Investing in India - 5 Minute WrapUp by Equitymaster

The destruction of dollar could be near 

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In this issue:
» Will middle class now target dishonest companies?
» US should go back to gold standard, feels Grant
» India Inc optimistic about the second quarter
» China and US markets perform poorly during the week
» ...and more!

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Humans believe themselves to be the most superior creatures in the universe; if not for anything else, for the simple fact that they can act and think rationally. Nothing could be further from the truth though. There are quite a few psychological tendencies that throw rationality out of the window. One of them is called as 'cognitive dissonance'. While the term may sound complicated, it has a very simple idea at its core. Simply put, it means that if you deeply believe something, there is a lot of discomfort felt while accepting ideas that are contrary to that belief. Alternatively, if learning something has been very difficult, it will be nearly impossible for you to accept that what you've learnt is useless.

Why are we bringing this up? Well, we believe that the phenomenon of cognitive dissonance does an excellent job of highlighting the problem that the global economy or to be more specific, the US economy is facing. You see, the US Fed Chairman Ben Bernanke and perhaps most other Fed officials seem to be under the vice like grip of cognitive dissonance. What else would explain the fact that despite QE1 and QE2 being utter failures, they still want to indulge in QE3? They seem to be enamoured with the idea that printing and dropping money from helicopters is all it takes to revive a declining economy. This is what they have learned all their lives and earned their doctoral degrees from. Thus, they are now finding it extremely difficult to accept the notion that printing money is not the way to go.

And why do we believe that we are right? Well, had printing money been the solution, the first two quantitative easing programs wouldn't have been the failures that they have become. There are trillions of dollars worth of excess reserves in the system and still they aren't doing anything. What would another trillion dollars do? Thus, if QE3 comes, there is a greater possibility that the inflation could go berserk and in the process, destroy the dollar. If the situation has any chance of improving, we believe that Messrs. Bernanke and Co shed their cognitive dissonance and see the fact for what it is. Failing to do so may not be good for the global economy that seems already at cliff edge.

Do you think Bernanke is wrong in his belief in quantitative easing program or he should come out with QE3? Share your views with us or you can also comment on our Facebook page.

01:23  Chart of the day
Today's chart of the day paints an interesting picture. It highlights the percentage of people that lie to their employers while calling in sick to work. In other words, they take a sick leave even when they are not actually sick. And we thought such practices are adopted only by school children! Fortunately though, India does not seem to be topping the list and is slightly below China, the country with the largest number of people lying when they go on sick leave. To be fair though, this is a study done only on a certain number of people and may not be reflective of the real trend for the entire workforce. It is at best an approximation.

Source: Kronos Incorporated

Should the US go back to the gold standard? This would mean that there would actually be some value attached to the dollar instead of it just being worthless pieces of paper. Jim Grant, editor of Grant's Interest Rate Observer believes that the US needs to revert to the gold standard. He believes that this would force the government into living within its means and go on a debt diet. Having legal tender backed by something that's tangible and that has value would ensure that the system is objective. The government would have to ensure fiscal prudence, and not depend on the open market for its needs. In theory, this looks good, but how this would actually work in practice is still to be determined.

Not many may have expected the recent standoff between Team Anna and the government to assume such epic proportions. Surprisingly, the hitherto politically indifferent middle class flooded the streets in support of the Gandhian anti-corruption activist and his Jan Lokpal Bill. The government had little choice but to relent. This should definitely ring alarm bells for all the corrupt corporates who have been free-riding for a long time. Just last week we had discussed how Corporate India too needs one Anna Hazare to help tackle corruption in the system.

The dynamics of the Indian middle class - with strength of 200 million people and growing -are going through a paradigm shift. This very middle class forms significant and powerful stakeholders in our society. They comprise both customers and shareholders. They are educated; they aspire higher standards of living. It would be naive for companies to take these stakeholders for granted. Corporates have been largely lucky so far as most of the public outcry has been directed against the government. But the crony capitalists are as much to be blamed. In fact, several companies that have been involved in scams and shady dealings have been severely punished by Mr Market. So it would be wise for corporates to clean up their acts before it's too late.

Even as a mood of caution grips the economy on account of the fall in bottomline in the first quarter, a Confederation of Indian Industry (CII) survey reveals that optimism on the part of India Inc is not over yet. The majority of those surveyed expect volumes and sales to rise in the second quarter. This is despite the hit in the bottomline taken in the first quarter due to rising interest rates and input prices. Especially, the companies operating in manufacturing and services sector are expecting the tide to turn other way in the second quarter.

