Is this the surest indicator of a slowdown?

Dec 1, 2009

In this issue:
» The link between skyscrapers and economic disasters
» Q3 GDP numbers: China, India way ahead
» Global debt problems seem far from over
» China will revalue its currency at its own pace
» ...and more!!

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00:00
 
For someone interested in modern architectural marvels, not knowing Burj Dubai is akin to being a car enthusiast and not knowing the Ferrari! At 2,684 feet, it is the tallest man made structure ever built. And until most recently, it was a testimony to the rapid strides the Emirate kingdom of Dubai had taken in establishing itself as one of the most popular destinations in the world. But henceforth, Burj Dubai is also going to be remembered for something else. It will be remembered for validating once again, an economic theory called as 'The Skyscraper Index'. Created by the economist Andrew Lawrence, the theory states that the building of world's tallest building may be a useful way to predict the onset of a major economic downturn.

Interestingly, in October 2009, Emaar, the construction company that was constructing Burj Dubai announced that it had completed the exterior of the building and within two months, the Dubai government came close to defaulting on its loans. And this is not an isolated case. As shown in the table below, there seems to be a healthy correlation between construction of landmark buildings and the occurrence of a financial crisis.

Skyscrapers & economic crisis: Is there a link?
Year Skyscrapers Height Economic crisis
1907 Singer Building 612 ft US banking panic
1931 Empire State Building 1,250 ft The Depression
1973 Sears Tower, Chicago 1,450 ft Oil crisis
1998 Petronas Tower, Malaysia 1,483 ft Asian crisis
2009 The Burj, Dubai 2,684 ft Subprime crisis?
Source: Equitymaster research

And this phenomenon could not be without reason? Construction of tall buildings is a long gestation and a capital intensive project and the most favorable time for it to start is during a low interest and strong liquidity regime. Hence, by the time the building gets completed, the loose policy may have run its course and the markets ripe for a correction, leading to the completion of construction coinciding with a slowdown. It should be noted that like all economic theories, this one may also not be a foolproof one, but is definitely an important tool towards assessing the health of the economy.

01:14
 Chart of the day
Most countries have reported their GDP growth for the September quarter of 2009. And as today's chart of the day shows, China and India are in a different league altogether as their respective economies have grown at a strong pace. In contrast, other nations depicted in the chart have witnessed a contraction. India's GDP has grown at a healthy 7.9% during the quarter. As a result, both the Finance Minister and the RBI are confident of upping their growth estimates of the economy for FY10.

Data Source: The Economist

01:47
 
Forget about concerns whether India will grow at 6% this fiscal or not, the Finance Minister Pranab Mukherjee is hoping that India logs in a growth of 7% for the year. The reason for this hope lies in the fact that the country's GDP grew by an impressive 7.9% in the September quarter. The pace of growth was the fastest in one and half years and was largely fuelled by strong manufacturing activity. This follows the decent 6.1% growth in GDP that the company had logged in the June quarter.

The RBI also believes that it may have to raise the country's growth outlook for FY10 from the current estimates of 6%, although it has refrained from citing a new estimate. This is because the central bank contends that the recovery has been driven by government spending. As a result, it opines that it is premature to make projections unless the impact of the poor monsoons on the third quarter numbers is clear. That also probably explains why the RBI has been sitting on the fence especially with respect to raising interest rates. If indeed, the growth in GDP turns out to be higher than what the RBI had originally estimated (i.e. 6%), then the case for a hike in interest rates will also get stronger. But that seems more likely in the next rather than this fiscal.

02:39
 
We love to blame Americans for consuming on credit. But besides American homeowners, governments and companies across the globe are these days turning red with debt. Debt-laden Dubai's sinking fortunes seems to be only the tip of the iceberg. Banks that have only recently recovered from the financial shocks of last year are now nervously eyeing their potential exposure to highly indebted corporations. Rich economies like the US and Japan have come close to crumbling under the burden of public debt thanks to reckless government spending. And this may not be all. As per a report in New York Times, Germany is expected to see government debt at 77% of GDP. This is despite being one of the richest nations in Europe. The country's debt was 60% of GDP in 2002. For UK, that figure is expected to more than double over the same period, to more than 80% of GDP. Little more is needed to be said about the frail status of global economic recovery. An investor can only wonder which country will default next on its borrowings.

