Are we repeating the mistakes of 2008? - The 5 Minute WrapUp by Equitymaster
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Are we repeating the mistakes of 2008?

Jun 28, 2011

In this issue:
» Dollar set to lose status in the next 25 years
» Foreign investors allowed to invest in MFs
» Have the oil price hikes come at the right time?
» Are global M&A deals slowing down?
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more, click here to read on...

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00:00
 
Ever since the global crisis heightened way back in October 2008, all efforts of central bankers and governments have been concentrated on preventing big institutions from failing. So the biggies in the financial world such as Citigroup, AIG, Goldman Sachs, Merrill Lynch, Freddie Mac, Fannie Mae and the like were injected with doses of liquidity. Why? Because they were big and big institutions cannot fail otherwise the global financial system will go for a toss. That was the view then. It still prevails. Take the Europe debt crisis for instance. The debate is centred on how to pull Greece out of its financial mess. Letting this European country default is not an option for many.

But we wonder whether such a line of thinking will not lead to a catastrophe of bigger proportions in the future. By not allowing big institutions and economies to fail, the governments are raising the problem of 'moral hazard'. Big financial institutions and economies are led to believe that they can take risky bets, saddle up huge debt and still not worry because the governments will come to their rescue. Because they believe they are insulated from risk, the appetite for more risk will only increase. After all any gains will be theirs to keep and any losses will be borne by the central bank or government.

Indeed, the current scenario is testimony to the fact that governments and central banks are not Gods. Although they have injected massive doses of liquidity into the financial system, developed economies have not really fully recovered. Unemployment reigns high as a result of which consumption has not really taken off. Moreover, there are concerns, that whatever spurt of growth was seen was a result of these stimulus measures. Therefore, once these are withdrawn, the developed world will sink into recession again. So what is the solution? Should such institutions and economies be allowed to default? Maybe. The pain will certainly be of unfathomable proportions. But that could turn out to be a better solution from a long term perspective as opposed to big stimulus packages, which rather than cure the pain, only prolongs it.

Do you think that big financial institutions and economies that are saddled with dollops of debt be allowed to default? Share your comments with us or post your views our Facebook page.

01:26
 Chart of the day
 
Although developed economies are still battling recession, consumer prices are gradually expected to inch up. As today's chart of the day shows, barring India, most economies are likely to see consumer prices rise in 2011. In India too, although consumer prices are expected to be lower than what they were a year ago, concerns persist as food prices have not really eased by much and the threat of firm fuel prices looms large.

Data Source: The Economist

02:11
 
The Union Budget 2011-12 has been done and dusted with. However, there are certain announcements that see the light of the day only during the course of the year. Consider the case of the opening up of India's mutual fund industry to foreign investors. It should be recalled that the Finance Minister had talked about liberalising the portfolio investment route by permitting mutual funds to invite foreign investors. Well, looks like the plan will soon turn into a reality. The Government announced yesterday that foreign investors, other than FIIs, would be allowed to invest up to US$ 10 bn in domestic mutual funds. No, this class of investors will not be called as FIIs. Instead, they would be referred to as the QFIs (Qualified Foreign Investors). Market regulator SEBI is likely to come out with necessary notification and framework by August 1. This is a very good move we believe. Not only will this help reduce the price volatility in the Indian stock markets but also bring more serious, long term investors to the market.

02:52
 
This would certainly be one of the biggest moments in the global financial history. The fall of the US dollar and the rise of emerging market currencies is a widely debated possibility. But the need for change in the reserve currency was confirmed by a poll of the central bank managers world over. The fact that they collectively control more than US$ 8 trillion in reserves adds weight to their opinions. According to FT, the central bankers are betting high on the US dollar losing its reserve currency status in another 25 years. In fact World Bank president, Robert Zoellick, has already proposed a new monetary system last year. He supported a system that would have not one but several currencies. This would include the dollar, euro, yen, pound and renminbi. The fact that central banks have purchased the largest amount of gold (151 tonnes) this year since the fall of Bretton Woods system in 1971 makes the yellow metal an equally strong contender. Thus, whenever the fall of the US dollar materializes those holding reasonable amounts of gold in their portfolio could consider themselves safe enough.

03:33
 
This was something long awaited. Finally, the economic sense has prevailed as government increased the prices for diesel, kerosene and LPG. However, the price hikes have come along with a slash in duty cuts on crude oil and oil products. With a target to bring fiscal deficit down to 4.6% this year from 5.1%, this must have been a tough call. What is surprising is the timing of the duty cuts. The Government missed the opportunity to relax the duty structure when crude touched sky high some time back. The cut at that time would have been much effective in terms of its impact rather than now when crude prices have softened.

With the recent steps, the Government has put itself in a tight spot. It has shifted both the targets a little away from itself - managing inflation and reducing fiscal deficit. The hike in fuel prices is expected to help oil companies limit losses by Rs 210 bn. However, revenue losses are still expected at around Rs 1,200 bn. This, along with a reduction in tax collections by around Rs 490 bn just shows this is just the beginning. If the Government is really serious to achieve the targets, there will be many more hard bullets to bite.

