»5 Minute Wrap Up by Equitymaster

On This Day - 3 MARCH 2011
An inflation solution the budget completely ignored!

In this issue:
» US Fed is stuck between devil and deep sea
» Buffett not in favour of continuing QE any more
» Auto sector is having a very good time
» Government seems pretty keen on 'Aadhar'
» ...and more!

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Rs 5,80,00,00,00,000 or alternatively, Rs 58,000 crores. Whichever way you look, it is certainly a great deal of money. And as per estimates, this is the quantum of money that gets wasted in India every year. In the form of food items that is. It is indeed ironic that in a country that faces amongst the most adverse food inflation of all Asian nations, food items in such copious quantities go unutilised every year. The wastage, it is believed, is mainly due to lack of post-harvest infrastructure such as cold chain facilities, transportation and proper storage facilities and other such infrastructure bottlenecks.

The key reasons behind the wastage are certainly not lost on the Government of India. And to be fair, it is trying to do something about it. Some of the steps it took in the recent budget are certainly a welcome break from the past. But we believe it seemed to have missed a rather big trick. The budget's silence on FDI in retail that is.

Agreed that it is the basic infrastructure that India is severely lacking in. And hence, amidst such a scenario there is very little than foreign retailers could do. But we believe that there is an enormous amount of expertise that retail giants like Wal Mart can bring to India. Above all, they have the ability to set up state of the art supply chains and provide the much needed infrastructure to India's food supply chain. And it is this ability of theirs that would have certainly gone some distance in softening the inflation blow. It is time the Government looked into this matter rather seriously.

Do you think foreign retail chains will be able to reduce India's rampant inflation? Let us know your views or post them on our Facebook page.

 Chart of the day
The Global Wind Energy Council released its report for the year 2010 recently. In a landmark change of sorts, China overtook the US and became the world's largest producer of wind energy. Today's chart of the day highlights this very fact and also depicts five of the biggest wind energy producers in the world. It should be noted that China was lagging US in 2009. However, it undertook a huge wind energy turbine installation program in 2010 and eventually edged past the US. As far as India is concerned, although it has a huge coastline conducive for wind power, its installation so far does not inspire much confidence.

Source; The Economist

For want of a nail the shoe was lost.

For want of a shoe the horse was lost.

For want of a horse the rider was lost.

For want of a rider the battle was lost.

For want of a battle the kingdom was lost.

And all for the want of a horseshoe nail.

This verse runs quite similar to the one that the US Fed is riding on. That is what happens when you try curing a debt crisis by creating more debt. How could the Fed be hallucinating that pumping in cheap money would buck up its ailing economy? Indeed, the Fed has been successful in driving up stock prices and bond yields by keeping interest rates artificially low. But can it really continue to do so? Let's see the chances. Most of the publically issued US$ 9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. However, what is striking now is the fact that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by the reserve surplus sovereigns such as China, Japan, etc.

So basically, the Treasury issues bonds and the Fed buys them. But who will buy Treasuries when the Fed doesn't (in case it stops its quantitative easing program)? Reserve surplus sovereigns are likely good for their standard US$ 500 billion annually. But what about the remainder 70%? Who will buy them? Banks are now making loans instead of buying Treasuries. Bond funds are not receiving generous inflows. So who's left? The Fed is left between the devil and the deep sea. One option is to raise interest rates significantly to attract buyers. But that could bring about a crash in the stock and bond markets. A lot of political turmoil could also follow. So what is the other option left? Print more money. Q III, QIV and so on...

The verse will go on... And all for the want of a horseshoe nail.

The US Fed seems to be now losing the approval of even its few supporters. Prominent amongst them being the man who bailed out some of the Too Big To Fail. Warren Buffett now seems to disagree with the Fed chief's views on continuing with monetary easing. The legendry investor believes that it is high time the Fed withdraws the QEII. This could be a huge setback to Bernanke who seems sanguine about the US being far from inflationary pressures. Buffett seems particularly worried about the massive level of debt that the US government has accumulated. He even claimed that the current government spending even outstrips that during the World War II in real terms. While we agree with Buffett this time, we think that his predicament is coming in a little too late. Had he sounded off some warning signals to Ben Bernanke a little early, there would be fewer asset bubbles and sovereign debt risks in global markets.

Interestingly, Buffett's flagship company Berkshire Hathaway has finally shown some interest in Indian markets. It has tied up with Bajaj Allianz to act as an agent for online sale of the latter's insurance products. We hope that with this Buffet will also look at picking up stakes in Indian businesses with solid long term value propositions.

Companies going bankrupt. Sales coming to a standstill. Well, these are some of the memories of the global auto sector in deep downturn in 2008. So a report in international media came to us as a surprise. The report suggested that auto sector has seen one of the most pronounced recoveries among all sectors from the depths of recession.

The report mentions, "Around the world, cars are rolling off the lot at a pace not seen in years. Global car ownership is expected to rise 17 percent over the next five years, according to data from J.D. Power." The interesting part is that the auto sector is not just booming in China and India. It is also showing recovery signs in the US, where the number of people planning to buy a car has tripled from last year.

Talking specifically about India, auto sales have been buoyant in the country for years now. Rising disposable incomes and benign interest rates have been the drivers of this growth. The potential in India seems so big that a number of MNC players have lined up the market with new launches. In short, all seems hunky dory for the Indian and global auto market, at least as of now!

The government appears to be very serious about the direct cash transfer as an alternative to subsidies. To enable this, it is creating the necessary infrastructure in the form of Aadhar-linked bank accounts. These accounts would be opened as a part of the Unique Identification Authority of India (UIDAI) scheme. These accounts would contain the information of the people who are to receive the subsidies. Consequently, the government would transfer the amount of cash subsidy directly to these accounts to be availed by the beneficiaries. In the long run, such direct transfers are aimed at reducing leakages as well as to ensure that the subsidy is being availed by the correct beneficiary. The UIDAI is expected to be in place by March 2012.

The UIDAI would be selecting at least 3 banks in each area for the opening of such Aadhar accounts. This would largely help banks in increasing their penetration especially in the rural areas. The other advantage is that it would bring more customers within the banking purview. This would help banks in cross-selling their products to the larger customer base.Therefore, if Aadhar becomes a reality, then it would be beneficial to all - the government, the customers as well as the banks.

Meanwhile, Indian markets took off on a rollercoaster ride right from the beginning today with the BSE Sensex trading lower by 115 points at the time of writing. Heavyweights like Infosys and Reliance were seen exerting the maximum selling pressure. The other Asian indices however put up a strong show today and ended mostly in the positive. Europe too has opened on a positive note.

 Today's investing mantra
"The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions." - Benjamin Graham

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