Even gold can't save you from what's coming - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Even gold can't save you from what's coming 

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In this issue:
» The 'peak oil' theory could well be dead
» Nomura sees a poor FY14 for India's GDP
» Is this the poor man's Swiss bank account?
» BRICS come together to launch infrastructure fund
» ....and more!


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00:00
 
There are only a few big picture guys we admire and love listening to. And Marc Faber aka Dr Doom is certainly one of them. Thus, every time he discusses something significant, we like to be all ears. So, what's going through the mind of Dr Doom these days? Well, true to his moniker, he is certainly not upbeat about the goings on in the global economy. In fact, in a recent interview he seems to have outdone even himself in terms of bearishness.

Mr Faber is of the view all that we are doing is creating bubbles, bubbles and more bubbles. And when this will come to an end, we will have a systemic crisis so big that it will be difficult to hide even in gold. Sounds pretty scary, isn't it? If you listen to the man's logic, you walk away convinced that things are certainly as scary as he is making it out to be.

He opines that printing money is nothing but an act of creating bogus money. Thus, as with bogus money, the money printed by US Fed and other central bankers does not spread evenly in the economy. It first reaches those officials and executives that are closest to this newly created money. And in this case it would be finance sector guys like brokers, insurance companies, fund managers etc.

Flush with funds, these people then go about scooping up assets like stocks and other commodities on the cheap. This is perhaps the reason why stocks are touching record highs and inflation is getting out of hand even without the economy improving. And what happens to the remaining majority of the population i.e. the people that are not first in line to receive the funds from central banks? Well, by the time the money reaches them, prices of assets and other goods and services are already up, forcing them to dip into their savings or take up more debt.

The rich on the other hand, the ones that get their hands on the money the earliest, keep playing the game of passing the parcel. They keep moving in and out of assets and in the process, creating bubbles that don't really rest on strong fundamentals.

It's obvious, isn't it? If one is earning a pretty handsome return on one's capital by selling it to the greater fool, why would someone bother setting up a plant and employ people. Besides, with interest rates at record lows, it makes more sense to invest in capital than hire labour. All of this further exacerbates problems in the economy, culminating into a systemic crisis Mr Faber is so worried about.

Thus, if there are bubbles in every asset class imaginable, how can even gold escape the painful result of these bubbles getting burst. Our only hope then are those assets and currencies that are the safest and are capable of getting away with minimum damage.

Do you think Marc Faber is right in his assessment of there being too many asset bubbles? Please share your comments or post them on our Facebook page / Google+ page

01:37  Chart of the day
 
Defence spending. It's quite a controversial issue as per us. Those in support say that high level of defence spending stimulates the economy and thus raises its GDP. Those against it argue that resources spend towards defence are indeed a waste and could have been better utilised in other productive areas like infrastructure. If today's chart of the day is any indication, the supporters seem to be clearly having their way. For it points out how the US economy is head and shoulders above the rest when it comes to defence spending. That said, China is in no mood to relent either given the growth in its defence spending in recent years. The irony is that emerging countries like India that have more pressing needs, is also forced to shell out a lot of money towards defence otherwise its risks being bullied by larger powers.

Data Source: Rediff.com


02:15
 
Oil is the basic fuel that runs the engine of any economy. Hence, the supply dynamics of oil have been an important concern. As such, peak oil has been one of the most critical theories in economics. The theory states that oil, a non-renewable resource, would at some point reach its peak production. After that, oil production would enter a phase of terminal decline as supplies plunge. The demand-supply mismatch would send oil prices rocketing. This, in turn, would send the world economy in a downward spiral.

We came across a very interesting article in Business Insider. It states that a growing number of experts have started debunking the peak oil theory. As per them, oil demand is set to decline. How? The answer is the emergence of natural gas as an alternative fuel to oil.

Does this mean oil prices are set to decline over the long term? On the face of it, it does seem that there could be some relief in oil prices over the long term. At least, we may not see substantial spurts in oil prices on account of supply-shortage. If this really happens, it will relieve India from the burden of expensive imports of crude oil. But it would be a bit too early to celebrate.

02:55
 
It is well known by now that India's GDP slowed down considerably in FY13. Now, estimates have started pouring in on how the economy is likely to perform in the coming fiscal. Nomura does not expect too much of a recovery in FY14. Accordingly, it has pegged GDP growth at around 5.6% for the fiscal. The subdued forecast has largely been attributed to non-agricultural growth not picking up. Indeed, monthly data for industrial production so far has been quite volatile with no clear trend emerging.

