Is another global crisis coming soon? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is another global crisis coming soon? 

A  A  A
In this issue:
» Did we just witness a perfect mini storm?
» Why tanking of Commodity-driven economies is good for India?
» Central Banks should take a close look at bitcoins
» Looming US $500 m default to test China's banking system
» ...and more!

Since the last financial crisis in 2008, trillions of dollars have been pumped into the economies of North America, Europe and Japan to support asset prices - property, shares, bonds, commodities and prevent the great recession turning into another great depression. But the truth is, the US economy is in rough shape right now.

According to experts such as Marc Faber, Peter Schiff, Donald Trump, and Robert Wiedemer, we are on the verge of another recession, and this one will be far worse than what we experienced during the last financial crisis. They have warned that the United States could soon become a large-scale Spain or Greece, teetering on the edge of financial ruin.

They argue that America does not have money and goes out to borrow from China and others. The US is going up to US $16 trillion in debt very soon, and it's going up very fast. When you have debt around US $21-$22 trillion, there will be a credit downgrade no matter how you look at it. It is this massive debt that worries them the most.

Millions of American consumers have accumulated hundreds and thousands of dollars of additional debt-spending money they don't have on gizmos and goods they don't need. The truth is that just a few years ago, America's economy came within minutes of total collapse and it isn't even close to recovering. Yet people are spending and consuming at a high rate.

The question arises then what next? And the answer is most certainly not to pump in still more trillions to try to reinflate bubbles of imaginary paper wealth. The Fed should slowly wind down its stimulus program. The process may be accompanied by market turbulence. However, this will be a small cost compared with the potential benefit of a return to normal asset pricing. In the long run, economic growth should be improved by improving productivity.

Investors therefore need to make not just their stocks and gold but also their debt investments with extreme caution. The word 'impossible' can no longer be associated to the risks in global and domestic economy.

Do you think that we are heading into a crisis bigger than the 2008 one? Let us know your comments or share your views in the Equitymaster Club.

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01:12  Chart of the day
When it comes to investments, Indians do like to play it safe. And given the uncertainty prevailing in present times, it does seem that they are looking to do so all the more. As reported in the Hindu Business Line, safe assets dominate the share of Indians household savings. Fixed deposits, insurance plans, cash and bank balances - all of which are classified as safe assets - together form nearly two-thirds of savings of Indian households. As reported by the business daily, Indians' exposure to equities however stands at a low figure of 13% of their wealth, which is way lower than the 26% mark globally. Cash holdings have reportedly increased by 0.4% YoY to 10.4% in 2013, indicating the cautious sentiments of the people.

All we can say is that equities have the tendency to outperform other asset classes over the long term. Despite this, Indians do not seem to be too interested in investing in market linked assets. Maybe it is an asset class that is just too complicated for them to gauge. Or maybe they have not had good experiences in the past which has led them to take such a decision. We believe that the perceptions could change if investors follow the simple practice of low P/E investing.

Indians continue to increase their cash holdings

A 'mini' perfect storm is what noted economist Nouriel Roubini wishes to call events these past few days. Speaking on the sidelines of the World Economic Forum, Roubini, who has amongst other things, the distinction of predicting the previous economic crisis correctly is not too pleased with the way the global economy is shaping up. He is of the view that not enough is being done to restore stronger growth. There is a strong need as per him to do something about the structural problem we have with job creation. Amongst the things that can be tried is the change of taxation of labour vs capital, investing in better educational systems, vocational schools and reducing payrolls taxes as a way to increase demand for labour.

Really? Can labor markets be improved by pulling a few levers on the policy front? Well, the move can be successful in the short run but what drive improvement in the long run are productivity improvement as well as innovation. And efforts should be made to encourage these activities rather than interfere too much in the free market process we believe.

As you would know, China is the largest consumer of commoditiess in the world today. It naturally follows that Chinese demand for commodities has a big impact on global commodity prices. And this in turn has far-reaching consequences for economies that are heavily dependent on commodity exports.

Now, as the growth rate of the Chinese economy has fallen from double-digit levels to 7.7% in 2013, commodity exporting economies are facing a tough time. As per an article in Firstpost, economies such as Argentina, Brazil, Australia and Russia have seen their growth rates fall sharply. Moreover, their currencies have been under pressure. In the last one year, their currencies have fallen by about 15% against the US dollar.

How does this affect India? Being a net importer of commodities, this is a favourable trend for India. Lower commodity prices mean lesser strain on the current account and the Indian rupee. Moreover, it could also bring inflation lower.

Bitcoins have earned the reputation of being the regulators' nightmare worldwide. The banking regulators in Europe and China completely banned the usage of the virtual currency. After that, the RBI too expressed a strong disapproval of the unregulated currency. However it seems not everyone in the banking sector shares the disapproval. Mr Uday Kotak, the chief of Kotak Mahindra Bank had some interesting views to share on bitcoins at the World Economic Forum. According to him, the virtual currency is at very early stages. Hence central banks will have to take a hard look at it before accepting or rejecting its potential. Only then can the global banking authorities take a call on the future of bitcoins. Whether central banks globally will be willing to bring bitcoins under their regulatory ambit is anybody's guess. But the risks that the virtual currency brings along with it cannot be sidelined by bankers we believe.

