The dollar is under no threat. Really?

Nov 24, 2009

In this issue:
» India's interest rates are higher on 10-year govt. bonds
» There is a nexus between companies and large brokers
» Efficient market theory does not find too many takers
» Another problem to thwart India's power plans
» ...and more!

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The US dollar has received a lot of bashing in recent times. And why not? The US economy is in the doldrums, unemployment is soaring and the deficit has widened all of which has put immense pressure on its currency. So much so that there have been voices in many quarters questioning the dollar's status as the world's reserve currency. China has been at the forefront suggesting that the US dollar should be replaced with another reserve currency.

However, the MD of International Monetary Fund (IMF), Dominique Strauss-Kahn has said that confidence in the dollar isn't under threat despite the fact that the debt on US' books has bloated.

And his view is endorsed by the Indian Prime Minister Manmohan Singh who also believes in the strength of the dollar. Infact, the PM opines that the current setback in the US is 'temporary' and that there is no substitute to the US dollar for replacement as the global reserve currency. What is more, he expressed confidence that the country would bounce back from the slump that it is in now.

We believe that Strauss-Kahn and Manmohan Singh may be right in suggesting that despite the various ills afflicting the US economy, the dollar is not in a serious threat. The reason for the same is simple. Other developed nations are stuck in a recession as well and their situation is no better than the US that would warrant a change in the reserve currency, in the near future atleast. But we are also of the opinion that the dollar cannot rest on its laurels. Emerging nations such as China are increasingly displaying their might in the global arena. So, while in the medium term, the dollar's position stands secure, if the US does not find a solution to correct its deficit problem, one cannot be sure of the dollar's supremacy some years down the line.

 Chart of the day
The wide gap in interest rates between the emerging markets and the developed world has led to a deluge of foreign money into the emerging markets. As today's chart of the day shows, as per latest data, the interest rate on 10-year government bonds in India is much higher than that in the developed world. Having said that, not only on these bonds, but the interest rates overall are much higher in India. This has compounded RBI's problems, which is contemplating on how to deal with these inflows. With the Fed in the US choosing to keep interest rates low for "an extended period" and RBI likely to hike interest rates in the future, this gap will only widen. It will thus be interesting to see how the RBI will choose to deal with this dilemma in the coming months.

Data Source: The Economist

"Can you push up this company's stock price?" we had asked our readers in the 5 Min. issue dated September 3 2009. The issue was that we had called a leading Indian PSU power company for a research meeting to discuss their performance and future plans.

But they bluntly denied us a meeting. They said, "We are not interested in meeting independent analysts. We are interested in meeting only the brokers and their research analysts...because brokers bring their sales guys along who can help in pushing up our stock price!"

Data source: Equitymaster

In this background, we conducted a poll on our website asking readers - "Do you believe there is a nexus between companies and large brokers who have the potential to influence stock prices?"

The response we received was indeed overwhelming! A majority 84% voted that the nexus exists. Just around 6% denied such an existence.

So what should you - the retail investor - do in such cases where you believe the nexus exists?

Rely on whatever information you have? Or call up your invested companies directly to see how responsive they are to your questions and problems?

Why not try doing the latter? As an activist investor, try calling up a large company you have invested in and try getting through the head of 'investor relations' to clear your doubts and seek information about the company's future. We have some idea of the response you might get! But only your trial will be a path to your empowerment.

"Federal government faces balloon in debt payments" screams a New York Times headline. It puts the state of the misbalanced economy in a tight spot. After all, the US$ 12 trillion of debt is going to dig a deeper hole in America's pocket. The debt which is currently calling for interest payments to the tune of US$ 202 bn is set to multiply further. It will multiply 3.5 times to US$ 700 bn in 2019. So much so that it may exceed the budgets for two wars (Iraq and Afghanistan), education and energy reforms. It is ironical that the US government is planning to add a few billion dollars more to the debt under the guise of healthcare reforms. As Pimco head William Gross has put it - "The United States is not only not saving nuts, it's eating the ones left over from the last winter." We think that says it all!

The efficient market theory is one of the bedrocks on which modern finance is based. However, the Chartered Financial Analyst Institute, which has been teaching efficient markets theory for decades, has admitted that most of its members do not believe in the theory anymore. We are not surprised by the development, but we are definitely amused that it has taken so long for the realisation to come. After all, the irrationality of markets has been there to see since the very beginning of stock markets. Be it tulip mania in 17th century Amsterdam, the South Sea bubble in 18th century London or the Florida real estate bubble in the 1920s. It has taken the dotcom bubble and the subprime crisis for this generation of investors to realise that markets are not always rational. We all could have listened to the most successful investor on of our times - Warren Buffett. He is on record saying, "observing correctly that the market was frequently efficient, they (investment professionals) went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day."

The power ministry's target of achieving atleast 85% of the capacity addition target during the 11th Plan is once again in jeopardy. This time for a different reason though. A capacity of 4,000 MW has gotten stuck up as the government has tightened the visa norms for Chinese workers. This after a probe revealed that hundreds of Chinese workers had applied for a business visa instead of employment visa. However, this has led to a shortage of commissioning engineers from Chinese companies. The initiation of many power projects has stalled as a result of this. Power shortages continue to stifle India's economic growth. We hope the government is able to resolve this issue soon.

Foreign banks are an uneasy lot these days. Their worries stem from the fact that India, already conservative, may further delay banking sector reforms in the wake of the financial crisis. India has been largely insulated from the financial slowdown. The reason is that Indian banks have been quite conservative in lending. To some it may seem ironic that the very foreign banks that were responsible for the economic crisis are pushing Indian banks to be more liberal. However, the need of the hour is for financial sector reforms. There is approximately US$ 400 bn in domestic savings at banks. This money needs to be used responsibly. Financial sector reforms will ensure that this money is channelled to projects where it can be used productively.

Although having significantly recovered from today's lows, the Indian markets were still trading below the dotted line at the time of writing. The benchmark index, the BSE-Sensex was trading lower by about 70 points or 0.4%. While stocks from the auto, IT and healthcare sectors were leading the pack of gainers, those from the metal and FMCG spaces were bearing the brunt of profit booking. As for global markets, Asia was trading weak, while European began the day on a weak note.

 Today's investing mantra
"In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult." - Warren Buffett

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16 Responses to "The dollar is under no threat. Really?"

Haresh prasad

Nov 24, 2009





Nov 24, 2009

Nexus between brokers and company promoters is a known fact especially in the Indian stock market.
Until there is confidence in the other currencies like Euro, Yen or yuan, dollar cannot be simply replaced, though many people feel the US acts as a policeman of the world.


Inder Ahuja

Nov 24, 2009

I wanted to know why this 5 minute wrap up is received by us almost after 12 hrs of happenings. Can't we get it faster.


K.G. Rao

Nov 24, 2009

This is not wrt the dollar, but yr suggestion that an activist should not rely just on his own information, but try to call up the invested co. for information. This sounds like wishful thinking, for which co's investment dept is going to comment adversely on the co.'s prospects. Think it over.Looks like muddled thinking by EQM.


Sunil Doshi

Nov 24, 2009

Dollar has many things going against it.
However US Fedral Reserve has Gold Reserves much higher than France,Germany,China put together.US Public is not against Gold Sale by Fed.This may help Dollar to retain Leadership for some years atleast.



Nov 24, 2009

Very good piece of information. And what more, you provide all this information in a short and interesting manner. Good Work.

Equitymaster requests your view! Post a comment on "The dollar is under no threat. Really?". Click here!