Bailouts will spur global depression - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Bailouts will spur global depression 

A  A  A

In this issue:
» AIG's infamous bonus payments
» CPI(M)'s new election agenda
» Indian CEOs are buoyant
» Words of wisdom from Lynch, Malkiel and Grantham
» ...and more!

Go to Jim Rogers for a sound bite and you would not be disappointed. The commodities guru who prefers calling spade a spade has once again made a verbal mince meat of the current economic policies of the US government. He believes that the policymakers at the world's most powerful nation are enhancing the possibilities of a global depression by resorting to taking capital from competent people and giving them to incompetent people. He is indeed referring to bailout of troubled financial giants like AIG, who are being provided with billions of dollars of taxpayers' money, which could have well been utilized elsewhere. The US, he believes is repeating the mistakes of Japan where a similar effort of bailing out inefficient banks led to what is now famously known as the 'lost decade' for the world's second biggest economy. Rogers also seemed concerned about massive inflation down the road, a natural outcome of the reckless money printing that is underway currently at most of the world's major economies.

-------------------------- Don't Miss --------------------------
Tell Your Friends about The 5 Minute Wrapup!
And Get This Guide Free - The most profitable approach to stock picking
Click here


Troubled insurer AIG's recent round of bonus payments to the tune to US$ 165 m to its employees has outraged the US and the White House. President Barack Obama, in this regard, ordered the Treasury Department to "pursue every single legal avenue to block these bonuses." However, the White House and the Treasury officials have also come under fire for not acting earlier. Readers would do well to recall the fact that the US government had infused US$ 170 bn into the battered insurance conglomerate, and now owns nearly 80% of the company. Already, retention payments made to AIG employees for 2008 and 2009 totaling to US$ 1 bn are under the scanner especially those which were doled out to the financial products unit which sowed the seeds of the insurance giant's collapse. How the US government manages to block these recent bonuses remains to be seen given that the payments have already been made. As reported in the International Herald Tribune (IHT), one option likely to be pursued by the Treasury to recapture the bonus money is to write new requirements into a US$ 30 bn installment of government aid scheduled to go soon to AIG. Whatever the case, AIG sure has left a bitter taste in the mouths of taxpayers.

Whether or not they have the wherewithal to form a government, the consortium of the CPI(M) and smaller leftist parties, or the third front as they call themselves, have a clear agenda. To oppose reforms and economic development that is. After years of blocking economic reforms, in 2008 the CPI(M) withdrew its support for the government to protest against a civilian nuclear deal with the United States. The deal which ultimately went through gives India access to nuclear fuel and technology in international markets. The third front's new election agenda has now proposed a complete halt to privatisation of profitable state owned entities and a ban on foreign investment in the retail sector. While the outcome of the upcoming elections is of relative consequence, what needs to be understood by the contesting parties is that opposition to reforms is something that the economy can least afford. At least, during times as these.

With shrinking economies and reducing incomes being the order of the day, it is only obvious that inflow of remittances would also take a hit. As per a World Bank report, remittances from the Middle East are all set to decline by 9% during 2009, as compared to a handsome rise of 38% during 2008. India, being the largest beneficiary in the world, will no doubt bear the brunt. India's central bank however has a different view. It is not seeing any perceptible slowdown in inward remittances by Indians settled abroad. Moreover, the favorable mix of higher interest rates and a weaker rupee is leading to higher flows into India, thus offsetting whatever little impact loss of jobs or lower salaries for Indian migrants is having on the total capital flows into India. Also called as private transfers, capital inflows of such kind have played a significant role in erasing a substantial portion of India's trade deficit for quite some years now. Infact, they have accounted for as much as 3% of India's GDP since 1999-2000. Little wonder, the RBI attaches so much importance to any news flow that has to do with remittances.

The global economic landscape may look very bleak indeed at the moment, but Indian CEOs are not to be deterred. This was amply reflected in the 12th annual global CEO survey conducted by PriceWaterhouseCoopers. As per the survey, which was published in the Times of India, only 50% of the respondents in India said they were likely to be affected by the credit crisis, as compared to 70% globally. The survey further revealed that India recorded the highest CEO confidence levels amongst the emerging economies, with 70% expressing confidence about both short term and long term revenue growth, compared to just 21% and 34% globally. There is certainly something positive in this given that many businesses across the globe are not too enthused about the economic conditions of their respective countries.

Peter Lynch, the legendary stock picker, thinks that stock bargains are plentiful now. "You feel like a mosquito in a nudist colony," he writes in an article in The Washington Post. He further adds, "We've had 11 recessions since World War II and we've had a perfect score - 11 recoveries."

He advises investors to buy stocks from sectors they understand - "If you're in an industry, you can probably find some companies in your field. If you're in the insurance industry, you're going to see things get better before I see them. All you need is a few good stocks a decade. Why don't you use your own industry knowledge?"

Here's another take on investing, and this comes from Burton Malkiel, author of the investing classic - A Random Walk Down Wall Street - who is sticking to his long-held belief in investing in index funds. While believing that what is going on now is not anything terribly unusual, he writes in The Washington Post column, "There have been many, many periods in the past where the stock market has been absolutely terrible for a decade or more. Unless you think that all of the sudden, the whole US economy is going to go into reverse and never going to return, I think the stock market will prove its worth again in the future." But then, he adds a caveat that investing in stocks in the current times is good only if "you've got a 10- or 20-year horizon."

Here's more positive dope on stocks from the man known by his colleagues as a 'perma-bear' for his bearish views on stock markets. Grantham, who called the tech bubble and the credit crisis months before these surfaced, now believes that it is a wonderful time to put money back into the market. "If you don't buy now, you may miss some big gains early in the recovery," he writes in his latest letter to his firm's clients, while adding, "Remember that you will never catch the low." Also, as a matter of prudence, Grantham has advised investors to make the shift from cash to stocks in a few large steps instead of all at once.

"Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before," he thus concludes his letter.

As per a leading business daily, the Centre for Monitoring Indian Economy (CMIE) has projected a slow but gradual uptrend in India's economic growth. The economic research body, which has been traditionally optimistic about India's prospects, expects the GDP growth rate to climb from around 6% YoY in 1HFY10 to about 8% YoY in 2HFY10. Although the bank credit growth and IIP data suggest otherwise, the CMIE sees early signs of recovery in the data that is available for January and February 2009. In fact it also believes that while the global economy may be in a deeper crisis, the domestic economy is likely to see a smarter and quicker recovery in the next fiscal. Amen!

The Indian markets closed lower by 1% today, led by losses in the BSE Bankex and BSE IT (down 2% each) indices. While the Asian markets closed mixed, key European indices are also witnessing a mixed trend currently. As reported on Bloomberg, crude oil prices fell by 2% to US$ 46.5 a barrel, as US stockpiles gained last week because of lower demand in the world's largest crude consumer.

04:56  Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." - Benjamin Graham
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?

Equitymaster requests your view! Post a comment on "Bailouts will spur global depression". Click here!



Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407