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Have we seen the last of the Lehman crisis?

Sep 14, 2013

In this issue:
» US dollar remains the world's actively traded currency
» India Inc.'s measures to deal with crony capitalism
» Money is moving out of Asia quite slowly
» Rule changes could impact aluminium players
» ...and more!

Exactly 5 years back, Lehman Brothers went bankrupt deepening the global financial crisis which was the worst one since the Great Depression of the 1930s. Global stock markets plunged, the developed world sank into recession and the emerging markets suffered a slowdown. Given the scope and scale of the crisis, it was pretty obvious that measures and controls had to be put into place so that such a crisis does not strike again. But has that been effective? Can we say that the possibility of another crisis looming has slimmed?

In an article on Moneynews, former Treasury Secretary Henry Paulson puts forth his views that another financial crisis occurring is a certainty. He stated, "As long as we have markets, as long as we have banks, no matter what the regulatory system is, there will be flawed government policies. Those policies will create bubbles. They will manifest themselves in a financial system no matter how it's structured and how it's regulated."

His words could not have been truer. But interestingly, Mr Paulson is a supporter of Ben Bernanke's easy money policies and this is where we disagree with him. Since the crisis, government policies indeed have been flawed. And the stimulus programs announced by US, Europe and Japan have been at the heart of them. These have hardly done much in propping up their economies from the pit they have sunk into. Certain European countries have been fighting to stave off bankruptcy. Meanwhile, the surge in liquidity has found its way into various asset classes in the world increasing the chances of bubbles forming there. Prices of these assets especially stocks have hardly reflected the ground reality. The dangers of this were evident in India as well. As soon as the US Fed announced its intention of withdrawing its QE program, money began flowing out. This impacted stockmarkets and accelerated the fall of the rupee exposing India's vulnerability.

It will be interesting to see whether the US Fed will actually be able to withdraw its stimulus programs. Other than easy money, none of the governments in the developed world have been able to come out with long term concrete solutions that will fuel growth of their respective economies. Indeed, one of the seeds of the 2008 global crisis was the expansionary monetary policy advocated by the then Fed chairman Mr Alan Greenspan. Ben Bernanke who succeeded him hardly learnt a lesson. And as long as his successor too continues to tread the same path, the chances of another global crisis occurring do not seem so remote. Will the global economy then be able to withstand another such shock? That will be the million dollar question.

In such a situation what should you do? How much should you allocate in different asset classes? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to stocks, you might be concerned about other asset classes like fixed deposits, gold and property as well. And that's why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!

Do you think that the chances of another global crisis occurring in the future look remote? comments or post them on our Facebook page / Google+ page

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 Chart of the day
Whatever brickbats the US dollar may have been receiving, it has remained the world's reserve currency. Not surprisingly, it was also the most actively traded currency in the global foreign exchange market in April 2013. The next best trade currency Euro trailed far behind accounting for around 33% of the deals as per the Economist. The Yuan paled in comparison. But that does not mean that the Chinese currency can be discounted entirely. Infact, the Yuan made it to the top ten for the first time meaning that the weight of the dragon nation is certainly increasing in the global arena. But the phenomenon of the Yuan replacing the US dollar as the reserve currency as has been predicted quite a few times in the past does seem a long way off for the time being.

Data Source: The Economist

Tomorrow is the 5th anniversary of the collapse of the financial giant, Lehman Brothers. One of the reasons behind the collapse and the crisis that unraveled after that was greed. Greed and crony capitalism, where increasing returns and saving costs were the mantras, drove all actions. Unfortunately 5 years down the line, it is still the same mantra that drives business. This is the ugly truth at least in India. India Inc. has blatantly used crony capitalism to further its business interests. Without giving any heed to the society in which it functioned. And this shortcoming was exploited to the core by our politicians who used these issues as their political agendas. The result - most of the projects ended up getting stuck for legal and approval issues. Over the years such projects have mounted up and weighed down on the economy. Therefore it is essential that capitalism goes through a makeover in the country. The article in Economic Times points out that corporate social responsibility (CSR) and creating shared value (CSV) are what the corporates should be looking at. Sharing wealth and giving back to the society at large is the only way forward for India Inc. Some of the noted names in the corporate world have already realized this and are working towards it. It is only a matter of time that the others would either follow or be forced to follow.

