Is the US just postponing an eventual crisis?

Aug 1, 2011

In this issue:
» India shunning 'Big Bang' economic change?
» SEBI tries to make investing simpler and easier
» Retail FDI approved but it will not be easy to invest in India
» BRIC banks signal credit risks
» ...and more!
----------------------------- Is this the Start of a Stock Market Crisis? -----------------------------

There's not much time left, so we will make this very quick...

You see, over the weekend, the US Government just about managed to avert a situation that could have triggered a huge global economic crisis.

But the solution is temporary. And the crisis could trigger again.

Here's what you should do immediately to protect yourself -

Crash Proof Your Portfolio

And to do that, all you need to do is respond to this message well before 5 PM tomorrow...


The world stock markets breathed a sigh of relief on Monday morning as the biggest economy raised its debt ceiling to avoid a potential default. President Obama and the Congress have agreed on a framework that would target raising US' debt ceiling. It would also target spending cuts and boosting savings. This news came as a breath of fresh air for all those who were worried that US would default on its debt.

But despite this huge risk, the country has still attracted the safest credit rating of AAA from Standard & Poors that has recently released the sovereign debt ratings for 126 countries. The ratings agency had only threatened to downgrade US debt if the debt ceiling was not raised. So solving the debt problem with more debt has given the entire world a lot to cheer on. But is this really a solution to the problem?

If we look at the examples of countries with mountains of debt like Greece, it does not appear so. Rather it appears that US seems to have just postponed their problems to another date. Or as a matter of fact to another President in case Mr Obama does not win the next Presidential race. The country's economic growth has slowed down in recent times. Add to this, the unemployment rates have skyrocketed. For private employment to pick up, it is necessary for the economy to grow at faster rates. And with the government scheduled to cut back on its spending, it is unlikely that the public sector would fuel any major growth. Therefore, in all possibility, it does appear that the US is headed into another recession. And if this happens, there would be fresh tremors across the world's markets.

Do you think raising the debt ceiling means that US is out of the woods? Share your comments with us or post your views on our Facebook page.

 Chart of the day
Mobile phones are a common sight in India. Nearly everyone has one at least. A large part of this growth has been driven by the availability of low cost handsets. And Nokia has dominated the scene for a very long time. In fact, Nokia has been the world's leading manufacturer of mobile phones since the time mobile phones came into commercial existence. But off late, the company has been losing its dominance. This has been largely on account of the fact that they are lagging behind on innovation. And this flaw led other manufacturers to not just come into existence but also steal Nokia's customers away from it. Offering better and superior features at cheaper or equivalent price points has helped companies like Samsung to give Nokia a run for its money.

Data source: Strategy Analytics
* As at the end of June 2011

'No power on earth can stop an idea whose time has come'. This is how the then finance minister, Mr Manmohan Singh, introduced India to reforms way back in 1991. Clearly, it was the best thing to have happened to the country since independence perhaps. This 'big bang' change helped propel India's GDP by a massive 247% in the two decades that followed. However, a lot of water has flown under the bridge since then. The finance minister of 1991 is now the prime minister of the nation and that too, for the second consecutive term. And has he stuck to his guns of introducing large scale reforms? May be not, if the daily, San Francisco Chronicle is to be believed. The newspaper has come down heavily on Mr Singh's new found approach of diverting focus from reformist changes and instead, embracing populist measures. This, the daily believes, is clearly taking its toll on the economy. As per estimates, India seems to be losing about 2.5% points in growth a year on account of unnecessary regulations and approval requirements. However, not everyone believes in this theory. There are experts who argue that Mr Singh is clearly doing the right thing as this will make the Indian growth story far more inclusive. If the evidence so far is anything to go by, Mr Singh seems to be failing in his approach as inflation is running rampant and investments slowing down. It will be interesting to see how things pan out in the long term.

SEBI in recent times has made headlines for coming out with guidelines meant for the benefit of minority shareholders and for investors across mutual funds. And with respect to the latter, the regulator intends to make investing a simple and easy process. Some of the measures introduced by the Securities and Exchange Board of India (SEBI) Chairman, UK Sinha are wider open offer exit routes, simplified initial public offer (IPO) application and single Know Your Client (KYC) norms. That said, investors will have to shell out Rs 100 for annual investments of over Rs 10,000 (Rs 150 for first time investors) if made through a mutual fund distributor or an agent. The single KYC norms are expected to intensify competition across brokers though. Earlier, investors had to submit various proofs and signatures to every new equity broker, mutual fund house, depository participant and portfolio manager he approached. With single KYC norms now being introduced, investors will be able to switch between brokers without having to submit umpteen signatures thereby fuelling competition between them. Indeed, with SEBI focusing on simplifying the investing process, serious investors will certainly benefit especially those who were hampered by the cumbersome process that was prevalent earlier.

