Are we dangerously close to a collapse?

Sep 22, 2011

In this issue:
» Is nuclear energy becoming a liability than asset?
» This is a bigger game changer than multi-brand FDI, feels Biyani
» Jim Grant's very interesting take on gold
» Forbes best under a billion list has tainted Indian companies
» ...and more!
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Anyone who's ever gone to the doctor knows that when he gets the disease wrong, there is absolutely no chance in hell his prescribed medicines would work. Thus, the skill lies in correct diagnosis and not the potency of the medicines administered. This analogy would sit rather lightly on the current US Fed. For it continues to wrongly diagnose the problems facing the US economy and keeps prescribing the same medicines.

The prescription that it gave yesterday was no different. Observing that the US economy still faces a significant downside risk, it introduced a program whereby it will buy US$ 400 bn worth of long term treasuries and sell an equal amount of short term treasuries. Thankfully, this is not another quantitative easing where money is printed and shovelled into the system. But it does lead to keeping the cost of money i.e. interest rates lower than what they should otherwise be. This step, believes the Fed, will encourage businesses and consumers to borrow long term and thus, could well lead to an US economic recovery.

Low interest rates leading to healthy recovery? Well, isn't this the practice that caused the problem in the first place. The current US Fed may not agree to this. But Alan Greenspan, a former Chairman and the man who's suddenly grown new teeth of wisdom did drop a hint few days back when he said that businesses don't want to borrow because they are uncertain about the future. Thus, what the Fed is doing by intervening is that it is creating uncertainty and interfering in the market mechanism. The money is thus not finding its way into long term productive capital investments but is rather going into speculative activities where all that matters is short term profit and not the longer term wealth creation.

We are of the view that the latest move by the US Fed does not lead to debt reduction of any kind. And this is what the rationale should have been. What the economy needs is greater savings which can only happen when the cost of money i.e. interest rates are not tinkered with. But the US Fed seems oblivious to this fact. It seems hell bent on destruction and taking the US monetary system ever so closer to the point of collapse. Thankfully, India would not be as badly impacted and any knee jerk reaction by investors should be seen as a long term buying opportunity. Also, gold may see higher highs in the times to come.

Do you think the latest move by US Fed will yield the desired results? Share your views with us or you can also comment on our Facebook page.

 Chart of the day
Today's chart of the day highlights how the area under cultivation of genetically modified (GM) crops has increased manifold globally over the past decade or so. However, it should be noted that it is still only a small fraction of the total area under cultivation. Furthermore, only four cash crops continue to account for a huge bulk of all GM products viz. soybean, corn, cotton and canola. However, rising food prices worldwide have led to renewed focus on GM crops. GM crop seed producers have argued that their technology could be a part of the solution for food crisis. On the other hand, a lot of research has also gone into proving that there could be more effective solutions than using GM crops. For now though, the acreage for GM crops seems to be rising steadily.

Source: The Financial Express

While the debate on whether FDI should be allowed in multi-brand retail keeps going, Kishore Biyani, the founder and CEO of Future Group, has opined that the bigger game changer for the retail industry will be the implementation of the goods and services (GST) tax. This is because everybody will be on a level-playing field as against the scenario prevalent currently where small retailers have bigger advantage as the tax they pay is different. Introduction of GST would subsume central and state taxes like excise, customs, service tax, sales tax and VAT. But here too, the bill has yet to get parliamentary approval as the opposition party appears to have issues with many aspects. What will also help matters will be the introduction of a manufacturing policy which will lead to consolidation on the supply side and thus attract overseas investments. But when the implementation of these policies sees the light of day remains to be seen.

Is China the next country to need a bailout? Well, James Chanos, ace American hedge fund manager sure thinks so. While the government's balance sheet does not directly have a lot of debt, various state owned enterprises and other borrowing vehicles have piled on the debt load. Chanos believes that the debt in China, implicitly backed by the government, has gone from about 100% of GDP to about 200% recently. These numbers are as bad, if not worse than the numbers coming out of the Euro zone. The Chinese property market also seems to have hit a brick wall. Chanos believes that even if the banking credit in the system does see huge growth, half of these loans may just go bad. Thus, the economy may not be actually growing at all. But, on paper it is still the fastest growing economy. Other countries thinking of piggybacking on China's 'fake' growth, if Chanos is to be believed, may need to now think again.

The global financial crisis brought to light one major issue. Just getting a high rating is not good enough. A list released by Forbes magazine has proven the same yet again. The list ranked the top 200 'best under a billion' companies in Asia. Interestingly there were 35 Indian companies in this list. More interestingly, the list included companies like Everonn Education and Neha International. Some of these companies have come under scanner in recent times due to dubious scams and governance issues. Forbes has clarified that the list was purely on the basis of growth in revenues and profits. However, it is important to remember that governance is of equal importance. As we have seen, only when the highest order of governance accompanies high growth, does a company maximize returns for its shareholders. A point every investor should remember. Particularly when they are picking up their investments on the basis of some published list or ranking order.

