The mother of all economic battles is here!

Nov 10, 2010

In this issue:
» Commodity prices in an orbit never seen before
» Yet another politician falls from grace
» Asian economies may resort to capital controls
» Insolvency risks for most US banks
» ...and more!!

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We are not yet out of the woods. The global economy has barely come to terms with the massive debt burden that most large economies are saddled with. Growth has been restricted to few emerging markets. And asset bubbles are threatening to bring in another catastrophe. Amidst this, the outcome of the economic battle brewing amongst arguably two most powerful nations is most feared.

The US and China have brought such distress to the sagging global economy. The currency war is just the tip of the iceberg. In the latest move, China has gone ahead de-rating the US sovereign debt from its erstwhile AAA status. This could irk the US and induce it to increase pressure on China's currency policy.

Although experts have suggested solutions to this currency battle, the ceasefire may not be very soon. De-rating US debt could hurt the value of China's massive dollar reserves. At the same time China's unwillingness to tweak its currency policy may continue to render US made products unaffordable. Thus neither of the economies may derive any benefit from this spat. The Yuan's candidature as an alternative reserve currency is also ruled out.

Whatever be the outcome, the end result is unlikely to be benign for the global economy. When the world's largest and fastest growing economies have locked horns there is little respite that others can get.

 Chart of the day
While loan growth has not been particularly buoyant for Indian banks so far this year, some have managed to grow their assets thanks to retail presence. The data from the RBI's latest report on the sector shows that the growth in retail loan book has been lopsided. As today's chart shows most of the retail loan growth came in the form of housing loans. Other loan segments like auto, consumer durables, credit cards and personal loans in fact saw a cut back. Given that housing loans are already nearly 50% of the system's retail assets such concentrated growth may lead to asset liability mismatches.

Data source: RBI Trends and Progress in Banking 2010

Sample this. Copper is just pennies away from an all time high. Gold is hitting new highs everyday and cotton is at its highest in more than 140 years. And this is not all. Corn has risen 39% so far this year and soybeans have returned 27%. The list does not end here though. There are a lot of other commodities that have done equally well in recent months. So, the big question that is on everyone's mind is what is driving this trend. As per the Wall Street Journal, it is a combination of three factors. Indeed, a loose monetary policy, a supply shortfall and a strong demand are all combining in some form or the other to push commodity prices into an orbit never seen before. And way things are right now, it looks unlikely that prices would stabilise anytime soon.

What could poop the party though could be the re-emergence of a financial crisis in an important part of the world, notably the US. A strong tightening measure by some Asian nations could also hurt commodity prices. However, there is clearly a fundamental angle to the rise in prices of some commodities. And it could take a few years to fill this gap up. Thus, a short term correction could actually be a good opportunity to pile onto an asset for attractive long term returns. However, one has to ensure that one is backing the right horse.

A popular belief in India is that politicians can get away with anything. All scams and scandals involving them are just noise that eventually dies down with time. Latest scandal on the block is the one surrounding the Comptroller and Auditor General's report on the 2G spectrum sale by telecom minister Mr. A Raja. As per the report, Raja is responsible for a loss of Rs 1,700 bn to the government due to his random sale of 2G spectrum in 2008. The report has stated evidence that shows that the minister had deliberately ignored the recommendations of TRAI on allocation of spectrum. He sold the spectrum to the new operators without going through the recommended auction process for the same. He also manipulated the selection process to ensure that only select companies qualified for the allocation of the spectrum. However, it remains to be seen as to whether Mr. Raja is punished for this scam or will this report fade into oblivion like the many others before it.

What do you think should be done to make politicians more accountable for their act? Let us know your views or post them on our Facebook page.

The US introduced a second round of quantitative easing with the desperate hope of reviving its economy. The misguided notion being that releasing more money would induce Americans to spend. With the unemployment rate still being high, it seems unlikely that the average American is going to loosen his purse strings anytime soon. But what this money will do is find its way into the much faster growing Asian economies. And therein lies the problem.

Quantitative easing by the US is threatening to spur asset bubbles in the region's stock, currency and property markets. And so, the World Bank has suggested that Asian economies may need to turn to capital controls. The effects have already begun to felt in the Asian region. In India, for instance, foreign money has gushed into Indian equities. As a result valuations of most stocks have reached unjustifiable levels. Real-estate prices are a concern in China, Australia and parts of Southeast Asia. Japan, Thailand and Malaysia have seen their currencies surge more than 10% against the dollar this year. Many of them have started imposing short term measures. These include intervening in the currency markets, withdrawing tax exemptions, etc. But Asia stands on a precarious edge. Especially since the formation of asset bubbles seems more and more imminent.

