|»5 Minute Wrap Up by Equitymaster|
On This Day - 23 FEBRUARY 2010
One number that is scaring most investors today!
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But the problem with paying back too much debt is that it is a lengthy procedure. The US Fed though is not in a mood to have any of it. It wants prices across all asset classes to go up rather quickly so that some amount of inflation enters the system and economic recovery takes shape. This in turn would ensure that jobs are created, profitability is improved and debt is paid back. But the Fed does not have a magic wand and Bernanke is no magician. All it can do is play its cards well and hope for things to turn out as anticipated.
Thus, an ideal situation would be a slow rise in inflation until some sort of recovery gets underway. A sooner than expected and a huge jump in inflation would once again push the economy down a huge cliff. For it will force the US Fed to raise interest rates and put the recovery at huge risk. Thus, the very medicine that the Fed is trying to revive the patient of economy with will turn into a poison. Back home in India, things are no different. Thanks to Government's efforts of trying to boost asset prices through stimuli, runaway inflation seems to be once again making a comeback. Threatening to eat away at the very recovery that the Government was trying to breathe life into. Thus, it is this inflation number and the interest rates that it would lead to that will hold the key to which way the markets move next.
China has not had its easy ever since the subprime crisis roiled financial markets and flattened developed economies. Its huge export driven economic machinery came to a screeching halt. To bridge the gap, it unveiled one of the world's biggest stimulus programs. It pumped in close to US$ 600 bn dollars. But in an economy where there is already surplus capacity, most of the money got channeled into assets like real estate and encouraged wasteful expenditure. The tower in Huaxi is indeed one such example of its extravagance. While China has taken steps to curb the menace, some feel that the steps are too small and there is a high probability that the Chinese economy could crash in the next year or two. And this would mean another wheel of the global economic engine also coming off. Not a very good sign indeed.
The deals are more broad-based emanating from established as well as emerging areas. In terms of industry segments as well as geographies. We accept that some part of this can be attributed to pent-up demand and vendor consolidation on part of the IT clients. Nevertheless as the businesses round the world aim to cut cost through improving efficiency, they will need to depend more on IT. The case is indeed strong for the Indian IT sector.
In fact, Volcker believes another crisis is inevitable if the practice is not curbed. He says, "I may not live long enough to see the crisis, but my soul is going to come back and haunt you". Interestingly, President Obama agrees. And so do five other former Chairmen of the Federal Reserve. In fact, they are of the view that proprietary trading should be allowed only for hedge funds, private-equity firms etc. These entities will not be bailed out by the government if they fail. Just like other private businesses. We fully agree. Banks often become too big to fail because of the implications on the entire system. Hence, it is only fair that their activities must stay well within conservative boundaries.
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