Does this mark the arrival of next crisis?
In this issue:
» What's up with European stability fund?
» Power sector threat to Indian banking system
» Who will China prove correct? A bull or a bear
» US' standard of living undergoing a major transformation
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Thus, in view of Reserve Bank of India's (RBI) stellar reputation on risk management, any warning from its side cannot be taken lightly. One such statement of caution was given by one of the bank's executive directors to a gathering in Singapore recently. The gentleman in question has warned that there is yet again a huge under-pricing of risks in the financial system. Hence, as per him, it is not a question of if but when the generic asset bubbles caused by a multi fold increase in balance sheets of central banks will burst.
And where does he come from? Well, the RBI director is of the view that balance sheets of major banks have grown by almost three times from pre-2007 levels and near-zero policy rates have added US$ 4 trillion to the central bank liquidity. Thus, the asset bubbles that have been built across the world on account of such a huge cache of surplus liquidity are all but guaranteed to burst.
Of course, no one can know for sure when the bubble will burst. But as Buffett says, predicting rain does not count, building the ark does. And the investing ark should be built by nothing else but businesses that are not at the mercy of low interest rate money but have pricing power and the ability to grow by relying entirely on internal accruals. If bought at reasonable prices, no matter how hard the downpour, the ark made of such investments will always protect and even enhance your wealth.
Do you think the global asset bubble will burst eventually or there exists hardly any bubble at all presently? Share your views with us or you can also comment on our Facebook page
01:21 | Chart of the day | |
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Asking the question was an easy task. But getting an answer is anything but easy. For China is a huge emerging economy with very diverse regional economies. Add to that the communist party's love for secrecy. All these factors make China seem extremely capricious, so much so that people change their views on China in a matter of few weeks. There are economists who believe China is gearing towards some short-term pain while in the long term China will lead the global economy. Then there are those who believe that China could save its face in the short term by pumping up its economy through monetary or fiscal stimuli. But 2 to 3 years from now, China is set for a hard landing. The years of high growth and low inflation would be passe. It seems that both bulls and bears could be right about China. But only time will tell whose timing was right.
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As confusing as this process sounds, it is actually very simple at heart. What the Eurozone is suggesting is that they solve the problem of debt through more debt. This process would help the risky countries that are on the brink of a default appear risk free as they have the 'guarantee' of the EFSF borrowing. So the new debt now acts as a guarantee instead of a risk. We really wonder when these policymakers would understand that hiding behind fancy words would really not solve the problem. The only way to solve the problem of debt is to pay it back and reduce it. Not create more of it.
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Having said that we do not think that the power sector is in the same condition as the steel and cement companies were in the late 90s. Neither is the sector in a state of overcapacity, nor are its problems incorrigible. Re-pricing of tariffs and coal mining rights to power producers can solve most of the problem. Also, increased private sector participation in electricity distribution will go a long way in making the sector more economically resilient. We do not think that the sector will heap NPAs on banks unless the government keeps sleeping on policy reforms for a very long time.
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04:55 | Today's investing mantra |
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2 Responses to "Does this mark the arrival of next crisis?"
Parag
Oct 20, 2011Euro Crisis: Sovereign problem; corporate solution
European Monetary Union is in crisis.
Greece is likely to default on its monetary commitments.
There is talk of kicking Greece out of the European Union (EU).
Greece has PIIGS for company (Portugal, Italy, Ireland, Greece & Spain). All have weak Sovereign finances.
It is believed that if Greece becomes independent of EU it could devaluate itself out of its problems.
But this surgical treatment has many side effects.
Once Greece is out, Currency speculators will cause havoc with the other PIIGS. It would kick-start a contagion in Europe. The treatment may itself turn into a disease.
The suggestion proposed is similar to corporate restructuring / Split.
Split Euro into two.
Euro (S): representing strong countries like Germany, France and others, and
Euro (W): representing weak PIIGS.
Euro (W) will gradually devaluate itself and come out of its problems. The union will have sufficient size to take the currency speculators head on. And it will be a full and final solution, unlike the piece meal breakup of each country.
A corporate example to a similar exercise is the split of Reliance Industries into
RIL and
R. Com, RNRL etc.
Som Nanda
Oct 21, 2011Hi,
I completely agree with Parag. Always some economics like PIIGS pull down all the goods done by others. Anyways, I belive the initial stage of individual conuntries in the Europe region was a better idea than the Union system. Atleast the problems were curtailed and isolated to these countries and don't spread to rest of the zone.
Thanks