Indian equity markets are predominantly driven by two set of investor's - the FII's and the domestic fund houses. However, rarely do their entry and exit timing match. At a time when FIIs were on a buying spree since the beginning of this fiscal, fund houses saw huge redemption pressures. However, after a lull of five months domestic fund houses have at last turned net buyers in equity during November. Though the figure is miniscule it is expected to increase gradually as mutual funds have started receiving fresh money from retail investors. The higher risk appetite amongst retail investors has been attributed to success of IPOs like that of Coal India. While that may not be a good reason for retail investors to invest into equities the fact that most of the inflows are through the SIP (systematic investment plan) route is encouraging.

Nouriel Roubini, more famously known as Dr. Doom is himself scared! Using Twitter as a forum, he reacted to a report by Amherst Securities on US housing defaults. This report estimated that 11.5 m US households could potentially default on their mortgages. These are the number of loans that are either non-performing or currently highly distressed. And, this is almost 3 times the 4 million home defaults that are currently priced into the market. Roubini stated, that if such a large number of defaults happen, most banks in the US will go back to being insolvent. Remember the Lehman Brothers' collapse that triggered the entire financial meltdown. Another collapse of such magnitude could be suicidal for the US financial system.

In what turned out to be an extremely volatile session, Indian indices succumbed to selling pressure in banking, FMCG, pharma and capital goods stocks. The BSE-Sensex was trading 24 points lower at the time of writing this. Stocks from mid and smallcap space, however, managed to remain in favour. Other Asian markets were mixed with Japan leading the pack of gainers. The European markets have opened on a cautious note.

 Today's investing mantra
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money." - Warren Buffett

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30 Responses to "The mother of all economic battles is here!"


Nov 15, 2010

Thans for advice in the stock market best advice..


JS Pandher

Nov 14, 2010

They should be removed from their posts,debarred from entering politics for life time and their properties be attached and they should be punished by the law like other citizens of the country.



Nov 12, 2010

politicians like Raja should be chucked out from his post . the loss must be compensated either by him or by the party he belongs too as they are also morally responsible for the proceedings . severe punishment must be given so that here after they must never even dream of cheating the government. the laws must be strict enough


Manohar Kantak

Nov 12, 2010

We have to introduce capital punishment even for the slightest crime.The people has to form a gang of new generation of freedom fighters to torture and kill such miscreants.Or lastly allow the crisis to happen and face it.


anish poojara

Nov 12, 2010

punishment is simply being out of the cabinet for some time before the wife or the son is made a minister.

what about recovering the money looted?

why doesn't Manmohan Singh ask the Swiss Government to freeze all Indian accounts ( Rs. one lakh eighty thousand crores as per some estimate)? unless of course he too has an account there.



Nov 11, 2010

Remember Sukh Ram? The Telcom Minister who had around 3 crores in his puja room tied in bedsheet bundles!!! Wonder what is his position now.Must be in shorts on the beach in Marutius sipping beer!! :)
Raja will follow suit....thats what taxpayers money is for!



Nov 11, 2010

As a first step, the minister shd be stripped of his portfolio relinquished of all responsibilities, even his MP position should be withdrawn pending enquiry. to deter all such people holding high office,it should be "guilty until proven innocent". regds



Nov 11, 2010




Nov 11, 2010

Under the existing circumstances there has to be a "LOK AYUKTA", with jurisdiction covering the Central Ministers including the P.M. This is the only way we can bring to book high level politicians.



Nov 10, 2010

This is not the question to be asked, of course public servants have to be held accountable and more so in India where the cost of such corruption to people, country and psyche of the people very high and we can hardly afford any such thing. What surprises me is that like CWG this 2G scam was well know since it happened in 2008, but no action was taken. Removal alone (if it's at all done) is not enough, this Raja guy's property and assets of his family has to be sealed and inquiry has to happen. If found guilty he has to go to jail. It's way past high time that some high-profile politician goes to jail, so that others are bit careful in getting in to any such scam/corruption. It's also failure of current govt for not having acted and shown leadership in dealing with such corruption and set some example.

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