03:12
 
There have been calls from several quarters that China must revalue the Yuan upwards. A cheap Yuan makes European and American exports unremunerative and Chinese imports cheap. However, the Chinese Prime Minister Wen Jiabao has warned that revaluing the Yuan could impede the growth of the Chinese economy. Moreover, he believes countries are already erecting trade barriers against Chinese trade. China would rather take gradual steps with regards to the currency but at its own pace. This is a classic chicken and egg problem in our view. However, one thing is sure. In sector after sector, the dragon nation is leading the world out of the recession. Any speed breaker to the Chinese economic engine is simply not in the interest of the developed countries.

03:51
 
Recovery or not, the situation at the micro economic level continues to be worrisome in the US. As per the American Bankruptcy Institute, the total number of bankruptcies filed in the third quarter in the US surged 33% in 2009 and is at the highest level since 2005. 388,485 bankruptcies were filed during 3QCY09, compared to 292,291 filed during the same period in 2008. These bankruptcy numbers include both consumers and businesses. In the US, bankruptcy allows an entity to close a bad chapter and start over. With US unemployment rate surpassing 10% and credit to businesses remaining tight, it doesn't surprise us that consumers and businesses have turned to the financial shelter of bankruptcy.

04:22
 
Which is the next frontier for Indian companies? We believe it is rural India. Companies with rural exposure are seeing an increase in incremental sales from this market. The reason for this growth is that in spite of the drought, agricultural income has risen. This has translated into increase in disposable income. Combined with improvement in infrastructure, rural customers are willing to spend money. In fact, they do not even hesitate to buy premium goods if they see value in the offering. We believe that companies with rural exposure thus stand to benefit from this largely untapped market.

04:45
 
In line with global markets, the Indian markets were trading firm at the time of writing. The benchmark index, the BSE-Sensex was trading higher by around 210 points or 1.2%. Buying activity was witnessed in stocks across sectors led by realty, healthcare and auto. However, selected stocks from the FMCG and IT spaces were trading in the red. As for global markets, Asia was trading firm with gains being witnessed in all major markets. Similar was the case with Europe, which began the day on a firm note.

04:58
 Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham

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11 Responses to "Is this the surest indicator of a slowdown?"

Gopalan Choyi

Dec 3, 2009

Very interesting to read as well as to think and act

Like 

MVR.Murty

Dec 2, 2009

So its Natural and obvious that the next is China!. They are building the next tallest tower that well surpasses the Burj Dubai, surely the collapse will be lot more catastrophic. We should request Japan to start its tower now. India will never build such tower, for sure.

Like 

alwan

Dec 2, 2009

The write up on 'healthy correlation between construction of landmark buildings and the occurrence of a financial crisis' is not for this format. It is an interesting reading but unscientific and definitely NOT one for a 5 minute reader.

Like 

satabdi pal

Dec 2, 2009

i really agree to what you have said..it is truly interesting in going through this information..

Like 

jatin

Dec 2, 2009

Can anyone tell me where I can find the average PE for a company for last five year.

Like 

Ramamurthy

Dec 2, 2009

excellent observation. From sublime to pathos as Milton says!

Like 

K.D.Viswanaathan

Dec 1, 2009

There is sumptuous food for thought in your shrewd analysis. Anyone having the patience and inclination to read and assimilate, stands to gain a lot. Keen readers will agree with this.

Like 

Dr. Atul Tiwari

Dec 1, 2009

I do not agree
In fact when ever we quote such examples, we surch out only for favorable ones.
But this time you could not search a tower to pracipitate latest great depression (of 2008).
But you are not at fault..we know, just few occurances are enough to set out a rule!!

Like 

mahinder sobti

Dec 1, 2009

Well it could be any highly expensive project having an execessively long gestation period.

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Vinay Raj

Dec 1, 2009

Interesting reading. Valuable. Thanks.

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