This has rocked the rich world. It's not high debt!

Sep 13, 2011

In this issue:
» India's July industrial production slows down
» Farmers take no pride in high agricultural output
» IMF to impose new checks and balances for debt
» Retailers drive demand for real estate space
» ...and more!
----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

We are proud to present an exclusive publication - The Guide to Gold, a compilation of Bill's most popular articles on Gold.

Join Bill as he discusses the past, present and most importantly, the future of Gold as an investment opportunity. And find out if Gold is still the best bet for you...

Quick! Sign Up Right Away & Get this guide FREE!


There is no doubt that the financial crisis and its aftermath have adversely dampened employment prospects, especially in the developed world. But according to the Economist, what is all the more worrying is the unemployment in the youth population. If not corrected soon, this could have an adverse impact on the fortunes of an economy for years to come. Indeed, the data at present looks quite disillusioning. For instance, one in five under-25 year olds in the European Union (EU) labour force is unemployed. In America over 18% of under-25s are jobless. Not just that, the number of young people in the rich world who have given up looking for work has risen considerably too. Most of the developed world is in recession, growth prospects are poor and there are talks of austerity programmes all of which are expected to exert more pressure on job creation.

It can be argued that the young always have their parents to fall back on, they can stay in education longer. They have no families to support and have no urgent need for medical insurance which the unemployed aged population require. But that perception is misleading. More and more young people remaining unemployed means lost income tax revenues to the government, increased benefit payments and the most worrying of all, wasted capacity.

Because of their relative inexperience, young people are always the first ones to be shown the door. Although once the recovery sets in, their chances of finding jobs are easier. But therein lies the problem. Given the scale of the crisis, recovery seems a long way off and the youth is finding itself without jobs for longer periods. Longer stretches of unemployment makes it that much harder for securing jobs down the years. Employers typically always prefer fresh graduates. This means that the unemployed are forced to undersell themselves. Over a period of time, this translates into lower salaries and experience compared to what would have been the case had they not been unemployed. There are also undesirable psychological and emotional consequences of long stretches of unemployment among the young. What is more, the link between youth unemployment and crime cannot be completely ruled out either. That is why, the rich world has a serious problem on its hands if it is not able to improve the job prospects for its people.

For India, the idea of youth unemployment assumes greater proportions. A lot has been said of how India's young demographic profile will be one of the key drivers of growth in the future. But here again, the Indian government will have to ensure that there are sufficient employment opportunities. This means more focus on quality education which will equip people with the required skills for any job. Without that India's demographic profile could end up being a double edged sword.

Do you think that unemployment among the youth will create more problems for countries in the future? Share with us with us or post your views on our our Facebook page.

 Chart of the day
Today's chart of the day shows that India's industrial output grew at its slowest pace since 2009, expanding just 3.3% in July 2011. This is in sharp contrast to China's which recorded an impressive 14% growth during the month. Indeed, although this data applies to only one month, such a performance in the subsequent months will certainly worry the Indian government and the RBI. The latter especially will be in a quandary with respect to whether further rate hikes should be undertaken. Especially when inflation has still not come down to the comfort levels of the Indian central bank.

Data source: The Economist

Rainfall has no doubt been good this year. And it almost seems intuitive to believe that this will translate into higher income for farmers. But think again? Would this really be the case? Good rainfall means a bumper crop. And with demand not increasing as fast, a bumper crop could result into lower and not higher prices. Furthermore, if costs for farmers are spiralling upwards then it could likely be a double whammy. As per a leading daily, this is exactly what seems to be happening in the Indian agricultural sector. Farmers do not seem to be taking pride in their increased agricultural output this year. But are worried that this output would put a lid on prices at a time when wages and other input costs are rising relentlessly.

