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

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!

---------------------------------------------------------------------------------------

00:00

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.

01:26		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

02:06

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.

02:45

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.

03:26

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.

04:06

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.

04:47

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.

04:56

Today's investing mantra

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