More money, faster - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

More money, faster 

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In this issue:
» 'More money, faster' says Japan
» The rise of the middle class
» Ratan Tata buys Tata Motors shares
» The rush for gold
» ...and more!

Ever since the unearthing of the US financial crisis, advice on how to fix the mess has been pouring in from all quarters. Surely, the men at the helm may be in a dilemma, who to listen and who to turn a deaf ear to. They may choose to ignore whosoever they want. But as per a story in The New York Times, they would be making a big mistake if they ignore the people who are getting a feeling of deja vu from the US crisis.

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(Image Source: The New York Times)

If you haven't guessed it by now, these people are none other than the so-called veterans of the Japanese crisis. A real estate bubble similar to the one that has swallowed the US wreaked such havoc on Japanese banking system and its economy that it took the nation nearly 10 years to get out of it. That 10 year period has gone down in folklore as the 'lost decade'. During this period, Japan's benchmark Nikkei lost three quarters of its value and its public debt exceeded its GDP. It was only in early 2000, when the regulators took the bull by its horns that the economy recovered.

And these veterans have only three words to offer to the Americans - 'More money, faster'. Indeed, the way the bailout has been carried out so far has left a bad taste in their mouth. They are worried that the people involved, for fear of a huge public backlash, are not willing to acknowledge the magnitude of the damage, thus leading to half hearted measures. Furthermore, they are also of the opinion that the economic stimulus will have very little impact if the banking system itself is impaired.

All out aggression and not a 'wait and watch' policy is what, in a nutshell, they seem to be advocating. We hope the Americans are listening for unlike Japan, the US is a lot more coupled with the rest of the world and a 'lost decade' there could also mean a 'lost decade' for the rest of the world.

Investors around the world are worried about global financial instability. They are also concerned that the stimulus packages will lead to years of inflation. No wonder then, the buzzword is 'risk aversion'. And the first safe-haven risk averse investors turn to is gold. In fact, such is the rush for gold that it has now become a mainstream asset class and has rallied sharply. As per Reuters, pension funds and wealth managers are now recommending a 5% to 7% allocation for the yellow metal.

Gold-backed exchange-traded funds (ETFs) have especially benefited. They offer investors exposure to the commodity without taking physical delivery. The funds buy a matching amount of physical gold and keep it in their vaults. However, we believe one should be cautious about any asset class where too many people start piling in a compressed time frame. They provide ideal conditions for the formation of bubbles.

The world may be facing the worst financial crisis since the Great Depression but the phenomenon that has caught everyone by storm is the surge in the middle class population, especially in the emerging markets. And given this global turmoil, the spotlight on the middle class is probably fiercer than ever as the world hopes that they revive consumption and consequently their respective economies.

So what set of people come under middle class? It is very difficult to give an exact definition. The Economist states, "They begin at roughly the point where people have a third of their income left for discretionary spending after providing for basic food and shelter. This allows them not just to buy things like fridges or cars but to improve their health care or plan for their children's education." One important feature that characterises all middle classes is the presence of a steady job.

(Image Source: The Economist)

The graphs above paint a vivid picture. As stated by The Economist, while western countries were instrumental in the surge in the middle classes uptil 1980, from then onwards to 2006, it is the emerging countries that have contributed to the rise in the middle classes. And this is to such an extent that the middle class people in Asia have now overtaken the number in the West for the first time since 1700. No wonder then that the middle class in the emerging markets is going to be a force to reckon with in the future.

While a recession is seen as a time that causes many companies to shut shop, let alone prosper, it may come as a big surprise to know that some of the world's most well known companies were founded during the roughest of times, and have gone on to survive to this day.

Procter & Gamble, owner of well known brands like Tide, Pampers, Oral-B, Pantene and Pringles was found during the panic of 1837 and continues to be one of the safest bets during tough times such as these. IBM and GE were also formed during the Long Depression of 1873-1896. United Technologies Corp (found amid the Great Depression in 1929) and FedEx (formed during the Oil Crisis of 1973) are some of the other companies that mark the triumph of innovation in times of depression.

As the world around him continues to go up in flames, Warren Buffett is calmly picking up his favorite high-yielding investments. He has now agreed to buy US$ 250 m of debt from luxury jewelry maker Tiffany & Co., yielding a good 10%. This newest investment marks the seventh time since September that his company Berkshire Hathaway has gotten at least a 10% payout by buying company bonds, preferred stock or convertible securities.

"Be prepared for hard decisions," Tata group chairman Ratan Tata recent warned his 350,000 employees worldwide. He was acknowledging the unprecedented troubled times facing the 140-year-old group. In the same letter, Tata had comforted his employees that the group would come out stronger from the crisis.

He has now acted upon his view. As reported by Mint, Mr. Tata has brought 100,000 shares of Tata Motors in his personal capacity. The shares have been bought at an average price of around Rs 136 per share, aggregating to Rs 13.6 m. Post this acquisition, Mr. Tata now holds 187,000 ordinary shares in Tata Motors.

The Indian benchmark index, the BSE-Sensex, saw a healthy 3.6% rise during this week. This was largely on the back of expectations that the RBI may cut interest rates further to boost economic growth. This performance was just second to China in the Asian region, where the Shanghai Composite gained a robust 6.4%.

Markets in the developed countries performed poorly. Germany led the losers in the European region with a fall of about 5%. The US Dow Jones Industrial Average performed the worst with a decline of 5.2%.

Source: Yahoo Finance Source: Yahoo Finance

While citing their 'commitment to avoid protectionist measures, which would only exacerbate the downturn', the Group of Seven (G-7) nations seem to be doing little to tangibly demonstrate the same. While the chiefs of these nations have pledged to restore confidence to financial markets and growth to the world economy, they have stopped short of spelling out the policies they would implement to meet those goals.

04:57  Weekend investing mantra
"Cash combined with courage in a crisis is priceless" - Warren Buffett
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