Furthermore, even exports seem out of bounds as Government chooses to clamp down on it following the food inflation in recent months. However, the price bane for farmers could turn out to be a boon for consumers what with prices of food articles finally expected to come down. This tug of war between the two i.e. a farmer's profit expectation and a consumer's price expectation is likely to persist even in the future provided rain gods continue to smile upon us. There is a sustainable solution though. The farmer will have to aim for higher productivity and thus make up from volumes what it could lose from lower profit margins. And the good news is that there are signs this is already happening. Certainly a good sign for the long term well being of the economy.

The views of some of the most renowned financial analysts have been written off ever since the financial crisis of 2008 took everyone by shock. It seems that even bodies like the IMF are no better when it comes to determining the future fundamental strengths of economies. What else can explain the fact that IMF's 2007 review projected a drop in Greece's public debt to GDP ratio to 72% in 2013 from 93% in 2007? All but one test carried out by the financial body showed Greece's debt was on a declining path over the medium term. The same review of Greece's debt in 2009 warned that Greek debt could rise to 115% of GDP by 2010. That too, even if cost-cutting measures were implemented. In fact the IMF provided rescue loans to Greece, Portugal and Ireland since 2010 as the countries struggled to rein in budget deficits. It turns out that the IMF wants to implement new checks and balances to get its estimates in order. It has suggested setting a 60% threshold for debt to GDP ratio as a warning signal. This signal would trigger deeper analysis for countries that have access to financial markets. We are not sure whether this will work or not in ensuring better financial regulation. But what entities like the IMF need to ensure is that even the rich economies do not take their financial strength for granted.

In the world of telecom, having more subscribers is the key to success. The reason, since it is a game of volumes, larger the subscriber base translates to higher revenues. And this has been the main driver for the new telecom operators that have launched services in India since 2008. With the aim of getting more subscribers, these operators resorted to a ruthless price war that brought tariffs crashing down. But despite getting an increasing number of subscribers, these operators still continue to bleed.

One reason for this has been the increasing cost of operations that have led to thin margins. But another and a bigger reason for this is the large percentage of inactive subscribers. As per the data released by the telecom regulator (TRAI), the active subscriber base for new operators like Videocon, Etisalat, etc is just 30 to 60% of total subscriber base. This when compared to an active base of over 90% for incumbents makes one realize as to why new operators have not been able to break even. Acquiring new subscribers becomes irrelevant if they do not contribute anything towards the revenues.

The Indian real estate sector is in complete doldrums. Commercial segment is plagued with high vacancy rates while demand in the residential segment is waning due to rising interest rates. However, with retail sector witnessing strong expansion (consumption theme riding high) it seems that the demand for commercial space is gradually gaining momentum. It is worthwhile to note that foreseeing huge demand potential in future, builders have already launched 6 m sq ft of retail space in the first half of this year itself. Compare this with the 5 m sq ft of space that builders launched in the entire year of 2010.

While the current expansion is happening in metro cities where demand for branded accessories is high we advise a word of caution. It may be noted that in the past builders have already paid the price for being too optimistic. Further, with most deals now having the revenue share component if the demand scenario does not pan out as envisaged the income calculations could go for a toss. We believe that the real turnaround would happen once the demand for retail space shows signs of improvement/increases in the tier 2-3 cities. That would bring in stability as concentration amongst few cities will get diluted.

Indian stock markets have been quite volatile today. The markets opened on a positive note, were trading firm and then got into the negative zone. At the time of writing, the benchmark BSE Sensex was down by 55 points (0.3%). The sectoral indices were trading weak except IT, realty and power stocks. Barring Japan and Malaysia, Asian stock markets were trading in the red.

 Today's investing mantra
"One of the biggest mistakes is to focus on a stock price instead of its value." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "This has rocked the rich world. It's not high debt!". Click here!

7 Responses to "This has rocked the rich world. It's not high debt!"

k.s.jayanth kumar

Sep 14, 2011

For India, instead of reaping the demographic dividend we may have to face the Domocles sword of Social unrest because of our Govt.'s policy paralysis,incompetence and corruption leading to inability to give employable education and create jobs in the manufacturing sector. May be we should outsource " Manufacturing Governance" to China !!



