|»5 Minute Wrap Up by Equitymaster|
On This Day - 10 JANUARY 2011
Are you suffering from confirmation bias?
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Wikipedia defines a confirmation bias as a tendency for people to favour information that confirms their preconceptions or hypotheses regardless of whether the information is true. So if the Fed believes that quantitative easing (QE) will work, it will be consistent in its views even when it doesn't work.
This is typical of so many investors. After having bought a stock, and then realizing that the company isn't as good as was originally thought, an investor would continue to hold on to it even if it is going down. Instead, he would try to give explanations of why he is right in holding the stock. And instead of realizing his mistake, he will continue to confirm to his original decision.
History is proof that nothing has caused a bigger loss to an investor than his confirmation with his original but incorrect investment ideas. As far as the US Fed is concerned, it is falling in the same trap. More money can't solve the crisis that was caused by excessive money. The Fed doesn't seem to understand this.
"India's return to high levels of growth is helping the global economy recover from the crisis," Mr. Zoellick is believed to have said ahead of his visit. Oh yes, India's current account deficit and its capital inflows which is making FIIs richer is no doubt helping the global economy recover. But sadly, it is not helping its own citizens to the extent required. The reason - persistently high inflation. And this inflation, besides being of supply side in nature, is also being caused on account of various infrastructural bottlenecks. Of course, Mr. Zoellick would do his bit in ensuring that money from World Bank is available for various projects. We wonder if he can do something to stem the rampant leakage of funds that ensues whenever a big public project is undertaken. More than the funds, this could be of even greater help to India we believe.
The IMF said in October that sub-Saharan Africa is expected to register a growth rate of 5.5% in 2011. This will be second only to Asia. India doesn't want to miss this great chance. Already, millions of mobile phone subscribers in Africa saw the icon on their phone screens change to Indian company Airtel last fall. The expansion by Bharti Airtel into 16 African countries underscores the rise of India in Africa. The Indian government is raising its diplomatic profile in Africa. The historical ties and our democratic politics also stand to our advantage. However, China has huge investments in Africa already. And Indian companies will have to strive hard to keep up with the dragon economy's business profile in the continent.
As per the Wall street Journal, most global economists have a contrarian view on this. They believe that India's attempt to fund imports through capital flows is good only to the extent that the latter is sustainable. They share the fear that most capital inflows so far have been short term in nature. This is because the long term investment in the form of FDI has met with several regulatory hurdles in most sectors. Also, delays in land acquisition and allocation of resources have dogged several projects. In view of these, India's ballooning current account deficit is running the risk of becoming unmanageable. Especially if the short term FII inflows were to completely dry up. Given the current state of developed economies, we do not see this happening anytime soon. However, the replacement of FII with FDI money will certainly make the India story more sustainable.
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