China's shadow banking is coming to haunt it again. As reported in CNN Money, one of the country's biggest and most profitable banks, notably the Industrial and Commercial Bank of China (ICBC) had been marketing a US$ 500 m trust called Credit Equals Gold. The trust was issued by China Credit Trust Company and offered a return of 10% to investors. Now it appears that the fund is expected to collapse by the end of the month on account of loan given to a troubled coal mining company which has gone bad.

Shadow banking activities in China have been on a rise in recent times. Although no one knows the exact size of this, it is estimated that the shadow banking sector accounts for roughly 60% of China's GDP. The popularity of this sector has been rising on account of higher returns offered to investors. If this trust collapses, the million dollar question on everyone's minds is whether there will be some sort of a bailout offered by the government. If there is a bailout, then the situation will be pretty much akin to what we have been seeing in the US and Europe. The governments of both these regions bailed out most of the banks and financial institutions when the 2008 credit crisis unfolded. And it was ultimately the taxpayer who had to bear the brunt.

In the meanwhile Indian stock markets continued to trade in the negative territory. At the time of writing, the benchmark BSE Sensex was down by 311 points (1.5%). All sectoral indices were trading in the red with the stocks in the banking and realty sector leading the losses. The major Asian stock markets were trading lower led by Hong Kong and Japan. The European markets also opened the day on a negative note.

04:55  Today's investing mantra
"The real key to making money in stocks is not to get scared out of them." - Peter Lynch
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9 Responses to "Is another global crisis coming soon?"

sivasankaran palakat

Jan 29, 2014

SEBI and GovtofIndia should extra care to stop gambling in the stock market. Many a times people are meddling with the stock market and artifical price increase/decrease is making . our economy is strong and a watch is needed for stock broking activies.


sivasankaran p alakat

Jan 29, 2014

Why India should get affected when USA collapses !

except oil we can manage our own . when you open so many malls and outlets, people spend like anything withoutany necessity but to show off. Stop the Mall culture and stop usage of cars with more than 10 lacs and those who go for more than 5 lacs car , should be charged extra for petrol consumption.


suresh Gujarati

Jan 29, 2014

Dear Sirs,
Your this letter is very informative and good read. But I do not agree about collapse of USA economy and give big recession soon come. What I feel that QE will be there for this year at least as indicated by FED. also American Economy if not improving but not going bad. War expenses are reduced and other matter are also taken care which may be helpful for economy preventing from deteriorating. Also our new Governor feel that QE may not that not big factor. Indian economy if fails it will be because of Goverment policy,
Suresh Gujarati


Dr. Arun Draviam

Jan 27, 2014

India’s import bill is larger on the oil imports. Unless India finds efficient ways of lowering oil consumption, global commodity price fall will not help India.



Jan 27, 2014

Yes, our economy, though has strong base but because of lacklustre administration of Congress party, is likely to face crisis.


R.Santhana Subramanian

Jan 27, 2014

It may be alarming to note that a debt of 16 Trillion US$ on the head of US treasuries and soon that country may turn to biggest Greece or Portugal. All very pessimistic ideas. No doubt , theoretically your arguments may be true. But who knows the future and the behaveour of other emerging countries in the fiscal field. Do u mean to say that there will be no growth at all in this world and dooms day is nearing soon. Things will change. The IMF recently predicts world GDP to be @ 3.32% within next 3 to 5 years. To get this growth rate each and every nation also should contribute. As always Financial inclusive growth is subject to international politcs and individual growth too on the basis of its own political thinking linked to the desire of the people. Ur comments appears to be not reflecting on the firm belief on the international citizens. After all we have seen many ups and downs in world economies since the last 2 centuries.Still we have come out successful and remained hopeful. Still my hope for a better future has not diminished.



Jan 27, 2014

Logically US should have been bankrupt long back. Is shale gas illusion preventing it?



Jan 27, 2014

You have stated that job creation can be achieved only thru innovation and productivity improvement..

While I agree with you on the innovation aspect partly, need to agree to disagree on productivity improvement. This is exactly how the notional US recovery has played out.. There is no growth in real jobs or wage.. since all has been thru productivity improvement (real interpretation being job elimination).

Innovation also leads to productivity improvement in most cases (existing sectors).. which is usually the driver.. Only in sunrise sectors can innovation potentially lead to increase in jobs..



Jan 27, 2014

In "isanother global crisis coming soon?" --- you have analysed the situation and made a diagnosiis. It would have been mor s
Useful to your readers to know what solutions and guideposts you could suggest. That would make it a diagnosis and treatment .

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