Sep 13, 2011

Very true, unemployment is going is a much bigger problem than debt etc. One has to also consider that when the govt. gives out unemployment benefits, is it actually beneficial. Agreed with the small amount recd by the unemployed, he may not indulge in crime and wrong doings, But the other side of the coin is that then the said unemployed is not ready to work for lesser pay also. Since he is getting some monies to tide over the month, unless he gets what he thinks he should get, he is not ready to take up the job.
A strong case in point is the unavailability of Farm workers. (I stay in rural area) Since NREGA funds are available,farm labourers are demanding Rs.150/- per hour for the 8 hours of work, or else they are ready to sit at home. Agreed it is a tough job working in the fields, but the actual output of these workers is worth less than 4 hrs., This I am speaking from actual conditions seen.
For solving all this problems you require a very visionary leadership, which at present is terribly lacking, at least in India. Ministers and elected representatives, very well supported by the adm. machinery is totally busy in self enrichment, BY EVERY CONCEIVABLE MEANS, mainly rampant corruption.
Words and ideas fail how this problem is going to be solved, particularly as the present govt. is going to continue for another 2 yrs. And in this all political parties are included.

MAybe, the youths themselves will create a new leadership, revolt and find a solution. (No, Rahul Gandhi is not the answer ; He is already a seasoned politicians, playing the political game to the hilt.)

MAy God help the country.



Sep 13, 2011

All of us talk Warren Buffet because he made huge money in stock trading. Ok could u compare one in India from the ordinary. None - take the list of loosers 99.9% of Indian public lost money on equities. Conduct an online survey of your own cutomers - truth will be out -Fund managers fail inspite of indepth study of stock market could u agree in fact certain fund houses performed better than Quantum.



Sep 13, 2011

You are absolutely right on this one. Middle Eastern and African countries undergoing political crisis have should youth unemployment of 25% - 30%. If young people remain unemployed for extended time, without a doubt, crime rate will go up! This is second effect in addition to loss of capacity what you have mentioned.



Sep 13, 2011

The increasing advent and continuing development of labour-saving devices is initially welcome as it boosts the profit of the device maker, but then, it also, in the long-run CUTS down on employment. This is one of the major reasons for the growing unemployment of youth in ALL sectors - industrial, agricultural, services etc.


Suresh Kumar

Sep 13, 2011

Corruption in our education system is taking a toll on the employability of youth, particularly in the technical education. AICTE is unable to enforce the standards. As a result, the salary level for youth from poor institutes is much lower. Those from better institutes normally prolong their education, while waiting for a job. While India will have under-employment of youth, West will have to face social unrest, the kind we saw during London riots. And, maybe some of these people may decide to move to BRICS countries for employment particularly with MNCs. That may change employment demographics over the next decade.



Sep 13, 2011

The world financial crisis has shown the weaknesses of a globally integrated economy. It has also indicated that some nations have higher resilience to overcome their financial problems. India is one economy which has demonstrated to the world what it can achieve in a short span of time. The fact is that India has a very high savings rate, as compared to other countries. These savings help to overcome financial crisis. The US economy thrives on borrowings, and not savings, and that is why it is impacted highly when markets crash. Everything is hypothecated or mortgaged to financial institutions, with very little ownership.

Indian brains are far superior to brains in the western countries, if used for constructive activities. That is why the average Indian performs better in the western context, and is helping to drive their IT systems. What if all the Indians decide to work for their own nation? What cannot be achieved?

What if the Indian savings are invested properly in equity. Any amount of FII that is withdrawn from the markets can easily be replenished by Indian resources. A billion, trillion or quadrillion dollars can easily be ploughed back by Indians to see their markets grow and yield returns.

Equitymaster requests your view! Post a comment on "This has rocked the rich world. It's not high debt!". Click here!