Banks saved at the cost of youth unemployment... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Banks saved at the cost of youth unemployment... 

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In this issue:
» Can Japan's PM end deflation in his country?
» Is Citigroup better than JP Morgan?
» MNCs: To invest or not to invest in India?
» Has the 12 year gold rally come to an end?
» and more....

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It is a well known fact that the global financial crisis was a product of unscrupulous practices by banks and the financial institutions in both the US and Europe. So it was natural that when the crisis unraveled these banks should have to pay for their mistakes. But that did not happen. What we were witness to instead was a massive injection of liquidity into the financial system so as to bail out all banks. The governments, policymakers and central bankers felt that allowing banks to fail would be a global catastrophe too large to contemplate. Hence, all possible measures were adopted to make sure that the banks, especially the biggies, were recapitalized to avert a disaster.

So the culprits got away scot free. So hell bent was the central bank in rescuing them that it missed the bigger picture. And today has a heavier price to pay for it. Take the European region for instance. True, today banks in the region are in a much better financial shape than what they were at the time of the crisis. But in the process, the European region has lost an entire generation of young people. While looking to tackle the crisis, the EU failed to understand the social implications of the same. The result is that there is massive unemployment in countries across the EU with Greece, Spain and parts of Italy and Portugal suffering the worst in this regard. This has led to protests and outbreaks of violence across southern Europe. It has raised the threat of full-scale social breakdown that can further rattle unstable governments.

Indeed, protests, rallies and violence that are typically seen in least developed, unstable and repressed economies are increasingly become a regular feature in the developed European region as well. It is highly ironic that the current younger generation which has been much better educated than the previous one, cannot put this knowledge to use due to lack of better job prospects.

The problem is further compounded by the fact the EU has displayed no visible signs of a meaningful recovery. Plus the governments of the region have not come up with strategies of fueling growth and creating jobs and have rather pumped more and more money into the economy. Why the EU fails to realise the futility of money printing is anybody's guess. More importantly, youth unemployment if not tackled in time can be a ticking time bomb for the region in the years to come.

Do you think that the EU has been highly ineffective in resolving the youth unemployment problem in the region? Please share your comments or post them on our Facebook page / Google+ page

01:16  Chart of the day
After two quarters of declining industrial output, there was some respite for the Indian economy when industrial production picked up for the month of January 2013. As today's chart of the day shows, India also fared better than most of its peers barring China. Thus, there are expectations that the central bank would go in for rate cuts in its next monetary policy. Indeed, the poor performance of the industrial sector has been one of the major reasons why the Indian economy has also slowed down. But we believe that whether the RBI cuts rates will depend a lot on the trend for the next few months as well as the level of inflation in the economy. Further, while China continues to tower over the rest of the pack, there has been a slowdown in the manufacturing sector in the dragon economy as well.

*Data is for Jan-Feb 2013
Data Source: The Economist

The newly heralded Japanese premier is clearly a man on a mission. Seems he will settle for nothing less than watching the demon of deflation in Japan being run into the ground. And there are signs that he could well be on his way to success. The Economist reports that the largest retailer in Japan recently announced a pay-hike for around 54,000 of its employees. For some of them, this will be their first basic-salary hike in four years.

Clearly, this is big news for a country that hasn't seen the mercury on the price-meter rise for about 15 years now. However, the big question is whether the other firms will follow suit? And this is where the good news ends we believe. Most other firms are unlikely to take a leaf out of the retailers' book. At least until they see clear signs of growth returning and the economy improving.

But will a sustainable growth return to the land of rising sun? We are not that positive. The simple reason being that Japan is trying to achieve this by printing money. And if printing money leads to prosperity then Zimbabwe could have been the richest nation in the world. So Japan could well move from deflation to hyperinflation. But increase in real wealth looks a very difficult proposition to achieve.

One cannot be blamed for assuming that the stress test for Wall Street is meant to make the entities bailout proof. But it seems that the exercise itself is flawed. So much so that the results have come to haunt not just investors, bond analysts and credit-rating agencies but the regulator too. For instance, as per Economic Times, the stress test shows that Citigroup scores far more than JP Morgan. Despite its multiple bailouts, Citi seems to be having the odds in its favour. The secret to this is its well capitalized balance sheet. Now capital adequacy (CAR) is a crucial metric for banks. However, one cannot say that the entity is safer than it was in the run-up to the financial crisis, simply because of more capital. Also the impact of Basel III norms on Citigroup's CAR can be subject to much debate. The test thus raises questions about the ability of regulators to head off the next big threat to the financial system. All we can say is that no evaluation system is foolproof. But the US banking regulator needs to stop being partial to the Too Big To Fail.

If you were invited to someone's house, you would naturally expect a warm welcome. But what if your host decided to make the environment as harsh as possible for you? Obviously you would not want to visit again. You would even advise your friends and acquaintances to refrain from visiting such a host. Such is the condition between India and the multinational companies (MNC). In order to bring down its current account deficit, India has been inviting MNCs to invest in the country. At the same time it has been going out of its way to create difficult business conditions for the MNCs.

