Another danger lurking around the corner

May 25, 2009

In this issue:
» Geithner puts the blame on borrowers, not regulators
» Surging stocks dent gold demand
» Oil to touch US$ 200/barrel in five years
» Hopes from India's new FM
» ...and more!

Global financial system has once come to the point of collapse, few banks have gone bust, slowdown has hurt the real economy and few large financial institutions deemed 'too big to fail' have been recapitalised. Even after this flurry of events, if a recent interview is to be believed, US Treasury Secretary Timothy Geithner has perhaps still not got a hang of what really ailed the global or the US financial markets in particular.

What else could explain his putting the blame of the crisis on over borrowing of the US consumers when the fact remains that new, dangerous forms of lending were allowed to proliferate unchecked, with little or no regulatory oversight. Thus, if what Geithner is saying is indeed true then we have reasons to be worried as failure to pin point the problem area could lead to the menace going unchecked and posing a threat in the future as well. We hope the US Treasury Secretary's statement is just meant to not show his fraternity in poor light rather than a show of ignorance.

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The man who has had to deal with this issue since he took charge at his office, now talks about the reality...of unpredictability. We're talking about the US Federal Reserve chief Ben Bernanke, who in a recent speech at a US law college talked about how one can deal with unpredictability. Bernanke believes that predicting the economy is even more difficult than forecasting the weather, "...because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make."

So, what's his advice for dealing with unpredictability? "Stay optimistic...and be creative and open-minded," he says. "Things usually have a way of working out."

Source: Trend
As an equity investor, you might want to pay heed to Bernanke's advice given the unpredictability you have seen over the past few months. Staying optimistic with the winners (quality companies brought at cheap valuations) and being open-minded with the losers (cutting losses of investments that later turned out to be mistakes) is what will differentiate between a solid and an average portfolio in the long run.

Surging stocks and high prices have dented gold demand in India. So much so that, as per data from the Bombay Bullion Association, India has only imported around 8 to 10 tonnes of gold this month as compared to the imports of 29 tonnes in May 2008. Also, as per the World Gold Council, India's jewellery demand during the January-March quarter was the lowest in 20 years at 34.7 tonnes, while retail investment demand turned negative for the first time, falling by 17 tonnes.

Given India's better situation than other world economies, investors do not seem to be in a hurry to go in for gold investments. But that has not meant that gold prices have fallen off the cliff. In fact, since the first week of March when stockmarkets across the world have surged, gold has also gained around 4%. This is against the common logic that when stock rise on the back of improving economic scenario, gold prices fall as investors take out money from the yellow metal and invest in stocks.

Source: EIA,

However, the truth is that gold has held steady during this period as while stockmarkets have moved up on the back of easy liquidity, investors have continued to be bearish about the state of the global economy given that things have not really improved on the ground. The developed world continues to see tremendous pressure on GDP growth, the emerging markets have their problems on the exports front and unemployment is gaining ground everywhere. In short, the macro picture remains hazy and this has led to gold maintain its levels.

As for the future, we believe that given the shock investors have received over the last year, there will be a shift away from capital appreciation towards wealth preservation. This will define gold's movement over the next 5-10 years.

Moving on from gold, let's talky about oil. Although, many markets rose to their all time highs in the preceding boom, the spike in crude oil prices was among the most spectacular. The commodity then fell nearly 75% from its high of US$ 147 a barrel to US$ 37. However, it has now staged a comeback to US$ 62 (see above chart).

Oil observers had identified the main cause for the earlier spike as a 'demand shock' from countries like China and India. They now believe that it is set to make a comeback. As per Daniel Yergin, a Pulitzer award winning oil commentator, "As the economy picks up, spare capacity will start to erode, and the oil market could tighten again in the first half of the next decade. The result could be another adverse shock to the US economy and global energy security."

T. Boone Pickens, the billionaire oil investor adds, "You're going to be back to $75 oil by the end of the year - and $200 per barrel within five years." It may be noted that Warren Buffett endorses Pickens' view although he has not made a specific prediction of this kind. Interestingly, Charlie Munger, his partner, believes that people will adapt to such prices.

Expectations from Mr. Pranab Mukherjee, India's new Finance Minister (FM), seems to be sky high. A quarter of a century after he presented his last budget as a full-time FM under the Indira Gandhi government, he is now once again tasked to steer the economy through choppy waters. His success in doing so will go a long way in determining India's ascent to the higher echelons of the global economic order over the next five years.

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Britain may be on the brink of a 'double recession', if professor of economics at Yale University Robert Shiller is to be believed. Mr. Shiller, known for his prescient judgment of the bursting of the 2000 tech bubble feels that the apparent upturn could soon go into reverse. And if that were to happen, it would be nothing new as it would just be a repeat of economic patterns in the 1930s and the 1980s. During both those periods, recovery was so fragile that the country plunged into another slowdown as soon as it emerged from the last.

Stocks in India closed marginally higher today, as the BSE-Sensex rose by 0.2%. However, stocks from the mid and small-cap segments surged as their respective indices on the BSE closed up by 3% and 5%. Among other key Asian markets, China and Japan also clocked gains in today's trade. Stocks in Europe have opened mixed today.

 Today's investing mantra
"If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantage, conventional diversification makes no sense for you." - Warren Buffett

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1 Responses to "Another danger lurking around the corner"


May 26, 2009

I do not see an another danger lurking around the corner, atleast in India. We are standing on our feet with head on the shoulder. An Economist as an A dministrator is a good sign for the country. God bless him(Mr.Manmohan Singhji)﷯

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