Central banks running out of time and trees

Jul 28, 2010

In this issue:
» Weakness in global markets to last until 2017: Bill Bonner
» RBI warns govt on fiscal discipline
» Is the airline industry too big to fail?
» After BRICs here come CIVETS.
» ...and more!!

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There is only one reason why the crisis of 2008 did not exactly look like the crisis of 1929. The US central bank that was sleeping through the housing bubble was at liberty to print currencies. Unlike in 1929, it did not have to think twice before doling out trillions of dollars as stimulus packages. Other countries followed the Fed in stimulating their economies via printing more money.

According to Jim Rogers, chairman of Rogers Holdings, this is not sustainable. In fact Rogers thinks another recession will hit the US around 2012. And he has some sound rationale to back his prediction. Rogers says that there has always been a recession every four to six years in the United States. Going by this logic, the next one is scheduled at the earliest in 2012. But unfortunately that one may not be very different from the Depression in 1929. In a recent interview to CNBC Rogers said "When the next one comes the world is going to be in worse shape because the world has shot all its bullets". In simple words, the central banks will not be able to print more money than they already have. For then, the world would run out of trees.

We second Rogers' thoughts. While we can't say for sure whether a deep recession will strike the US in 2012, the truth is that the central bankers would definitely run out of options if Rogers' prediction does become an eventuality.

 Chart of the day

Data source: Mint

Indian policy makers have fetching foreign direct investment (FDI) very high on their priority list. For it is this long term foreign money that can help India build the new industrial capacities that it needs to. Several foreign players like Posco and Mittal Steel have been trying their best to set footprints in India. But disputes over land and raw materials continue to cloud their attempts. Nonetheless, India has made some progress in setting up new capacities over the years. As today's chart shows, India ranked amongst the top destinations fetching investment in new industrial capacities in 2009. We hope this ranking improves at a faster pace.

Bill Bonner needs no introduction. But he must still get the acclaim for correctly predicting the movement of stockmarkets and gold 10 years ago, when he outlined his then trade of the decade. It was to sell US stocks and buy into gold. The results, 10 years later, are here for us to see. While US markets did not go anywhere during this period, gold prices skyrocketed!

So, when Bill recently talked about his views for the next few years, we were all ears. In the just concluded annual conference organized by his company in Canada, Bill predicted that the ongoing uncertainty and weakness in global financial markets, which started in 2007, will last till 2017. And it is unavoidable, as he added.

Following the global financial crisis, the Indian government's fiscal deficit rose to uncomfortable levels. The government now hopes to get it down to FRBM target levels. To achieve this, it should ideally seek to increase its revenue streams (the majority of which comes from taxes) and decrease its expenditures. One important step to achieve the latter is to rework the subsidy regime. Populist measures like subsidies on fuels and fertilizers are a big part of this.

However, the Centre has off late been increasingly looking at non recurring revenue streams to get the fiscal deficit to lower levels. The selling of 3G spectrum and divestment in PSUs being the foremost. This may help the Centre achieve its target of a fiscal deficit of 5.5% of GDP for FY11. The problem though is that this by its very nature is not a sustainable path. Keeping this in mind, the Reserve Bank of India (RBI) yesterday suggested that the Centre should not be complacent due to the recent windfall by way of asset sales. It still needs to put in place actions that will lead to sustainable fiscal consolidation. As only this can lead to healthy and sustainable growth for the country.

If one of the divisions in a company starts making losses, the management certainly does not keep pouring more money into the division. Either the division shapes up or risks being shipped out. After all, what is the use of supporting a loss making enterprise? However, India's central bank, the RBI, seems to be in no mood to paying heed to a logic which is as crystal clear as this one. Apparently, the bank is trying to look into a debt restructuring package for the troubled airline sector of India.

The airlines have been actively lobbying with the Government for quite some time now for a one-time debt restructuring plan. The airlines feel that this would enable them to tide over the short term liquidity crisis that the sector is facing currently.

We are certainly not in favour of such a move. Agreed that the airline industry not just in India but globally also is ruthlessly competitive. But we believe that a part of the problem for Indian companies is of their own making. They are certainly not being run in the most efficient manner, especially the Government owned ones and hence, a bailout plan if any, should come with some pretty strict riders. What also worries us is the fact that this could also end up sending all the wrong signals to other troubled industries. What if they start approaching the central bank now? Authorities need to keep in mind that the only way a capitalist system thrives and survives is by letting sick enterprises fail. Regardless of how big they are.

India's growth story has caught the fancy of many foreign investors around the world. Otherwise what would explain the surge in the Indian stock markets in the past one year. Since it is evident that the developed world will take some time to recover, global investors are looking at other attractive destinations to generate returns. And the scope of growth in India has led many of them to make a beeline for the Indian shores. Including the billionaire financier George Soros. As per reports, Soros is in late stage talks to buy a 4% stake in the Bombay Stock Exchange (BSE). Soros Fund Management plans to buy Dubai Holding's stake for about US$ 40 m, valuing the bourse at US$ 1 bn. With much of the exciting action having shifted from the West to the East, particularly India and China, Soros sure does want to have a piece of the pie.

What do Brazil, Russia, India and China have in common? They are a group of the fastest growing economies in the emerging world and are fondly known as BRICs in the investor community. The BRICs already rival some of the developed countries in terms of the size and growth of their GDP. However the group has failed to represent the broader spectrum of emerging markets. So the question haunting investors is who next?

This has been answered by the new group CIVETS comprising of Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa. While CIVETS comprise a broader spectrum of emerging markets, they are not in the same league as the BRICs in terms of growth. The EIU forecasts the average GDP growth for CIVETs at 4.5% over the next 20 years. While this is higher than the 1.8% forecast for the developed G7 countries, it still falls short of the 4.8% forecast for BRICs. Still they do represent the next layer of growth that the markets have been seeking.

After a volatile session, Indian markets nosedived into the negative territory in the final hour of trade. The benchmark indices shed gains backed by profit booking in engineering, banking, auto and pharma stocks. Markets across Asia except India ended higher today. The BSE-Sensex was trading nearly 95 points (0.5%) lower at the time of writing. The European markets have opened on a cautious note.

 Today's investing mantra
"Although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a 'high-probability insight'. This is what causes the cash register to really sing." - Warren Buffett

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5 Responses to "Central banks running out of time and trees"


Jul 29, 2010

please don't send me mail next time. o.k.



Jul 29, 2010

Good article. Thought provoking. A warning to be cautious in deploying the funds.

The Indian Government should realise and neck out the FIIs before they loot us to offset their economic losses.



Jul 28, 2010

Next time when central bank running out of time and tree they will not print money but they will enter the money in Electronic ledger with the number of Zero's as they like!!!!. Everybody has to make transection through only cheque. No printed money available. You may remember introduction of EURO.


R R Dalal

Jul 28, 2010

This is certainly a most ingenious answe to the printing of paper money. But what if they start plastic currency! And what if the world runs out of water before then?


C V Ramachandran

Jul 28, 2010

Reading today's investing mantra, one can conclude that Mr.Warren Buffett has alwys been in QUALNTITATIVE('N' silent)school! ie QUANTITY with QUALITY !!

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