Forget recovery. A 'third depression' has just begun

Jun 29, 2010

In this issue:
» The world's wealthy are rising
» Will fuel prices really obey market forces?
» RBI to keep a tight leash on cash
» What determines mutual fund inflows...
» ...and more!!

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The Europe debt crisis aside, you might be led into thinking that the US economy atleast is slowly but surely displaying some signs of a recovery. Not really, according to noted economist Paul Krugman. He says, "We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression." Krugman is of the view that governments are obsessing about inflation when the real threat is deflation. Policymakers are preaching the need for belt-tightening when the real problem is inadequate spending.

However, we believe, that government finances in the developed world (more specifically US and Europe) are already shaky. To such an extent that many of them are already in the danger of defaulting! And therefore, more government spending at these times would indeed be very tricky.

At the same time severe austerity measures to bring down debt will hurt economic growth. That said, the only way for the rich world to come out of this slump is by focusing more on growth. And the governments would have to ensure that the spending is more towards productive uses that would aid this growth. This, however, will not happen overnight and will involve many long years.

A prolonged depression in the US does not spell good news for emerging economies like India. However, the India growth story still holds. And it will largely be driven by domestic consumption. Therefore, any correction in the short to medium term should be looked upon as a good opportunity to pick some very good quality stocks at attractive prices.

 Chart of the day
Whatever ills may be afflicting the global economy, nothing has hampered the rise of very rich people. As today's chart of the day shows, there was a substantial rise in the number of high net worth individuals in 2009 in both the developed countries and the emerging ones. And these are people with investable assets of more than US$ 1 m. The rest of the world would probably brand them as God's chosen few!

* Individuals with at least US$ 1 m of investable assets
Data Source: The Economist

Finally fuel prices will obey the market forces. That's the sense one might get from the recent hike in petrol and diesel prices. In our opinion though, it would be wise to withhold the celebrations for the time being. We have highlighted our concerns in the last few editions of the 5 Minute Wrapup. Today's Financial Times quotes the oil secretary saying that the government reserves the right to intervene again if prices surged. Something we fear will happen again given our view that crude oil prices will inevitably march upwards. Much will also depend on what happens to diesel pricing, as the country's dominant fuel. It may be noted that diesel prices have only been hiked and not yet 'freed'. It would be wise to not to celebrate just yet.

With inflation on a rise, RBI is expected to tighten its monetary policy soon. One way for it to do this is directly raise interest rates. And the other way is to restrict lending. Economists expect the central bank to prefer the second route - keeping a tight leash on cash. Anyways, we'll get to know what's going on inside the RBI's mind only when the central bank announces its policy review in July. It's a wait and watch game till then!

What does one look for when one invests in a mutual fund? Track record, isn't it? After all it is performance that counts the most. However, if you hold this view, you will be shocked to know that you are in a minority. A report by a leading consulting company has found out that the performance of the schemes has no bearing on mutual fund inflows! Infact, a study comparing the five year performance of similar schemes has come to a very interesting conclusion.

The study shows that branding, marketing and compensation to distributors determine fund inflows to a great extent. Little wonder that SEBI, the market watchdog has gone about setting things right on this front. What is more, the report also observed that it is only the top 30 cities that account for 90% of the assets under management, underscoring the tremendous potential that awaits the industry if at all it decides to reach out to smaller towns.

Thus, going forward, the Indian mutual fund industry will have two things as its main focus areas. One, changing from a distribution driven to a more performance-driven model. And two, increasing its penetration considerably. Only then will the industry truly come of age we reckon.

They were recently in the headlines for achieving a super turnaround of sorts. After going near bankrupt these entities had once again posted handsome profits. Not just that they were able to repay the bailout funds in record time. Reasons enough to envy the business of some top US banks? Not really. For as per the Bank for International Settlements, the US banks are not at all on a solid footing. The profits booked in 2009 were largely derived from trading income. And most of it is unlikely to be sustainable. More importantly their core business of borrowing and lending is set to witness challenges. The banks will have to compete with the government for their borrowing needs. This is least likely to lower their funding costs. Also provision will have to be made for further write-down of asset values. All said, thin chances of any super turnaround stories likely to come in from US banking.

