused significant problems to the people engaged in external trade and services in India. One way out for the RBI would be to resort to greater intervention in the market. However, given India's limited trade surpluses, even this operation cannot be conducted in the manner so desired.

Source: LiveMint

The debate is still on. Whether the developed and emerging economies are set for a U or a V-shaped recovery continues to intrigue economists. Encouraging GDP growth data from the US, India and China have skewed opinions in favour of a faster recovery. That is a V-shaped one. Morgan Stanley economist Andy Xie believes that when people are bullish about an economic outlook, they offer lots of data to support their optimism.

However, the positive statistics raise an important question. Could a V-shaped economic recovery also mean 'vulnerable'? Case in point being the record high sale of vehicles in India and China. While this is certainly fallout of rise in per capita income, can the numbers sustain? Developed economies like the US and UK are running fiscal deficits exceeding 10% of GDP. The deficits in Europe and Japan are half that amount. Can these facts override the V-shaped recovery sentiment? We think so. While the improvement in global economic scenario is inevitable, it can take longer than we think.

Few years back, very few people would have betted on India for being at the forefront of a revolution of sorts in the IT services sector. In a similar vein, it is indeed a little apocryphal to believe that India looks all set to revolutionise the use of green technology over the next 10 years. However, if a leading daily is to be believed, that dream may just about turn into a reality. As per the daily, the development of the Delhi-Mumbai Industrial corridor with an investment of over US$ 100 bn over the next ten years could bolster India's chances of becoming the global workshop for geotechnologies. This is how it will work. Huge cities and industrial regions are being planned along the industrial corridor, most of which would be built using smart technologies. Fabulous plans indeed. However, as is the case with infrastructure projects in India, execution remains the key. It should be noted that there has already been a delay in implementing the world's largest infrastructure development initiative. We just hope the delay does not turn into a perpetual wait.

Legendary investor Jim Rogers is not at all enthused with the EU bailout package. He believes that the package announced by the EU effectively means that these 16 nations have lost all hope for the Euro and that this is just 'another nail in the coffin' for the currency. This is because higher spending will only increase the region's debt. This is because they will be spending money that they do not have. At the time the idea of a unified European currency was announced, there were several criteria that European nations were required to adhere to. One was that deficit should not exceed 3% of GDP. Greece, Spain and Portugal, all have deficits way beyond this target.

And hence two scenarios are likely to play out as far as the Euro is concerned. One is that only those countries with strong economic fundamentals stick to the euro. The second is that the currency may be dissolved altogether. Indeed, given the way things are progressing, the strength of the euro is seriously under question.

The absurd intraday fall of nearly 9% in the US markets recently made us reflect on the nature of free markets. Though we are all for capitalism, is a particular free market still considered good if its participants start behaving in completely ridiculous ways? What else could explain the above mentioned debacle? You could blame it on 'high frequency computerised trading' as they prefer to call it. But the fact remains, that those computers are nothing but programmed slaves of human decision making.

John Bogle, founder of The Vanguard Group, hints at a solution. "We have to have regulation" said Bogle recently. He is of the view that everyone's been operating in an illusion on Wall Street and that speculation has been in the driver's seat, thus throwing long-term investment out of the window. While we have to agree with him, all this is not really bad news for the real long term investors. For him, such bouts of absurdity and volatility are his friend rather than his enemy. As Warren Buffett once said, "Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments as well as on the amplitudes of stock-market folly that prevail during your investing career". Need we say more?

Very few countries detest communism as much as the United States. So, it comes as a surprise when one of its most successful businessmen says China's communism is good for business. In a recent interview, Charles Munger, the vice chairman of Berkshire Hathaway, said something to that effect. It may be noted that one of the founding principles of communism is the state ownership of capital. Hence the irony in the statement. In our view, the catch is in Munger's observation that China has abandoned a pure communist approach to an autocratic capitalistic system.

Interesting to note that China is not the only successful economy which has taken the autocratic route. South Korea and Singapore are the other famous examples. Also, interesting to note that Munger admires India's democracy although he admits it causes economic paralysis. So, would India's economy be better off if it were an autocratic state instead of being a messy democracy? We're not so gung-ho about that idea. For every successful autocracy in history, there are several which failed. Moreover, almost all of them take a heavy toll on the rights of their citizens - a price we consider too high even for economic growth.

Meanwhile, the Indian stock market came off the day's highs at the time of writing but were still trading comfortably in the positive. The BSE Sensex was ruling higher by around 80 points with heavyweights like Infosys and ICICI Bank contributing majorly to the buoyancy. Other Asian indices have also had a strong day whereas Europe is trading mixed at the moment.

 Today's investing mantra
"The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable." - Warren Buffett

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5 Responses to "Rising every year for 9 years and still not a bubble!"


May 25, 2010

Without Greed, there is no investor in stock Market - Hence, no stock Market. Fear is for those who are reckless. Folly - follows law of averages. If you don't commit folly more than 30 percent time, no problem - you are a winner. Yet - Warren is right. We don't know in which order people become greedy,fearful and committers of folly / mistakes.



May 13, 2010

Gold is a non-productive article - unlike business that may grow and provide more revenue. However, Gold is considered as the ultimate asset and people tend to hoard it more when the faith in economy/ dollar etc is shaken. So we have a continuous bull run in Gold and the economists continue to be positive on India Growth Story or world economic growth? Is that a contradiction?
Is there an inverse relationship between rise of gold and fall of confidence in other assets classes?


Prof. Ramalingam K.

May 13, 2010

Dear Sir,
The last two wrap-ups indeed go to show how change the intrinsic value of world currencies play havoc creating grave difficulties to manage the currencies of countries like India whose currency is practically a free-float against all major currencies.

US$, the Euro and sterling pound were considered comparatively stable. US$ though temporarily is bcoming stronger, that is because of the weakening of the Euro.
The fact is there is no intrinsic strength in the US$, and now the Euro or the Japanese Yen. Even though a country like India is out of the economic depression, it is still affected by the change in value of these currencies.

The solution to the currency problems facing the world is that 'no one country's currency should be given importance'. We must have a world currency - (let us call it "Global"- G)administered and monitored by the World Bank. This can be a virtual currency used only for international trade and trasactions between nations. Every nation will have their account of G with the world bank.
The transactions within one own country, will be carried out in the country's currency by means of physical as well as electronic form. This will eliminate
the exchange rate difficulties being faced, for all times to come.
This is my suggestion as an Economics Professor.


Prem Singh Dhankar

May 13, 2010

Wow, another good analysis. Yes, the realities are painful,but it is all for good. And we Indians know how to make the best under the circumstances- sustain.
Well, thanks for the taste readings.


Anupam Garg

May 13, 2010

The best thing which i love about RBI is that it follows this sequence without resorting to the last word unlike the indian politicians.

Your chart clearly shows that RBI has been trying to benchmark Re at level around 45. The trade surpluses lead to appreciation and RBI is fully aware of that. Lets hope the central bank knows when to intervene

V shape growth? the combination of 2 Vs make a W. The question is: where does the global economy stand on this W today & should India actually care whatever be the point?

Its easier to dissolve a currency. At a time when crude was trading at 150 levels, the world thought of making euro the currency of tracking crude. Its time the Europeans show and prove their mettle.

Anything which affects the rights of ppl can't be right, can it?

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