»5 Minute Wrap Up by Equitymaster

On This Day - 23 AUGUST 2011
All these point to a new global recession

In this issue:
» Will the Euro disintegrate?
» Hedge funds perform poorly this year
» Reversing demographic trends to impact US stocks
» Gold will continue to remain firm
» ...and more!

-------------------------------- Urgent Update On The Global Crisis --------------------------------

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The fact that the US and European economies are down in the dumps is obvious enough. But almost three years after the collapse of Lehman Brothers and a massive dosage of stimulus packages, debate still prevails as to whether the global economy is on its path to recovery or is likely to sink into another recession. Having said that, more than one indicator points to the latter scenario.

So which are these indicators that firmly point to another recession in the making? Take shipping to begin with, which is a critical indicator of global financial health because so many of the world's goods travel by sea. The latest data about dry bulk commodities-shipping costs, as tracked by the Baltic Dry Index, reveals that rates have fallen by a third so far this year. Further, the industry has not been able to impose normal surcharge which is typically a feature of peak demand periods.

Other indicators are the revision of various estimates as far as GDP growth and oil demand is concerned. Most global organisations have cut down GDP forecasts taking into account the failure of the developed nations to recover. But these downgrades are not just applicable to developed nations but to emerging countries as well. The latter especially are expected to witness a slowdown in growth as inflation and interest rates rise. On the oil front, OPEC expects demand to drop. China, which is one of the biggest guzzlers of oil, is likely to consume less oil as its economy slows and demand slackens. Government spending has also come under severe strain in the developed world due to massive debt thereby restricting any headroom to spend on activities that will contribute to GDP growth.

It doesn't end here. Unemployment has become a cause for worry in the developed world as it has remained persistently high in the region for quite some time now. Indeed even in China, although the CIA Factbook has recorded the unemployment there at 4%, it comes with a caveat; this figure takes into account the urban areas only. On considering migrants, the rate may very well jump to 9%. Poverty is another indicator. The number of people who live below the poverty line and have poor access to food has risen sharply this year hurt further by drought, flood and higher food prices. Not to mention the telling effect that all these factors have had on the global financial markets, which have once again seen a sell-off in recent times. Indeed, even if the staunchest optimists are not ready to believe that the global economy is heading into a new recession, they will have to concede that recovery is certainly not expected to happen for some time to come.

Do you think that these indicators are sufficient enough to point towards a new global recession? Share with us or post your comments on our Facebook page.

 Chart of the day
Growth for the US, Europe and Japan was not surprisingly stunted during the global financial crisis. The same, however, cannot be said for the emerging countries which recorded a rather healthy growth in GDP. Today's chart of the day shows that from Q4 2007 to Q2 2011, China and India's GDP per person has grown head and shoulders above the rest of the pack. Indeed, the fact that the US, Britain and Japan have not yet been able to revert back to the levels before the crisis speaks volumes of the slump that these countries are finding themselves in.

*Q2 2011 growth estimated
Data Source: The Economist

The fate of the US dollar is not the only thing that is keeping investors awake at night. They are grappling another problem of almost equal if not a bigger proportion. And it has its roots in the other side of Atlantic. We are talking about the Euro indeed. Murmurs about a possible breakup of the Euro group of nations are getting more intense by the day. Some experts have argued that the existence of the Euro as a currency and the Euro zone as an economic block may now require members to leave the 17-nation currency region. We would certainly tend to agree.

A group where member countries have common currencies and nearly the same interest rates but no common deficit limits is indeed skating on thin ice. Thus, taking advantage of lower interest rates, peripheral countries like Greece and Ireland borrowed enormously. And when the crisis struck, they became unable to repay their debts as not only did economic growth suffer but investors started demand higher interest rates from them.

Therefore, the only option before these troubled countries is to either default or go back to having their own currency so that they can devalue the same and kick start economic growth by boosting exports. However, political leaders in the Euro zone are not ready for anything like this yet. They believe that the cost of disintegration will be too much to bear. But sooner or later, the bullet will have to be bitten we believe.

Hedge funds had caught the eye of nearly every investor at one point of time. A promise of high return, no matter which turn the stock markets took, was too big an incentive for any investor to miss. But when the bad times came, very few hedge funds delivered on this promise. By the looks of it, this year would be another year of lackluster performance by the hedge funds.

Despite the high volatility in the markets (an ideal time for hedge funds to make money), most of the hedge funds continue to deliver negative returns. Some of the reputed names have given losses of nearly 30% in the month of August alone. The result being that most investors are now growing exceedingly wary of them. In fact, most of the smaller hedge funds may end up closing shop unless they can improve their returns. The larger ones may survive the battle but if they don't turn things around, this survival too maybe short lived.

'Baby boomers' may be a fairly foreign term to most Indians but in the West, it is often the focus of marketing campaigns and business plans. Essentially, a baby boomer is a person born between 1946 and 1964. But what is so special about that? Well, after the end of World War II in 1945, birth rates across the world rose substantially. The spurt in population gave rise to a huge demand for goods, thus giving an immense boost to the economy. In fact, during this baby boom period, about 7.7 million babies were born in the US. As these baby boomers reached their peak working age between 1981 and 2000, the equity-price-to-earnings ratio of US stocks tripled. But the same has witnessed a decline post 2000. Given that demographic trends have had a direct impact on stock prices, the reversing trend is a matter of concern for the future of US stocks. Those same baby boomers who rode the US economic boom are now aging and retiring. What researchers are worried about is that these retiring people may sell off their stocks to finance their retirements. This will only further weaken an already sagging stock market.

Will you think twice before buying gold this festive season? Prices are currently at record levels of Rs 28,244 per ten grams (US$ 1900). This shiny metal definitely doesn't come cheap. According to Prithviraj Kothari, the president of the Bombay Bullion Association, festival demand for the metal may pick up if prices correct to Rs 25,000. But, what we feel will continue to keep gold prices firm is that people are increasingly buying gold as a form of investment. People now buy gold throughout the year, and not only during certain months. 2-3 years back, 85% of gold consumption was in the form of jewellery. Now this has fallen to 70% according to Kothari. He believes that this year, India's imports will be in excess of 1,000 tonnes, compared to a record 958 tonnes last year. Thus, as long the as the global uncertainty continues, we believe that prices of gold will continue to remain firm.

Indian stock markets have bounced back from the day's lows and are now trading in the green. At the time of writing, the benchmark BSE Sensex was up by 154 points (1.0%). All sectoral indices were trading firm except PSU and FMCG. All Asian stock markets too closed in the positive with South Korea and Taiwan leading the gains.

 Today's investing mantra
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring." - George Soros

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