Recently, the Committee of Secretaries (CoS) approved the foreign direct investments (FDI) in Indian retailing industry to the extent of 51%. However, the final decision is still awaited from the Cabinet Committee on Economic affairs. But, the going is not going to be an easy ride for the global retailers. The CoS has laid out a few stringent conditions for the willing parties. They will have to invest in the back end infrastructure at least 50% of the total FDI. 30% of the sales turnover for such companies will have to be from small traders. Also, the retailers will have to procure at least 30% (in value terms) of their manufactured items from small and medium enterprises (SMEs). Therefore, we believe stricter regulations will ultimately result in continued and sustainable growth of retailing industry in the country. And protect the smaller players at the same time.

If you have been an investor in financial stocks in the emerging markets your portfolio by now could have a shade of red. Banks in the biggest emerging markets are losing the confidence of investors. As loans turn sour after a two-year credit binge, rising NPAs and conservative provisioning is taking a toll on profits. Few in India have also had to write-off staff payments on a retrospective basis against their reserves. This is at a time when the lending margins are also showing no signs of recovery. Only the ones with high share of low cost deposits have been able to at least maintain the same. A report by rating agency Fitch, published by Bloomberg puts it accurately. "Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery. This has turned emerging-market banks into some of the world's biggest companies by market value" It also suggests that banks in Brazil and China could see loan growth drop by at least 50% over the next 2 years. This is while the central banks try to curb price rises and asset bubbles. Our very own RBI has been quite proactive at this and the results are being seen. As per the IMF, the average debt burden in the BRIC economies is just 40% of GDP (gross domestic product). This when compared with 102% percent for developed nations seems benign. However it will be best to assume that banks in emerging markets will have to moderate growth in the medium term to keep themselves healthy.

In the meanwhile, the Indian stock market shed most of the morning session gains but continue to trade in the green. At the time of writing, the benchmark BSE Sensex was trading up 34 points (0.2%). Mahindra and Mahindra (M&M) and Infosys were seen gaining the most amongst blue chips. All major Asian indices closed in the green today with stock markets from Japan and South Korea leading the pack of gainers. Europe too has opened on a positive note.

 Today's investing mantra
"Chains of habit are too light to be felt until they are too heavy to be broken." - Benjamin Graham

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12 Responses to "Is the US just postponing an eventual crisis?"

B.Kailash Shankar

Sep 6, 2011

Of course it seems that US is buying time. However, that aht differrentiates us from them is that they are truly transparent and so, the crisis come out as it happens unlike in India where many thing are hidden. The control in India is good but, manipulated control is dangerous. I have no doubt that US will spring back again because that country is till resilient where merit counts unlike in India where everything, including security of the country is a GAME!!!



Aug 2, 2011

If we as Indian think that we did a great job by having strict policies in our financial system and if we think the western countries let themselves loose on that front, then it's better to think again. As final receipient of any sound policies should the general public, if we look at general public then the common man in India is chewed beyond limits. The common man in western countries are having great living standards for very good reasons. Please let's not feel too proud in ourselves for any sound policies, if the common man had any strength left then we in India also could have gone for subprime mortgage (remember banks were running after the comon man to take any loan they want)..but common man couldn't dare as he had no strengh left and not to mention the confusing policies, forest land scams, builders defaulting and still scot-free...hundreds of reasons to "cheer" about for us Indians. We should really "Cheer", our inefficiencies saved us....
I still believe US is not in any danger of an debt defaults, they have lot of options and a very smart/bully nation to make themselves come out in any shape they want...



Aug 2, 2011

Moving from gold standard we have been persuaded to embrace Keynesian developmental monetary economics. But the fundamentals can not change. Money represents value created. Keynesian concept was based on today's money chasing tomorrow's value. But in the current circumstances cutting govt spending means contraction of jobs or stagnation of joblessness levels. Result double dip.

Demand stimulation is the key which in turns depends on expansion of consumption. Private industry will not invest unless it sees demand and income rising.

Unless govt makes it bold to spend on infrastructure projects and thus increase employment, put money back in the hands of the consumer who will go and buy stuff, the economy cannot be put back on rails. Some sharp pinpricks will be encountered but US govt must look to spending cuts but improve spending efficiency.