The first quarter was marked by high inflation. The same led to a cycle of rate hikes, decline in credit and slow down in investment. What is perplexing is where is this optimism stemming from? The majority of respondents' expectations have worsened as far as economic growth and inflation rates are concerned. As inflation remains stubbornly high, we will not be surprised to see more rounds of hike in interest rates by RBI. In the absence of immediate positive data, perhaps it would be better to discount the outcome as irrational exuberance.

It was a stellar week for the global stock markets with all countries except for US and China closing the week in the green. US stock markets were trading firm during the week. However, losses in the last trading session due to dismal job market data instilled recessionary fears and erased gains registered earlier during the week. It may be noted that US markets have registered losses in six out of the last seven trading weeks. Nonetheless, President Obama is about to unveil a new jobs program in order to curtail rising unemployment which is the main cause of concern for US. It would be interesting to see how the markets react to it and whether the propaganda materialises or not.

After registering losses for five consecutive weeks, Indian stock market finally gained some ground in a truncated trading week. Despite modest GDP growth numbers and rising inflationary pressures, Sensex registered healthy gains on the back of bargain hunting opportunities in select sectors like realty and metals. Amongst the other world markets, Brazil was up 6.0% while Singapore was up 3.5% followed by Hong Kong which was up by 3.2%. However, China was down by 2.3% during the week.

Source: CNNfn, Yahoo finance, Kitco

04:35  Weekend investing mantra
"The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I've been doing my part". - Marc Faber
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17 Responses to "The destruction of dollar could be near"


Sep 14, 2011



Nayan Desai

Sep 7, 2011

QE or currency printing may have its merits in form of sustained consumerism as more velocity of money increases in the market however, I feel that in turn pushes up inflation as demand rises. What I guess is the culprit in QE is the fear of slowdown and rising unemployment tends people to save more and the newer investment instruments like derivatives and commodity/forex trading adds to negative impact of QE. I also wonder, QE or no-QE, still in almost all economies there is substantial share of 'black money' playing parallel economy which harms or dilutes the desired effects of policy actions. I would suggest that world over this black money is indirect QE, why to tame this and try bring this money contributing to GDP growth rather than inflation growth.


M.Dinakar Shetty

Sep 5, 2011

This is my response to your point under para 01:57.
Adding currency in circulation, as you say, is not the solution for the present financial crisis even when it is backed up by gold stock. If the value addition is planned in such a way that by the time additional currency is spent on the value addition project, such project should start yielding result. Without value addition projects, if simply currency is added in the money circulation, that is going to cause inflation.


Joshua Kurien C

Sep 4, 2011

QE 3 is not good for the world econmy. Unless USA corrects the structural imbalances and improve the domestic savings easing of economy will not do any good. It may suppress the growth of other countries


Ganesh K

Sep 4, 2011

Well said....



Sep 4, 2011



Tamal Dasgupta

Sep 3, 2011

Yes, QE3 may not succeed. Do you have an alternative? And if you do, don't you think you should convince the Indian Govt first and before piling on to the US Fed? Why do you think there is uncontrollable inflation in India? Its the same; just dropping free money on the masses.


sarvotham yerdoor

Sep 3, 2011

The US FED has always been in the grip of Wall Street speculators and the Bankers to support them.Hence every QE has only resulted in providing more and easy funds for speculation of every kind.Unless this nexus is broken there is no deliverance for either US economy or the world at large.


Sonny Jacob

Sep 3, 2011

Now what the world expect M/s Bernanke and Co. to do at this late hour? There are 2 short term options. Print more notes or sell gold. In either way, its gloom and doom. EU is also to follow suit.


Gopal Kalpathi

Sep 3, 2011

Cognitive Dissonance and QE3in US. - But then the US had always believed that they are and have the superior knowledge and powers to do whatever they like not going by the consensus opinion. What else could explain their wars against WMD and Terrorism in Iraq and Afghanistan? Derivative products which became toxic and is still being circulated with 'AAA' ratings (this very journal had reported about it)? If these would not explain the discordant belief of US (collectively) what else would I am not sure. But then, the whole world still depends a lot on US and its $s for their own well being and that of other parts of the world.

I had expressed my opinion in this very forum that if US wants to get out of this (self made dilemma)they should take up organic farming in a massive scale and with ultra modern techniques. They can become the 'Annadata' for those still struggling to feed its masses as a part of its moral and ethical cleansing and in the processes provide its masses employment as well. It can earn both money and blessing of the world.

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