What does one say after trillions of dollars are pumped into an economy showing barely any signs of revival? US Vice President, Joe Biden warned that 'there's no possibility to restore eight million jobs lost in the Great Recession'. Referring to President Obama and himself, he said, "We inherited a god-awful mess," and that "...there is no way to regenerate US$ 3 trillion that was lost. Not misplaced, lost." What this means is that there was never any hope of getting back lost jobs. But taxpayers' money was used all the same.

Although the US economy has been showing some growth, it will take a long time for it to go back to its heydays. The unemployment rate is still hovering around the 10% mark, and domestic consumption is far from satisfactory. Without proper job creation, this consumption based economy will continue to plod along slowly.

We just heard that Wall Street is hiring again! But have they have learned from their previous mistakes? No one can be too sure.

In the meanwhile, Indian markets languished in the red for most part of today's session. At the time of writing, the BSE-Sensex was trading lower by around 240 points (1.3%). Losses were largely seen in metals, banking, and oil & gas stocks. Asian indices were also trading deep in the red at the time of writing. Most of them witnessed losses in the range of 1-3%.

 Today's investing mantra
"The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions." - Warren Buffett

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9 Responses to "Forget recovery. A 'third depression' has just begun"


Jul 1, 2010

After almost four months, I have again recd your 5 minute wrap. I had written this earlier also. Now I am based in JAlgaon but I was born and educated at Bombay, AND I AM AN ARDENT READER OF J.MULRAJ's column maybe for the past 35 years, when they use to appear in TOI every Monday morning. Actually, that was the first article to be read on every Monday.
And this email I have been receivng for the past year or two. However when for the past 4/5 months I was not receiving the mails I was really disappointed.

I hope i will not be deprived of this email, till such times J. MULRAJ is writing it.

During my days in Bombay two articles were very important. J.Mulraj to get the perspective and daily dose of Busybee in the Evening News. and later in Afternoon.
Thanks Damani



Jun 30, 2010

you are doing a great job of decoding the finanacial market data and comments for all us readers


Nikit Parmar

Jun 30, 2010

I think the opinion's derived by you somewhere matches the actual reality. I read other articles also and it is said that still many more things to come. Hope your view on RBI reflects in the July policy.


Nikit Parmar



Jun 29, 2010


What is the authenticity of this article or news??
Or is that to be in the news/media and to make sensational news, are such types of news are published by you??



Jun 29, 2010

I am 80% agreed to the comments viz "Forget recovery. A 'third depression' has just begun"



Jun 29, 2010

How much commission did the leading consultancy company charge for its report. What is the basis of its conclusion? Some sample survey which may not be true representative of the whole?



Jun 29, 2010

US VP has said we have inherited a god awful mess. This speaks volumes that they are unsuccessful in solving the mess they have inherited. Further the Mexico oil mess is creating more problems& is sure to create more unemployment as fisheries industry has come to stand still & will destroy the small businessmen in & around the Gulf of Mexico.
I am firmly of the view that the Americans Banks are running away from the Credit Card problem that is certainly come up in near future. As far as India is concern Our Govt. is not interested in bringing down the taxes it collects on Oil but wants to burden the common man. Govt. wants to ruin the business of Stock Market by introducing Capital Gain Tax.As far as Europe is concern there is more to come as how long is European Council will support?How long?


SK Mitroo

Jun 29, 2010

Very concise n clear& hopefully it will Be correct too--CCC


Dhana Karthikeyan

Jun 29, 2010

Do you all think that markets wil go down to 10000 in coming days.. no it wont ... first it wil reach 19000 then only the downtrend wil start.. currently its in uptrend only... we are experiencing an intermediate downtrend tats all...

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