Aug 2, 2011

The article written on the US postponing its pain to a further date is completly correct. Also another problem of US consumers is the outstandings on credit cards, where in its nearing US 1 Tn. With more job looses and government hard on curtailing its expenditure in the months to come consumers would be hard pressed to pay or settle, meaning more writeoff on Bank's books. In the last meltdown there were atleast physical properties however in non secured consumer credit nothing is backed by security and its a huge risk that is likly to unfold as it happens. Every sneeze the US makes its going to rock the world economy very hard. All the talk about cutting down on expenditure can be forced upon countries like greece stating that for them to live they will have to take pay cuts and huge increase in taxes will US be able to do the same. A talk on downgrading the US debt just before the settlement was reached had stated that of reducing the "AAA" status of "D" equivalent to junk status which will have repurcussions in terms of corporate paper issued by US will have high interest rates thereby loosing out on the credibility part. Also US could risk the tag of Global Currency" in case if it happens. Presently US has ignored the Cancer problem, once it reaches the critical stage all will have to take a hit to treat them.


meera menon

Aug 1, 2011

As you have already said, US economy is not safe at postponing the issue.If the ceiling is raised, there is more chance for more debts to pile up and more space for double recession.



Aug 1, 2011

Yes. Even if the deal is signed, the terms are very stringent and it will be difficult for the US economy to recover. At present all the US indices are trading in red. European idices are also down, particularly GErman (Dax) almost 2%. Early today morning with the news that the debt deal has been signed, the Dow and Nasdaq Furtures were almost 1.5% plus. As we get the details the markets have turned negative.
However things in India should be good. One possibility of funds flowing 'IN" can lead to a rally. Secondly Prannab Babu has been speaking very psoitively today evening. At last the Govt's think tank must have realised, the only way to get out of the great mess of corruption is to divert publics mind from a static govt. to a one which is eager on dev. and reforms.
At least on these points the markets can move up.
Keep minimum position. Investors should wait a couple of days more before putting in their funds.
Thanks Damani



Aug 1, 2011

It's no surprise that the opnly option is to buy time. But I don't believe US is any trouble at all, because in case USA wants to raise money then there are hundreds of ways to raise money and boost economy at the same time. e.g. allowing enterpreneurship to foreigners, I am sure there will be countless such enterpreneurs in India who would like to set-up business in USA I believe. I think there has been such proposals in past so during this period of next 3-4 years along with cutting the federal costs, there should be equal focus on releasing the FDI ways too....impagine if they ask for business worth 3 million dollar to be revived and generating at least 4 jobs in US, then if we have 10,000 such cases it's 300 billion of business and cutting the unemployments numbers in good I realy doubt if US is in any trouble, they have hundreds of options I believe....


Subramanian K

Aug 1, 2011

The USA is still very much floating on the debt bubble and can therefore default yet again - unless its people and government are not living on tomfoolery and continue to enjoy the pleasures derived from the much maligned and affected Japanese economy. By helping Japan to come out of their war crisis, the US thought that by helping that country, they can shove off their manual work to third world countries and enjoy the pleasures of automation. By the influence of economic hegemony the US has been dominating the entire world, especially because of large scale brain drain from Asian countries. But their unbridled enjoyment of absolute freedom at the cost of the rest of the world has made the people lethargic and living on pleasures enjoyed through the economy sustained by arms and ammunition marketing in the third world countries! With the stoppage of US initiated wars spread across the third world coming to almost grinding halt, their economy boosted by armament manufacturing ans service industries, has come to a naught and they are perhaps facing the worst ever crisis in the entire world. hence thier recovery is not to be seen in the near future, if they continue the spending uncontrolled.


Hasan Abbas

Aug 1, 2011

big mistake USA is doing in raising the ceiling and not addressing the issue.. this is the end of the great american dream if things are not solved quickly.. in any case bad times tome come for the economy for the next 10 yrs and transition of economic power to china


anupam garg

Aug 1, 2011

Mr. benjamin's mantra aptly defines the status of agencies r again doin wht they did in subprime crisis...same mistakes being repeated agn & agn...the alarm bells r ringing, but is any1 hearing?

chart of the day is highly surprising...i thought spice, karbon, micromax & 2-3 more were the only other major players but together they r eating 43% of the pie...funny sony ericsson doesn't's share is understandable with its unbelievably awesome galaxy SII

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