Basically, there are two factors that drive equity markets. One is cheap liquidity and the second is earnings. While earnings play a major role in stock price movement, sometimes doses of cheap liquidity happen to be the main driver. Take the case of emerging markets for instance. The past performance is more or less attributable to the cheap liquidity inflow that came from monetary easing policies of the US. As such, when the emerging markets pack corrected recently, most attributed the reason to waning liquidity. However, this is only partially true. As per an article in Firstpost, Asia's top 10 economies received inflows worth US$2.1 trillion over the last 5 years. However, since April 2013, when emerging markets started witnessed massive correction only 4% of that cash has left Asia! Thus, while the money is indeed moving out of emerging markets, the pace is rather slow.

But why is it so? For one, as of now the Fed has just indicated that it will curtail its bond buying program. While this signals that the US economy no longer needs external stimulus it does not give a clear picture as to when it will start recovering. For cheap money to move out of emerging markets investors need to witness concrete signs of revival in the US. And this is not happening as of now. Also, the US treasury yields have seen a modest rise in the recent past and have been way off their peak as witnessed in 1994. So, with yields remaining low, cheap money will continue to find its way in other asset classes rather than making a measly return from treasury securities.

A possible game changer could be in the offering for the aluminium industry. A new rule proposed by the London Metal Exchange (LME) could change the dynamics of the aluminium industry. Stocks at LME-licensed warehouses, intended to store metal for physical delivery when required by expiring LME contracts, have risen from less than 1 m tonnes before the financial crisis to more than 5 m tonnes today. This has lengthened the wait to retrieve material from the warehouses. Under the new rules, warehouses with long waits for delivery would have to deliver more metal than they take in. This would deal a blow to a trade that has sprung up in the last three years, by which warehouse owners offer cash and other incentives to draw supplies into their sheds. They then limit the amount they deliver out, which traders and analysts say drives up prices for customers who need metal immediately. But this proposed new rule has not gone down well with the metal produces. They worry that premiums will fall as a result of the rule changes, hurting their profits while LME prices are close to or below many smelters' cost of production.

Major global stock markets posted strong gains for the second week in a row shrugging aside macroeconomic concerns. Despite caution arising from the likelihood of the Fed announcing pull-back of its stimulus program on Wednesday the markets registered healthy gains. In the meanwhile, worries over Syria continued as US and Russia held talks and felt that Syria was not doing enough to give up its chemical arms. The US stock markets were up by 3%. Even the European markets were buoyant with indices in Germany and France ending higher by 2.8% and 1.6%, respectively. The UK markets were up by 0.6%.

Stocks across Asian markets recorded high returns. Equity markets in China surged by 4.5% on the back of an improving economic climate. The stock markets in Japan continued to revel in the euphoria on being selected to host 2020 Summer Olympics and gained 3.9%.

Even the equity markets in India were up by 2.4% as the rupee continued to climb higher backed by a slew of measures announced by the new RBI governor. By the end of the week, the rupee had recovered to Rs 63.5 to the US dollar. Even the Index of Industrial Production grew by 2.6% YoY in July after contracting in the preceding two months. Barring software (down 0.7%), all sectoral indices ended the week in the green with realty (up 8.8%) and capital goods stocks (up 8.0%) being the major gainers.

Source: Yahoo Finance, Kitco

 Weekend investing mantra
"The business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective."- Warren Buffett

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5 Responses to "Have we seen the last of the Lehman crisis?"


Sep 17, 2013



P V Ranganathan

Sep 15, 2013

"That will be the million dollar question"?
Com'on. Where are you? A million dollars are pea nuts even for junior politicians in India. And no banker gets even in bonus less than in billions of dollars.
You must learn to say "That will be the multi billion dollar question".



Sep 15, 2013

crony capitalism is bound to remain as long as human beings are there.
See,how Henry kissinger brought capitalism in CHINA,and it is bigger economy than America.(his intention was to bringrestraint oh USSR).He did not visualise this position of china.
Even the most honest are forced to use bribery to maintain their industry which was due save liquidation and save thosands of jobs (in case of crony socialism).
Mafia's and black-money prolifiration are not controlled but control the govt's.



Sep 14, 2013



N Nagaraja rao

Sep 14, 2013

You remind me of my childhood days. There was a special mango tree in my landlords garden and it used to yield only 20 to 25 fruits a year. Good big and delicious.Two persons could have their full with a single fruit.The last fruit of the season was ready to be plucked but it was at a great height. My landlord goaded me to try with a promise to let me enjoy the last Mango. In my enthusiasm I started and went up after a lot of pains and effort. YES I got the Mango. I was happy. But then when I looked down I started pissing and could not muster the courage to retract my path. Finally a big ladder was brought and the mali came to my rescue. After I came down I swore not to climb a tree in future. Well we should keep a ladder ready. It will be required any time now.

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