Tough and volatile tax laws. Problems with power and land acquisition. Difficulty in setting up new projects. These are just some ways in which the government has made it difficult for MNCs to set up shop in the country. And to add to this, it comes out with protectionist measures for the domestic industry. With so many things working against them, one would not really blame MNCs when they say that they are reluctant in doing business in India. The thing is India desperately needs foreign investments to help it with its twin deficit problem. The only way it can boost the flow of these investments is by changing its attitude and reform its policies. If you want someone to invest in your country, provide them with an environment that is conducive. If they see no returns coming their way, they will not invest.

International gold prices touched an all-time high of US$ 1,900 per ounce in August 2011. Since then gold prices have been range-bound. As per Kitco, gold prices are currently about US$ 1,581.9 per ounce. This is 20% lower than the all-time high. Of course, Indians have not seen such of a correction because of the rupee depreciation. But what is really happening in the gold market?

Well, the year so far has been gold's worst start to a year in 25 years. In fact, investors sold off 106.2 metric tonnes of gold from exchange-traded products (ETP) in the month of February alone. This has been the biggest sell off since the creation of ETP in 2003. Many are already ringing the alarm that the 12-year gold bull rally is nearing its end. Renowned investor George Soros has slashed his stake in the biggest ETP by a whopping 55%.

Why is the gold correcting now? There seems to be a change of sentiment globally. Many are beginning to believe that the world economy is on the path of recovery. Improving economic activity tends to push capital out of gold and towards equities and other assets.

We do not share the same enthusiasm for the world economy yet. In the aftermath of the 2008 financial crisis, policymakers pumped in excessive liquidity into the financial system. They tried to solve a debt problem by injecting more debt. So the real problem has not been solved at all. And this, in our view, still poses a serious risk to the developed world. So, there are good chances that gold prices will continue to correct for a while. But this must be treated an opportunity to buy the yellow metal.

It is a known fact that there is a slowdown in real estate market. But it seems that the luxury segment of the market is immune to this slowdown. Or else what could explain the fact that Rs 100 bn worth of luxury homes were launched across the country last year. And that too at a time when there is a slowdown in the housing segment. In fact, you would be surprised to know that about 5,000 homes priced at Rs 30 m and above were launched in major metros during the year because of increasing demand in this segment. This is in stark contrast with the mid & low housing segment which is witnessing waning demand.

The primary reason for increasing demand in the luxury housing segment is India's affluent class. India's super rich still prefer hard assets like real estate over intangibles like stocks and bonds. Increasing demand by the rich is jacking up the property prices. But the affluent class is immune to price changes. As such, the demand continues to persist. And this will continue in the future as well irrespective of the general slowdown in the housing market. Only when the return from this asset class diminishes or the general interest to invest in it dies down demand would falter.

The Indian equity markets shed their morning gains during the pre-noon session and were trading lower ever since. At the time of writing, the BSE-Sensex was down by nearly 90 points or 0.5%. Barring stocks from the FMCG and auto sectors, selling activity was seen across the board. Consumer durables and realty stocks were amongst the top underperformers. Asian stock markets ended the day on a weak note with China, Hong Kong and Japan up by 1%, 0.8% and 0.3% respectively.

04:56  Today's investing mantra
"You ought to be able to explain why you're taking the job you're taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more. And if you can't write an intelligent answer to those questions, don't do it." - Warren Buffett

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    4 Responses to "Banks saved at the cost of youth unemployment..."

    B K Nandi

    Mar 12, 2013

    The global financial crisis was not analyzed effectively. Economists, analysts and the government all were puzzled. Immediate thing government found that banks do not have money. Feed them from the press and this money was not created from the economic system, the demand supply system. The base of this money is only the printing press and it gets mixed with the real money. Not only did the banks, even the people also did not have money. Buyers quality and conditions deteriorated. They cannot buy. Layoff started, so youth do not have jobs. As banks are bailed out, citizen also deserves bailout, free money to keep the demand stable. Then there would have been some justice to the system. Economy is not in good shape after just bailing out only banks. Somehow these countries have to raise demand to improve youth condition.

    Like (2)


    Mar 12, 2013

    Its like well and trench situation for EU as till now they could sabotage the frightening financial crisis which was enough to drag whole world in severe economic downturn. Though it's been observed with its lot many side effects but employment is not only EU liability as these are the same region which still generating opportunities for no so much expecting Asians. In fact its the time when youth from these nation to start expecting little low with cutting down their squander in concurrence with current situation.

    Like (2)


    Mar 12, 2013

    All in all a very good analysis of current situation & caution for the future ! Japan has survived Atom Bomb,Tsunami & so many major earthquakes, which is everyday affair.Even though it seems difficult but not impossible to revive Japanese economy. They are capable of doing it - merely because of one simple word -NATION first not any indivisual. We are busy in planning great statues of yesteryear heros by spending millions of rupees while youth unemployment is rising.

    Like (2)

    JA Mehta

    Mar 12, 2013

    In my view, Since EU is able to raise the debt rather easily, they have deferred the hard decision for tomorrow - left the decision to be taken by other leaders. Nations who have bought this debt would suffer when the high debt shall get restructured. In my view, it is nothing but, using money of other nations for welfare / benefit of own citizens.

    Like (1)
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