Every US citizen is a Madoff

Mar 14, 2009

In this issue:
» Obama begins political mudslinging
» Unilever CEO's admiration for India
» Protectionism and the Indian IT industry
» India a hotspot for global R&D
» ...and more!

If you think what the infamous Bernie Madoff has done is ghastly and deplorable, wait until you hear this. US economist, Nouriel Roubini, the man who shot into limelight by accurately predicting the US subprime debacle has labeled all the US citizens as Madoffs. Shocking isn't it? However, a peek into the reason as to why he believes the same and it becomes clear that while the title is indeed painful to accept, what he says is not far from the truth. Mr. Roubini is of the opinion that while Bernie is likely to spend the rest of his life in prison, every American citizen is also likely to do so, the only difference being that the latter's prison can be called as a Debtors' prison. More than a decade long binge of overspending and undersaving has put the US so knee deep in debt that to come out of the vicious cycle will not be easy and will require years of toil and hard work. Indeed, there could be no better metaphor to describe the current plight of the US citizens.

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A Washington Post report has some interesting observations to make. In his inaugural address, President Obama had confidently declared an end to the petty grievances and recriminations. But it hasn't taken long for that to change.

As per the report, over the past month Obama has not hesitated to remind the public often that he is facing problems "inherited" from the Bush administration using increasingly bold language. The "deepening economic crisis" that the president described six days after taking office became "a big mess" in remarks this month. And later "By any measure, my administration has inherited a fiscal disaster." Interestingly, this comes at a time when the Republicans have upped their criticism that the current president's policies are compounding the nation's economic problems.

So the mutual accusations have begun. Yes, our Indian politicians are not the only ones who resort to mudslinging. Obama too is no different.

It's not just the art of saving that developed countries like the US need to learn from India but perhaps the art of selling as well. This was put across in no uncertain terms by the CEO of FMCG behemoth Unilever, Paul Polman. Mr Paulman, who is on a India visit was effusive in its praise of the Indian subsidiary, HUL, India's largest FMCG company and felt that had Unilever's operations in developed markets followed the former's ability to sell the same brand across various price points, a lot of the recessionary pain could have been avoided. Although Unilever's businesses have been hurt owing to slowdown in developed markets, the company is taking a fair deal of succor in the fact that growth across developing economies like India and China has continued unabated, thus providing some sort of cushion. It is however not taking any chances and has embarked on a huge cost cutting drive involving pay cuts and leveraging on its scale, the savings from which could be reinvested in growing its brands.

Innovation in pharma is set to gather pace in India in the coming years. The Indian government is confident that India will be amongst the top five pharma innovation hubs by 2020, attracting an additional US$ 20 bn. The fact that that the country accounts for less than 1% of the US$ 130 bn spent worldwide on pharma R&D means that there is ample scope for growth of R&D efforts of the pharma industry in India. But all this could probably be easier said than done. Firstly, while the government has been stressing on the importance of investments in healthcare, not much really has been done on this front. Secondly, the price control policies of the government are not much of an incentive to intensify R&D initiatives. Of course, Indian pharma companies already started focusing on R&D in a bid to develop new drugs a few years back. But the government does have a tough task on its hands to ensure that the kind of investments that it is talking about, do actually take place.

Speaking of R&D, India and China, which have a rich scientific talent pool, are increasingly becoming the most sought after destinations for global R&D. In India especially, this is being demonstrated by the fact that global majors such as GM, IBM, Cisco, Motorola and GE are setting up large centres here. As reported in a leading business daily, India, with 63 centres, ranked seventh in housing R&D activities after the US, Germany, Japan, UK, China and France. While this is certainly an encouraging sign for the country, the government efforts to sustain this advantage and improve the infrastructure of India will go a long way in furthering India's growth.

Standard & Poor's which recently downgraded India's sovereign rating has projected an optimistic outlook on the economy's long term prospects. As per the Wall Street Journal, the global rating agency believes that India's real GDP growth will accelerate to 7.3% in 2010 from 6% YoY in 2009. This will largely be on the back of the deferred impact of the recent fiscal stimulus packages and higher savings rate in the economy. Having said that, S&P has maintained its cautious stance on the country's sovereign rating given its disappointment with the fiscal deficit situation (which will nearly double to 6% of GDP in FY09) and has warned of a further downgrade to 'junk' status. We wonder whether the rating agency's divergent views will help foreign investors form an opinion.

Media coverage on crude oil has abated ever since the commodity slipped below US$ 100 per barrel. But keen oil watchers would be paying attention. The OPEC ministers meet in Vienna on Sunday for their policy meeting. And the falling inventory levels in developed nations in the last few months have shown how OPEC's supply policies can shape which way crude will move in the immediate future. It may be noted that the cartel has embarked on a policy of lower production in the past meetings. The member countries have been complying (they have not always in the past).

The International Energy Agency has forecasted that non-OPEC countries will simply be unable to increase supply this year. That's even if there are no major hurricanes. So, supply cuts from OPEC cannot be compensated by others. The only way it will go easy on the oil cuts is if it realizes that a spike in crude prices will break the back of an already sputtering global economy.

The outlook for the Indian IT industry was considered to be hampered as the US government has recently increasingly taken to protectionist policies to benefit its own economy. Thus, to get some clarity on the issue, Nasscom (National Association of Software and Service Companies) representatives recently visited the US and Europe to discuss various matters with experts including representatives of the Congress, US headquartered companies, the US administration and customer companies.

It came as a welcome surprise that the Nasscom officials have said that the 'Buy American' clause illustrated by the US government is not likely to impact India's IT industry. Though the proposed amendment to H-1B visa legislation remains a cause of concern, Nasscom has said that it will be working with authorities in US to ensure that legitimate business users are not affected.

The Asian markets put up a strong performance during the week. However, the Chinese markets, which were last week's top performer, declined by 2.9% this week. India's benchmark index, the BSE-Sensex, gained a good 5.2%, second only to Japan whose markets increased by 5.5%. Hong Kong and Singapore followed suit, gaining 5.1% and 4.3% respectively. The Asian markets witnessed a positive week mainly on hopes of additional stimulus packages.

Source: Yahoo FinanceSource: Yahoo Finance

As for other global markets, the US indices were the top gainers this week with the Dow Jones Industrial Index recording a gain of 9%. It may be noted that the markets saw their best run since November. While there was no more major reason for the same, this run has been termed as a 'relief rally' following several months of selling.

 Weekend investing mantra
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring" - George Soros

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