You guys are in trouble - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

You guys are in trouble 

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In this issue:
» Is the Asian dream fading away?
» Budget fails to show the way
» Jim Rogers predicts Russia's disintegration
» Obama's fear mongering angers experts
» ...and more!

The Chinese economy is in a soup. The devastating impact of the financial crisis, which has brought the developed world down on its knees has not spared the dragon either. Consider this. China's exports in January plunged 17.5%. Foreign direct investment (FDI) fell by 33% in January 2009 as compared to the 6% decline in December 2008. Jobs are being axed left, right and centre and thousands of factories have been closed in China as the world demand for Chinese goods have diminished.

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Profits of Chinese corporate are under severe pressure, with those of industrial companies slumping 27% in the three months to November. As a result, as reported on Bloomberg, the world's third-biggest economy could expand 6.3% this quarter, which is the weakest pace since 1999 and a far cry from the 11% growth rate that the country has logged in the past couple of years.

Image source: Wall Street Journal

But China is not the only one in trouble. Most of the Asian economies especially those dependent on exports are heading for a slowdown as the global financial crisis has shown no signs of abating. In fact, this is what the noted Morgan Stanley economist Stephen Roach had to say when he addressed a conference of Asia-Pacific central bankers, "You guys are in trouble."

Choosing to rest on the laurels for the commendable economic performance during the initial four years of its tenure, the UPA government's 2009-10 interim budget announcement today was largely a reflection on the past. Without delving on the probable solutions for the present problems, particularly the poor fiscal situation, the government has passed the buck to the RBI to take care of the problems facing the economy.

What clearly came out of the interim budget, however, was that the government is not done with its borrowing programme and will have to continue to borrow heavily in the coming months to meet its expenditure plans, probably sowing the seeds of further distress in the future.

Anyways, politicians being candid as they always are, here is a comment from the Congress spokesman - "Any objective observer would applaud the remarkable Budget of the United Progressive Alliance government. It is an Interim Budget and we will be back in power in June to take it forward."

Led by the non-event that the interim Budget turned out to be, Indian markets closed deep in the red today. The BSE-Sensex, in fact, led the pack of losers among Asian indices as it lost almost 330 points (3.4%). It was closely followed by Singapore (down 1.3%) and Hong Kong (down 0.7%) markets. Stocks in China, despite reports of the country's deepening slowdown, closed with almost 3% gains. European markets have opened weak.

There has hardly been a day in recent times that has passed off without its fair share of gloom. Things like layoffs, asset sale and bankruptcies have indeed become the order of the day. So it came as a little surprise when a survey of more than 300 international corporates conducted by global accountancy firm Ernst & Young had majority of the respondents saying that important customers are undergoing severe financial pain and have been delaying payments.

Needless, to say things have been equally bad on the supplier side as well. And as a consequence, while half of the respondents were broadening their supplier base, the other half was whittling down to a select few, a perfect example of 'horses for courses' policy. And mind you, these were no small companies as majority of the firms participating in the survey had more than US$ 10 bn in annual revenues.

Last but not the least, need for cash has become so acute that 4 out of every 10 participants indicated that they were considering selling parts of their businesses, thus raising the possibility of the emergence of a markets, where there would be a lot of asset sellers but few potential buyers. No wonder, 'Cash is the eternal king'.

In a recent interview he gave to Bloomberg, world's leading commodities guru, Jim Rogers has spelled trouble for Russia. He has predicted that given the serious problems, "...there are chances that Russia will disintegrate into more than one country. When empires have disintegrated throughout history, the reverberations have gone on for a long-long time. Certainly there are good investments in Russia if you are on the ground, but not for me!"

Rogers further said, "What they (the Russian authorities) are doing wrong is they are trying to prop up their banks, which is bad economics and bad morality as well. They are supposed to take the assets from the incompetent and give it to the competent and you start over from a stronger base. But Russians are making mistakes like the Americans and anybody else is making."

The Wall Street Journal reports that "Indians are flocking to jewellery shops to sell old jewellery in the middle of a busy wedding season." This is given the highs the yellow metal has touched. Gold, in the spot markets in India, is currently trading at Rs 14,770 per 10 grams. The newspaper has quoted the president of the Bombay Bullion Association, Mr. Suresh Hundia as saying, "About 90% of people are only coming to us to sell old jewelry. So far in the month of February, there have been no imports of gold due to the record high prices."

Traders are now expecting gold to cross the Rs 16,000 per 10 gram mark over the next two months as economic concerns are expected to persist, and further deepen.

Gold has, in fact, seen a sharp run over the past couple of months given that governments around the world are busy printing currency notes to tide over the liquidity crisis and fund financial institutions strapped for cash. At this time, we are reminded of a comment made by Bill Bonner of the leading daily financial newsletter The Daily Reckoning - "Over long periods, gold makes no gains at all. It is only valuable when other gains are fraudulent...when there is a crash...or inflation. That is why it is so valuable now. We face all of those things. But over the long run, gold does nothing and goes nowhere. That makes it a bad investment usually and a good investment occasionally."

The Sun seems to be fast setting in the 'land of the rising Sun', or so it seems. As reported in The New York Times, Japan is facing its worst economic crisis since 1974. The country has been hit hard by shrinking exports and slowdown in domestic consumption spending by the country's ageing population.

As reported, Japan's real gross domestic product (GDP) has shrunk at an annual rate of 12.7% during the October to December 2008 quarter. This was the third straight quarter of contraction in the country's GDP, and dwarfs the decline witnessed in the US and Europe. An economist quoted by the report, said, "At one time, it looked like Japan escaped the brunt of the financial crisis. Now we see Japan's most damaged because it's so dependent on trade, which is stalling. This shows how feeble Japan's economic fundamentals were in the first place."

Hours before the Congress in the US finally passed the US$ 789 bn stimulus package, Barack Obama had a caveat for the citizens of America - the recovery of US economy would take years, and not months. His message was clear, there's going to be no instant coffee.

The Wall Street Journal terms Obama's fear mongering as 'the real catastrophe'. While talking about the instances when Obama compared today's economy as the worst since the Great Depression, the WSJ writes - "This fear mongering may be good politics, but it is bad history and bad economics. It is bad history because our current economic woes don't come close to those of the 1930s. At worst, a comparison to the 1981-82 recession might be appropriate."

Here we hope the WSJ to be more right than the most powerful man on earth. Anyways, the newspaper has a suggestion for Obama - "Fear mongering can trigger a political stampede to embrace a recovery package that delivers a lot less than it promises. A more cool-headed assessment of the economy's woes might produce better policies."

04:58  Today's investing mantra
"If you have good stocks and you really know them, you'll make money if you're patient over three years or more" - David Dreman
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