Warren Buffett blames the crisis on...

May 4, 2009

In this issue:
» Buffett, Munger dispel many a doubts on the crisis
» Political uncertainty to rule roost
» Indian black money-holders in serious trouble
» American media cos. prefer India over China
» ...and more!

It is said that in economics, there are no free lunches. And where better to apply that aphorism than the recent spending spree of the US government. Warren Buffett too has made numerous grim warnings that efforts such as the Treasury's US$ 700 bn Troubled Asset Relief Program and the US$ 787 bn fiscal stimulus plan passed this year by Congress (US) will have to be paid for, one way or another. And with political leaders in the US showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency says Buffett. He is of the belief that inflation is sure to rear its ugly ahead in a big way in the near future. And as per Buffett, the biggest losers in a surge of inflation would include holders of bonds and other fixed-income assets.

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Speaking at his company Berkshire's shareholders' annual meet that was attended by around 35,000 people, Buffett along with his partner Charlie Munger also said that the most important lessons of the recent financial turmoil are that companies should borrow less and build a system that imposes severe disincentives for failure. The two also said most of America's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of protections built into the system. Buffett jokingly remarked that if the system were set up so that an executive would be shot if the company fails, then the company would definitely borrow less.

On being asked whom to lay the blame of the crisis, Buffett aptly replied - "I think that virtually everybody associated with the financial world contributed to it. Some of it stemmed from greed, some from stupidity, some from people saying the other guy was doing it."

On the US economy, he said, "The economy may have suffered a huge jolt, but when the patient gets going again, he'll be setting tremendous records. That patient is a terrific athlete."

Risk averseness towards equities seems to be on the wane, evident in the way stockmarkets across the world have behaved over the past few weeks. And today was no different. Markets across Asia closed with gains in a range of 2% to 6%. The Indian markets closed higher by over 6%, led by gains in stocks from the IT and banking sectors.

As reported on Bloomberg, gains in Asian stocks today were led by reports that the manufacturing sector in China expanded for the first time in three quarters. Also the news that regional policymakers (led by ASEAN or Association of Southeast Asian Nations) have pledged to start a US$ 120 bn foreign currency reserve pool seemed to have soothed investors' sentiment.

Mark Mobius, who helps manage US$ 20 bn in emerging market funds at Templeton Asset Management Ltd., believes that this step from the ASEAN (India is not a part of this group) is very positive for reviving investor confidence in the region. He says, "It's not so much the amounts of money being put in, but the concept of these countries getting together and cooperating."

The question uppermost on everyone's mind is whether the current rally (which has led to the BSE-Sensex surging by almost 40% since early March) will last or for that matter does the current rally herald signs of revival in the economy and the overall stockmarkets. The outcome of the general elections in India will be the key here. While the Indian economy despite the slowdown is still better off as compared to its developed peers, the country still needs to go ahead with vital reforms and privatisation if the strong growth trend has to continue.

With expectations of another coalition government, there are also worries that the policy making of the main parties (either the Congress or the BJP) will be influenced by the demands from small regional based parties. Therefore, an element of uncertainty remains. Whatever be the case, these are early times yet to brand the current rally as sustainable as the downturn continues to persist globally. Waiting for a few more quarters is probably in order before any definite conclusion can reached on this front.

Ultra-cheap is set to become even cheaper. As reported by Business Standard, mobile tariffs in India are set to fall by 25% this year due to increased competitiveness among existing and new players and infrastructure overcapacity. We wonder, with most call rates already costing within a range of 30 to 50 paise per minute, how much more headroom do the tariffs have to fall.

Source: Bharti, Equitymaster Research

While this will bring in cheers from consumers, some existing operators do not see these consistent reductions in tariffs healthy for the industry. For instance, as per Mr. Sanjeev Aga, the chief of Idea Cellular, "Indian companies are rolling our predatory prices without conducting proper studies, unlike in the US or developed countries. Price reductions coming in from desperate companies are anti-competition and these are not based on economic sense, and in the long run this would be anti-consumer and anti-industry."

We fully agree to Mr. Aga's words. Does India really need still lower tariffs, which are already the lowest in the world? Or should the priority be to make telecom services accessible to the rural population on a much widespread basis?

Last week, we had reported the World Steel Association's (WSA) demand forecast for steel for the current calendar year, whereby the steel body had indicated that the metal's demand is likely to grow by 2% in India and witness a negative growth in China in 2009. However, Mr. Lakshmi Mittal, the chief of world's largest steel firm ArcelorMittal and ironically, the current head of WSA begs to differ. He is of the belief that India's growth should stand at 5% in the current year.

He has also refuted WSA's claims of a negative growth in China, arguing that demand for the first quarter has already gone up 7.1% there, and with government undertaking huge stimulus programs there is very little reason for demand growth in the dragon nation to fall in the negative territory. Coming from someone like him, we indeed need to give it a serious thought.

Anyone who has a secret bank account in Germany is now in for some serious trouble. In a document filed with the Supreme Court, the Finance Ministry has disclosed that it has secured significant information on Indians with secret accounts from Germany and that income tax sleuths back here in India are now busy following it up. Indian black money, pegged at Rs 70 trillion (!!), is said to be stashed abroad in various tax havens. We recently spoke about how India ranks 5th for illicit financial outflows, and how detrimental that can be for the nation's progress. Now that the government has revealed that it has been aggressively working on cracking down black money parked in tax havens abroad and has made some progress on the same, it is surely good news.

The cliche goes that China is the place for manufacturing, India for services. The latest to realise this truth are US media companies. After years of effort in China, they seem to be fed up with censorship and government control over media. As per The New York Times, Time Warner, Viacom and CBS have either frozen their plans or shut shop entirely. Manufacturing and consumer goods companies- Nike, Coca Cola, General Motors- still love China, but that just reaffirms the cliche.

Most of them are warming up to India. In fact, the Motion Picture Association of America has recently opened an office in India for the first time. The reasons are not hard to find - government censorship is lesser and one can reach to a larger audience. Hence, no wonder that Time Warner now has Indian channels like WB and REAL while Viacom's Colors has been a runaway success. We believe that certain features of the Indian society like democracy, free speech, and an emphasis on education equip us with certain competitive advantages. The IT revolution is a testimony to the fact. The question is - will more sectors make use of these advantages?

 Today's investing mantra
"There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do." - Warren Buffett

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3 Responses to "Warren Buffett blames the crisis on..."


May 5, 2009



sameer surkund

May 5, 2009

extremely informativeupdates us on news not generally available on other media.Thank you for this, keep it coming.



May 4, 2009

If India can get back the black money stashed abroad by it's own citizens,there would be no need to run after FDI

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