»5 Minute Wrap Up by Equitymaster

On This Day - 25 JULY 2013
Is being self-reliant on crude oil stupid?

In this issue:
» Are India's mega cities disasters waiting to happen?
» India Inc not happy with RBI's liquidity squeeze
» Is an MBA degree losing its sheen?
» QE to not end in a hurry, feels Gross of PIMCO
» ....and more!

Everyone loves ideas that turn conventional wisdom on its head. We therefore got intrigued when we came across one such idea recently. It concerns the issue of energy security. And has been proposed by none other than Charlie Munger, a man we respect a lot. You see, the conventional wisdom in the area of energy policy has been that a country should try to become as much energy independent as possible.

Not known to mince words, Munger launched into a scathing attack on this kind of stance of the US Government. He argued that the policymakers are barking the absolutely wrong tree by supporting energy independence. As per him, energy independence is a really dumb idea.

To help understand why, he argued that oil and gas are absolutely certain to dwindle in quantity and thus, could also get highly priced. Consequently, by using up its domestic reserves, US is leaving very little for future generation to use and survive on.

As a matter of fact Munger loves what China is doing. He opines that China is suffering now to benefit later. China is relying heavily on imports and is thus preserving its own domestic reserves of hydrocarbons. Thus what Munger seems to be saying is hydrocarbons are absolutely essential in running an economy and are also non-renewable. Therefore, the less we use it from our own national borders and the more we import, the better it will be for a country's long term energy security.

As always, we do believe that Munger does make a lot of sense. But blindly adopting his advice in India would be a recipe for disaster according to us. Of course his arguments have now become a stick with which to beat those who argue for energy independence in India.

But is high oil imports really a problem for India? It could be. But we believe a bigger problem is the absolutely low energy productivity. Had we used the oil we import sensibly, we would have had a strong economy and robust exports. And higher exports would have meant that we don't run into the currency problems we are running into right now.

Thus, India's problem is lack of reforms and not high energy dependence. For tomorrow, even if we unearth a massive oil discovery, the lack of reforms will ensure we squander it away and still have the currency problems we now blame on high oil imports. Thus, the key is to improve productivity and encourage other sources of energy so that we are not reliant on non-renewable hydrocarbons alone.

Do you agree with Charlie Munger that high energy dependence is not such a bad thing after all? Please share your comments or post them on our Facebook page / Google+ page

------------------------------- A good investing strategy for bad or uncertain times... -------------------------------

When the markets are uncertain... or when they don't appear to be doing too much...

Investors often experience the urge to pull all their money from the market, and watch how things turn out in the days to come.

But in our opinion, that may not be the best thing to do.

What we suggest during such times is investing with a proven plan. And when things get better in the near future, you will be doing much better than the other investors.

For full details of this proven plan, click here to watch a short video.

 Chart of the day
Amidst a steady flow of negative news on the Indian economy coming in from all quarters, there was finally something to cheer about. As per the Planning Commission, poverty levels in India came down to 22% in FY12 as opposed to 45% that existed back in 1993-94. In fact, the fall has been steady over the past couple of decades. But criticism has started pouring in from many quarters, arguing that the result has not been achieved by way of achieving the goal but in fact, the entire goalpost has been shifted to make the numbers look good. Consequently, the entire methodology of poverty estimation is now being reviewed. While the final numbers could look higher, there can be no denying the fact that some success in reducing poverty has certainly been achieved. However, what's also true is that lot more needs to be done.

Source: Indiaspend.com, livemint

A post graduate degree/diploma in management has almost become a norm in India. Irrespective of their field of education, nearly every person in the country aspires to get the revered MBA tag. Why? Because it helps them get a better job. And it was almost a given. People considered MBA to be an investment to get a higher paying job. As a result, there were MBA colleges cropping up in every nook and corner of the cities. But in recent times, the slowdown has started to bite into the salaries being offered to MBA candidates. As per an article carried by Firstpost, candidates spend nearly Rs 9 lakhs to get an MBA but get jobs that pay only Rs 4 lakhs. So is this mismatch purely a result of the slowdown or is there another explanation for this?

One reason for this is that with so many MBA institutes and colleges there is excess supply. To add to this, the quality of education being given in most of the colleges is not too good either. In the current scenario of companies facing a slowdown, they are desperately looking for talented individuals to help them boost their growth. And this is where most MBA colleges have been failing to deliver.

The squeeze on short term liquidity by the RBI has not amused many in India Inc. The chairman of the country's biggest bank, SBI, in particular has been most critical of the move. In addition, several other entities are concerned about short term financing getting unviable. While most opine that the move will not hurt bluechips, the health of smaller entities is at stake. More importantly the choked liquidity scenario could bring the snail paced economy to a temporary standstill.

The silver lining is that most corporate agree with the RBI's compulsion in taking the distinctly prohibitive move. That stemming the rupee's fall against US dollar was possible only by stopping speculative activities is well recognized. Corporate India is now looking forward to banks donning a hat of generosity for productive sectors. Instead of diverting funds to unproductive sectors like real estate, it expects more funds to go towards manufacturing. All said, the latest move by the central bank seems to be yet another litmus test for India Inc. Those who can come out of it unscathed may win favour amongst investors too.

One of the biggest challenges that India faces is extremely poor infrastructure. Take the big metros. A few hours of downpour can bring these mega cities to a standstill. How prepared are we for bigger disasters? The recent calamity in Uttarakhand says it all. Haphazard construction and inadequate disaster management cost us thousands of lives.

What if a similar calamity struck any mega city that houses tens of millions of people? Be it Mumbai, Delhi or Kolkata, the preparedness for any major calamity is close to zero. Low probability of disaster should not be mistaken as zero chance of disaster.

There are numerous cases around the globe of cities collapsing on account of natural disasters. Many, who learnt the lessons the hard way, committed themselves to building more sustainable and resilient settlements. It would be too naive of us to assume that nothing could happen to our place of residence. Can we learn lessons from the mistakes of others? Or are we going to wait for disasters to rebuild sustainable cities?

When the US Fed recently announced that it was most likely to taper off its QE program, financial markets the world over took this as a negative sign. That is hardly surprising. Given the massive amount of liquidity that was injected into the system post the crisis, most of this money found its way into asset classes thereby inflating their prices. Hardly any went towards capex and investments which are what would have helped the economies limp back to recovery. As a result, most of the economies of the developed world are still mired in recession. Unemployment and weak job prospects continue to rule the roost. Meanwhile, asset prices have rallied only highlighting the disconnect between markets and the ground realities.

So, it goes without saying that the Fed's so called exit from QE is hardly going to be smooth. Infact, Bill Gross of Pimco opines that he does not expect QE to wind down any time before 2016 at least. What is more, Ben Bernanke since then has also started making conflicting statements. The latest being that the withdrawal of QE would depend on how the economic data shapes up. If that is the case, we agree with Mr Gross. It seems highly unlikely that a financial system which has been propped up by steroids will hold up once these are just taken away.

Meanwhile, indices in the Indian stock markets traded weak today as well with the Sensex lower by around 200 points at the time of writing. Stocks from FMCG and power space were seen exerting the maximum pressure.

 Today's investing mantra
"If I have noticed anything over these sixty years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."- Benjamin Graham

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407