Nuclear energy is certainly a high risk - high return game changer. While it can help multiply growth prospects for economies, the risks of going wrong are terribly high. This is because apart from economic viability, nuclear energy also poses a serious risk to human life. Nuclear disasters like the ones at Chernobyl, Three Mile Island and Fukushima are testimonies to this. The latest blast in France only added to the fear. Even then, developing economies like India and China seem to be in no mood to go back on their nuclear plans. China currently has 11 nuclear reactors and plans to add another 20. India already has 14 reactors and will add 32 more, bringing the capacity to 31,000 MW. While the developed countries have drawn out plans to phase away the nuclear capacities, India continues to spend billions on new ones. That brings us to the question whether the nuclear power plants are becoming sort of white elephants for a country like India. Spending the same resources on other forms of clean energy would not just fetch higher revenues but also do away with the environment and safety issues. But it seems that our policymakers have too much of ego at stake to take more reasonable decisions.

Jim Grant is a name worth reckoning as far as macroeconomics and interest rates are concerned. He presents an interesting perspective on gold. According to him, gold is not in bubble territory yet. But how do you put a correct value to gold? He points out that it is the inherent nature of gold that its valuation must forever be a mystery. He illustrates his view with an abstract yet compelling logic, "What I do think is gold is simply the reciprocal of the world's faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold. If a bubble connotes absurdity, what is absurd is the monetary condition that supported this gold bull market. Gold is an expression of the world's justifiable distrust of the way our central bankers conduct their affairs." We couldn't have agreed more.

Meanwhile, following their global counterparts, indices in the Indian stock market are in a free fall mode today with the BSE Sensex trading lower by around 470 points at the time of writing. While all the heavyweights are headed downwards, couple of them like Reliance Industries and ICICI Bank are exerting more pressure than others. As mentioned, Asian and Europe are bathing in a sea of red.

 Today's investing mantra
"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing." - Charlie Munger

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11 Responses to "Are we dangerously close to a collapse?"

Arun Pai

Oct 1, 2011

Sir is it posible to get the costing of all petroleum products from the state owned companies, to find out the facts of petrol cost in india. In this matter we can fight through RTI act. please advise. if yes what is the process.



Sep 24, 2011

I agree with the views on Nuclear industry as mentioned by ashim.


Prashant Manohar

Sep 23, 2011

Since Management Quality, Integrity and Governance are most important inputs for Investment Decision for Stocks, I suggest Equity Master should bring out a list of "TOP 200 Companies" ranked for these three attributes.


Ramakant Pareek

Sep 23, 2011

On the topic whether the nuclear power plants are becoming sort of white elephants for a country like India; at present we have sufficient thorium, the essential raw material for nuclear power generation. In fact if we have adequate safeguard we will be energy efficient provided we also have required modern nuclear plants. France is an example. This fact is not covered in your point. All view should have been taken into account.
Most of people campaigning against nuclear power is either ignorant, non informed or playing under the hands of wrested interest.



Sep 22, 2011

Eq.Master Team,

In all humility fortified with ignorance in abundance

There is a huge Python which spots a slow moving object nearby. It starts to swallow the same. Unknowingly that happens to be its own tail ??

I hasten to conclude !!


Vinod Maheswari

Sep 22, 2011

Certainly ridiculous, and move in wrong direction. Further buy this temporary steps they are exporting infilation to other developing nation and bring entire worlds economy in a fix and negative state.


chintan shah

Sep 22, 2011

i believe though the problems have intensify over last couple of days as far as US and Europe is concern, but Greece going for default and US getting deeper and deeper into it's own debt,fiscal and employment issues will get better over next 12-18 months and infact, emerging economics specially India where, fiscal slippage, political issues, Election in the coming period and lower growth with higher inflation will create more problems than before.

let's cross the finger that we keep getting enough flows to finance our curent a/c or we will also be put on watch by rating agencies globally...


anupam garg

Sep 22, 2011

US continues with its baseless measures and expects miracles...if this is how it keeps on continuing, US is only going to take global economy down along with itself

With such surplus of money supply in the global system, all that can be done with it is short term trading & betting...the enhanced volatility these days is just a beginning


shome suvra

Sep 22, 2011

States' economic freedom is important where revenue deficits as % of Gross State domestic product is an important indicator. Some money should have been earmarked for battered states for improving their public expenditures.


Ganapathy Sastri

Sep 22, 2011

First of all, the US Treasury and Fed should be regarded as one person with two pockets. You cannot transfer money from one pocket to another and become richer or poorer or less indebted. Fed buying debts of US Treasury is only a glorified name for PRINTING MONEY.
There is no free lunch. Likewise there is no free money. Money will go where it is treated well.
You can suppress interest only for a while. At some point of time, it will recoil like a coiled spring.

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