On top of that, auto sales have been quite tepid with February seeing considerable fall in auto volumes. Further, weakness in the global economic environment remains non conducive for growth in India. Not to mention the fact that government finances are already stretched. As a result of which there is not much headroom for fiscal stimulus. Having said that, we believe that although there are still near term headwinds for the country, the long term growth story still has potential.

03:25
 
The geographically and culturally diverse BRICS nations have finally decided to unite. These nations would establish a new development bank to finance infrastructure. This proposal was ratified at a summit yesterday. A US$ 100 bn Contingency Reserve will also be created. This will help tackle any financial crisis in emerging economies. A Business Council was also arranged in order to encourage investment, expand business cooperation and trade among member countries.

Developing nations, India being a prime example, are facing challenges in terms of infra development. There are insufficient avenues for long term financing and foreign direct investment. Creating long term capital stock is difficult. Such patient investment is hard to come by. BRICS nations require over US$ 4.5 trillion over the next 5 years for infra needs. If these nations work together, they can surely become a huge force to reckon with in the years to come. Well, we really hope that this arrangement goes as per plan. And not the way of the European Union.

03:56
 
Gold bugs have had a tough time so far this year. Gold has lost 5% of its value in rupee terms year to date. Hence, citing its inflation hedging properties or calling it a safe haven is proving to be difficult. But that is only for those who choose to have a myopic view of things. Anybody taking a closer look at the state of affairs in the US and Europe will be convinced that gold's dream run is far from over. Neither the economic vulnerability nor money printing in the West is nearing its end. Hence abandoning gold as a safe haven asset is one of the riskiest proposition in current times. If nothing else, at least the recent incident of Cyprus bailout should convince investors of the same. Bank depositors in Cyprus are on the verge of losing their uninsured deposits. If such a scenario is to be replicated in few other parts of the world, one can only imagine the impact that it will have on gold prices. As investors lose faith in governments, banks and currency value, it is only the yellow metal that they can rely on.

An article in Firstpost, intelligently calls gold 'the poor man's Swiss Bank account'. It argues that most middle class Indians cannot afford to park money abroad. However, at least gold hedges the domestic political and economic risks to an extent, besides inflation. We believe that while speculating on gold prices can be very risky, insuring one's portfolio with a little bit of gold is mandatory in current times.

04:45
 
Meanwhile, indices in the Indian stock markets are trading lacklustre currently with the Sensex lower by around 50 points at the time of writing. Auto and realty counters were seen witnessing the maximum selling pressure. Other Asian indices also closed mostly in the red today with Europe too opening in the red.

04:55  Today's investing mantra
"The successful investor is usually an individual who is inherently interested in business problems." - Philip Fisher
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4 Responses to "Even gold can't save you from what's coming"

DC Gupta

Mar 30, 2013

Absolutely. Marc Faber is right in his assessment of there being too many asset bubbles. The bogus money is finding its way to stocks markets in countries like ours . Investments (flow of funds) despite prevailing economic and political uncertainty and widening current account deficit is imminent prelude to asset bubble in making with scary consequences.

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ASHIT KOTHI

Mar 29, 2013

What Marc Fabber is worried about is Bubbles getting burst. But then Diffusion of Bubble also will bring pain for a long time. Everyone is critising, but then talk about alternative path / solutions and start debate on the same and build people's support for it and force the system to listen and act accordingly.

There is no point in saying - 'SEE I PREDICTED THIS' OR CHEST THUMPING - ' DIDN'T I WARN ALL'.

THERE ARE ENOUGH OF TOOLS AVAILBALE TO DO THIS. USE MARKETING GURU'S EXPERTISE IF NEEDED TO BUILD SUPPORT / CONSENSUS FOR THE RIGHT PATH OR THE ALTERNATE PATH.

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Nathan

Mar 28, 2013

It is really shocking discovery,For economical stability the labor should get more % of money than others ,those who are in white collar job.Thanks.

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ALOK KOTHARI

Mar 28, 2013

What Marc Fabber (Dr Doom ) does not understand that the bubbles will never end. Capital always flows towards the asset which relatively gives the best investment return.so we have to spot that asset class before any one else does.as long as FEAR and GREED are there we will always have some or other bubble and mind it all bubbles will not burst at the same time.all assets may go down at the same time only for a short period. good assets will also go down when people sell their good assets to make up losses on the bad assets only in the short run but then again the rule that capital moves to the relatively best return asset class takes over in the long term. one needs to be only patient and not panic when all assets are going down.

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