Barack Obama's no. 1 priority
(Jan 20, 2009)
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In this issue:
Barack Obama will be sworn in today as the President of the United States. In an interview with a leading business daily, former US assistant secretary of state, Robin Raphael has identified the economic recession as Barack Obama's no. 1 priority. She also identified Iraq, Afghanistan and reestablishing America's image in world diplomacy as important concerns. While Obama has been wise in managing expectations right at the start, appointing Hillary Clinton has also been a sensible move according to her. His lack of political experience also means he is open to new ways.
» Threat of deceleration in India and China
» South Korea's biggest fund bearish on US Treasury
» Indian pharma not immune to slowdown
» Number of bank collapses in the US
» ...and more!
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On the international front, Ms. Raphael is of the view that US foreign policy will not undergo dramatic shifts although there will be a change in emphasis. She feels that there will be a ceasefire in the Israel Gaza conflict which will give the Obama administration some breathing space. With regard to Iran, she is of the view that not talking to parties is not a sustainable solution.
She sees Indo-US ties getting stronger in the future. She also regretted that the US did not involve itself in the Pakistanis system at the time of providing military aid post 9/11. However, she also reminded India that a stable Pakistan is ultimately in its best interest.
The Organisation for Economic Co-operation and Development (OECD) and the World Economic Forum (WEF) in their respective releases have pointed out the threat of further deceleration in the economies of India and China due to inter-linkages with the developed world and the distress underway therein.
The OECD has a composite leading indicator (CLI) that identifies turning points in several economies. Early signs of economic expansion or slowdown can be seen from this indicator. The CLI has been predicting not just a slowdown but a downturn in the Indian economy of a severity not witnessed before.
The WEF has also predicted that the massive government spending to support ailing financial institutions hit by the credit crisis could sow the seeds of more problems in the future. These problems, the seeds of which were sown in the developed nations, would then percolate to the developing economies. The report also sounded a warning about the consequences of a hard landing for the Chinese economy, which could magnify the deficit problems for economies across the globe.
Investment expert Jim Rogers has been bearish on the US dollar for quite some time now and hence it came as no surprise when he reiterated the fact at a financial forum in Hong Kong recently. However, he is being increasingly joined these days by other gurus and institutions offering a similar advice. Latest to join the list is South Korea's biggest investor, its National Pension Service fund. Thanks to the enormous printing of the US dollars, the fund feels that a couple of years hence, inflation would be a key threat and this would prompt the Fed to hike rates. This in turn would lead to a fall in treasury prices as the two are inversely related. Furthermore, the dollar could also come under pressure as investors feel reluctant to hold dollar denominated assets as higher inflation could push real interest rates lower. It should be noted that the US treasuries have just come out of a strong rally, its best since 1995 as risk aversion forced investors to take shelter in dollar's safety. But as more dollars find their way into the system and as people's risk appetite grows, the low yielding US Treasury could be in for some severe correction.
Speaking of Barack Obama, everybody is now familiar with his campaign buzzword "change", which was instrumental in garnering him the most coveted post in the US - that of the President. Given that he will be sworn in as President today, the following chart gives an idea of the number of times the words 'hope' and 'change' have been used previously in the US presidential inaugural addresses.
Given the current economic slowdown, it was assumed that FMCG and the pharma were defensive plays as they were immune to slowdown. While this is certainly the case for FMCG, it appears that the slowdown has impacted the pharma sector to some extent. According to data released by ORG IMS, sales of prescription drugs contracted in October and November for the first time in four years. While sales in October fell by 1.2%, the same improved marginally by 7% in November, whereas in 2006 and 2007, sales growth in October and November were between 8% and 10%. The reasons attributed to the same have been a gradual cut in expenditure on costly drugs, shift of focus to low cost medicines and the winter season trend wherein consumers go for more over-the-counter (OTC) medicines for the treatment of common ailments such as cough and cold. As a result, while companies such as GSK Pharma and Dr.Reddy's have been among the worst affected, Piramal Healthcare appears to have bucked the trend due to different strategies followed by it.
Corruption has always been rampant in India. Besides the unraveling of various scams in the country during the years, this was all the more highlighted by the fact that India ranks 85th on Transparency International's 2008 "corruption index," making it more corrupt than the likes of Saudi Arabia, Mexico and China. So, why has the Satyam fraud really shocked everybody? A lot of it has do with the fact that the company belongs to an industry i.e. software which was instrumental in putting India on the global map. As reported in the International Herald Tribune (IHT), the software business was started as a "new industry, with none of the baggage of the traditional industries in India". Meanwhile, corruption in the country continues to be a menace and is not likely to go away anytime soon.
|Source: The Economist
Infact, 90% of respondents whose opinions help form the corruption index said they think corruption in India will increase over the next three years, the highest number for any country in the world. And what has been the root cause for the same? The IHT states, "India's bribe-paying, nepotism and petty corruption have alternately been blamed on everything from the bureaucracy set up by the British, a shortage of resources exacerbated by a population of more than 1 bn, or the Hindu belief in reincarnation that allows wiggle room for mistakes in this life". Further, as new money keeps pouring into India, in big businesses especially, corruption is probably getting legitimized. The fact that auditors are reluctant to blow the whistle on companies whose accounts they audit have not helped matters either. But while eradicating this problem completely may be easier said than done, companies definitely have to make efforts to follow good corporate governance practices.
The year 2008 saw 24 of them in the US. The first month of 2009 has already seen 2. Yes we are talking of bank collapses in the US as reported by the FDIC (Federal Deposit Insurance Corporation). Among the 17 banks which failed since September, the most prominent was Washington Mutual (better known as WaMu), US' largest savings and loan entity. As per FDIC, prior to 2008, the largest number of bank failures took place in 2002, when 11 entities went belly up. Moreover, official statistics reveal that the number of banks in America have steadily been declining since 1990. FDIC data show that the number of commercial banks in America has come down by over 5,000 in the past 18 years.
While we in India have been lucky to not witness any bank collapse in the past year, the vigilance of the RBI and other governing bodies will be necessary to avoid such mishaps in the near future.
In a bid to make profits on their trades, banks, commodity traders and suppliers have been seeking new ways to hoard the commodities that have lost considerable value in the past few months of economic slump. This has been particularly true in the case of crude oil prices which have dropped by more than US$ 100 a barrel from their peak. In fact, companies like British Petroleum are reportedly hoarding enough crude at sea to supply the world for almost a day. As per Bloomberg, Morgan Stanley has even hired a supertanker to store crude oil in the Gulf of Mexico, joining Citigroup and Royal Dutch Shell in trying to profit from higher prices later in the year.
The US economic data has projected loss of another 2 m jobs in 2009, on top of the 2.6 m already lost in 2008. Obama's economic team has put forth a plan, which involves hundreds of billions in capital spending to save or create 3 m jobs. It in fact seems that in the US, the Wall Street's loss has been the US Army's gain. As a rule, when unemployment rates climb so do military enlistments. In November, the US army recruited 5,605 soldiers, 6% more than its target and in December, when the jobless rate reached 7.2%, the army saw similar increases in recruitments.
Asian stocks closed on a negative note today, concerned about the earnings deteriorating further amidst the global economic slump. India's BSE-Sensex too languished in the red through the day, to finally close lower by over 2%. The Chinese benchmark index - the Shanghai Composite (up about 0.4%) - was the only gainer in the region. European indices are trading mixed currently.
Crude oil fell below US$ 34 a barrel after UK bailed out banks for the second time in three months, raising further brows about the economic crisis deepening. Gold too followed suit with a decline for the second consecutive day due to an advancing dollar.
"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond". - Warren Buffett
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