04:15
 
Let us see what's happening on the merger and acquisition (M&A) front. Data shows that announced M&A deals totalled US$ 611 bn during the second quarter of the calendar year 2011 which is a 23% drop from the preceding quarter. Of course, factors such as volatility in stock markets, sovereign debt concerns and a failed global economic 'recovery' have slowed down the M&A deals. However, if you look at the deals for the first 6 months, the picture doesn't seem as worrisome. In fact, with deals worth US$ 1.4 trillion so far, it is the best first-half since 2008.

So what will decide the fate of M&A activity? Some opine that the slowdown in the developed world could actually propel the flow of deals. How exactly? They argue that ample cash, low interest rates and the reduced scope for organic growth would drive companies to go for M&A. Will that really happen? Time will tell.

04:44
 
Indian stock markets had a rather volatile outing today as they oscillated to either side of yesterday's close. At the time of writing, the BSE-Sensex was trading up by 65 points. Most major Asian indices are trading in the green with Japan leading the pack of gainers. Europe has also opened on a positive note.

04:56
 Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom" - Peter Lynch

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9 Responses to "Are we repeating the mistakes of 2008?"

Manoj Kumar

Jun 30, 2011

Definitely. If they got to default they have got to default. Why should tax-payers be burdened with their losses?

Like 

Nirav Shah

Jun 29, 2011

The Goverment has no choice, how to run economy? they all are busy to setup their mony of swis bank. Govt has no wright thing to run the country's GDP at higher level. they all are talking about rain. but last year we have seen how much impact of rain? ther is no chance to down the inflation. in last three years the world talking about India, but we cant do anything properly.PM and FM both are always says nothing to worry. In coming time lots of problems we have to face like higer price of petrol,gas,oil,food price,higer intrest rate, falling of property price,bed monsoon. Economist says these are factored in but there is no good news in coming years. The Economy is running on only stimulus package. there is no new revenue genrate. The current account deficit is increase instead of down. Only the GOD save the poor people of country.

Like 

Sushil Desale

Jun 29, 2011


Dear Sir,
I am small trader particular i invest in Crude oil. So my quarry is what is trend for crude in month of july and also please clear the range.

Regards,

Sushil Desale

Like 

shome suvra

Jun 28, 2011

To maintain the financial stability of a country its financial institutions must be strong.Through the proliferation of derivative transactions there is high chance of contagion effects if one of them fails. Profitability and capital adequacy are preconditions for sustainable credit growth.

Like 

Kamal

Jun 28, 2011

Your "investing mantra" quotes have been repeating so long now, they have started to rot. You need to get some new quotes or remove the section altogether.

Like 

Rajaram P. Kane

Jun 28, 2011

"I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom" -

This is not true. If you had watched the 5-year chart, you would have noticed a down-trend at $12 level and should have waited till it eased near $2. One can never know the bottom exactly but one can play near it, and buy more vigorously when there is an upturn.

Like 

Stithapragnja

Jun 28, 2011

Eq.Master Team,

Your article with a poser ”Are we repeating the mistakes of 2008 ??”
Prompts me to cite an adage “ The cure prescribed happens to be worse than the disease ?? it proposes to cure !!
The dollops of stimulus packages(debt: a sugar coated bitter pill)??
also act as the cure in the instance cited at the outset itself ??

I hasten to conclude !!

Like 

Santosh S

Jun 28, 2011

Economics has always taught us that the need for demand and the need for supply balance each other till the equilibrium point is reached for free trade to persist. The one who saves lends the money to the one who spends and accordingly balance is maintained. This is the fundamental tenet for balance to exist. By allowing large nations to go scot free at the expense of taxpayers money is a violation of the balance of trade principle. The defaulters should be punished and good money should never chase bad ideas for this creates inefficiencies and leads to value destruction rather than value creation. Hence big financial institutions and economies that are saddled with dollops of debt should be allowed to default so that the need for maintaining the overall balance is of paramount importance. If we tweak this, it will only lead to a bigger catastrophe and does not solve the root problem.

Like 

K M Riyazuddin

Jun 28, 2011

The big institutions are too big to fail. The Governments are scared what will happen to hundreds and thousands of stakeholders if such big institutions fall. That is the reason why, the Government has given crutches and financial support to big institutions likes Fannie Mac, Fraddie Mae, Goldman Sachs, Merill, Citi, etc. I really don't know why and how the colossus Lehman was allowed free fall. That was an exception. Even in India, Govt did not allow Satyam to fall. Indirectly, it gave a helping hand. The take is: The big institutions are free to do whatever they want. They can take any risky position. If things go wrong, there is a Govt to help them out.

Even the Govt of a country can do whatever it wants - borrow high degree of loans, employ these funds in productive / unproductive way. No problem. Even if the Government fails, there is another Government to bail it out. Greece is an outstanding example. The Government camouflaged its deficit position. Finally, when the cat was out of the bag, nothing happened to it. The member nations of Europe are there to bail it out.

So, if you are big - nothing to worry. Nothing will happen. Somebody is there to help you.

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