The huge bubble that no one is talking about! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The huge bubble that no one is talking about! 

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In this issue:
» The step that could take gold to new levels
» MSME activities in India point to a slowdown
» US Fed does not want a QE3
» Infrastructure stocks lie low for the time being
» ...and more!


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00:00
 
A gentleman named Peter Thiel may not be all that famous in India. But an idea of his stature can be had from the fact that he gave Facebook, the extremely popular social networking site the angel investment it needed to launch. Besides, he is also credited with being the cofounder of PayPal, an e-commerce behemoth. Thus, Mr Thiel seems to have this unusual knack of making big, bold bets and turning them into huge success stories. It would be interesting to see what Mr Thiel is betting on these days. Well, if his recent interviews are anything to go by, he seems to be betting on the decline of the US college education system. Yes, it may be hard to believe but it is true. He has apparently established a program called as the Thiel Fellowship that will select 20 college students under the age of 20 and pay them US$ 100,000 each to drop out of college and embark on entrepreneurial careers!

The reason? He argues that the US is in a huge higher education bubble. It's extremely overpriced as per Thiel and just as big as the tech and housing bubbles of the recent past...but with potentially much bigger consequences. Extremely important to add that Mr Thiel is not alone in this diagnosis. He has been recently joined by none other than Bill Gross, one of the most successful bond fund managers in history. Gross has opined that US students can no longer assume that a four year degree will be the golden ticket to a good job in a global economy. The world cares little for their social networking skills and more about what their labour is worth on the global marketplace. Quite a correct assessment we should say if one goes by the current unemployment rate in the US and its decline as a manufacturing powerhouse.

Thus, while the US seems to be in a higher education bubble, is India in a similar situation too? May be not we believe. Thanks to the robust economic growth and a low base, we seem to be doing just fine. But there is certainly a great scope for improvement. Currently, we don't seem to be focusing enough on the pure science disciplines of science and math. Instead, there seems to be too much emphasis on commerce and discipline of liberal arts such as management. Thus, if as a society we want to keep increasing our productivity and standard of living, improving the quality of technical education is a must we believe. While investments are certainly pouring in, only time will tell whether they lead to the desired results.

Do you think there is an education bubble in India as well? Share your feedback with us or you can also comment on our Facebook page.

01:31  Chart of the day
 
Today's chart of the day highlights the sharp fall that has been witnessed in some of the key residential markets in the country in FY11. As shown, the National Capital Region was the worst hit as residences constructed witnessed a significant fall of 39% YoY. Cash flow issues, delayed approvals and price hikes seem to be the main reason behind the dismal performance. Pune seems to be the only silver lining in an otherwise dark cloud as incremental construction grew by 61% over the previous fiscal.

Source: LiveMint

01:59
 
In 2010, central banks went on a gold buying spree. They became a net buyer of gold for the first time after 21 years. Banks from Mexico, to Russia, all rushed to this safe haven. Now, could this year, see the return of gold buying? Well, we believe so, but this time major buyers are expected to be global commercial banks. Either way, banks like Citigroup and Bank of America are bigger than the GDP of some countries.

Commercial banks need to maintain certain capital adequacy ratios, as per the Basel Committee's banking regulations. They maintain a certain amount of less risky, common equity as a portion of their assets in order to absorb market shocks. Sovereign debt is also considered as a high quality, 'Tier 1' asset. Gold has been historically classified as a 'Tier 3' asset. But, with government's stocking up on 'safe' gold themselves, shouldn't gold also be given a status upgrade? There is now a lot of sentiment going around that gold should be upgraded to 'Tier 1' status. J.P. Morgan was one of the first banks to recognise this. Early this year, it announced that it would now be accepting gold as collateral. If the Basel committee does consider this upgrade, it would have a significant impact on gold. With increased demand from large banks, gold prices can only see a further ascent.

02:44
 
Stock prices of infrastructure companies have been battered hard over the last year or so. And it is because the underlying risks pertaining to the sector have magnified. Pick up any asset class amongst the infrastructure sector and you will see either policy risk or regulatory hurdles impacting the execution cycle. For instance, take the case of roads. Land acquisition problems have magnified over the last 15-18 months. Even power projects are facing fuel shortage due to inadequate coal linkages. This is because the policy on coal mining in the proposed "no go" area is under strict vigilance. Airport projects too are facing the heat due to changes in norms with respect to collection of airport development fees.

Overall, almost all asset classes in the infrastructure sector are facing hurdles. And it may be noted that most infrastructure firms have exposure to two or more of these asset classes. This further magnifies the problem of these companies. And going forward we do not expect the situation to improve either. Considering that government is preoccupied with issues relating to corruption and inflation, it would take some time before the focus shifts back to administrative functions. Currently, the policy framework is in a transition phase and thus it would take some time before we see any action in the infrastructure space.

03:27
 
That the US government cannot get any more callous about money printing is something every follower of economic data is well versed with. The past two rounds of money printing (QE1 and QE2) failed to facilitate the economic recovery in any way. On the contrary it flooded the world with unnecessary dollars and saddled the US with an unprecedented debt burden. Having said that, the US economy is still so fragile that a sharp up move in interest rates could paralyze its growth permanently. Hence we are not surprised with the US Fed's decision to keep interest rates near zero for the time being. By not resorting to any more QEs at least the Fed has shown some remorse about its money printing decisions. We only hope that the good sense prevails in terms of tightening its fiscal status and government expenditure. Data about the US economy has hardly had anything to cheer about for months. Slowing GDP numbers, poor production growth, declining auto sales, unemployment and dip in housing prices all point towards gloom. We believe that at least a resolve to tighten its monetary policy will bring back some credibility to the US government.

04:06
 
How well the micro, small and medium enterprises are performing (MSMEs) is a good indicator of where the economy is headed. In this regard, the scenario in India does not look too good. Many of these SMEs were looking to go in for capex but have now deferred their plans because the number of product enquiries has dropped. This has especially been the case for engineering and consumer goods segment. Slowdown in capex has been corroborated by reduction in the growth rate of new project additions, which are down 2% from a year ago to US$ 378 bn. Not surprisingly, factors which have contributed to this slowdown have been lower utilisation rates versus the previous peak, high interest rates, regulatory hurdles and political inertia due to the recent state elections. The importance of MSMEs cannot be undermined. They account for 90% of India's employment and over 10% of banking sector loans. They also contribute 45% to the manufacturing output of the country and 40% to exports. Thus, it is obvious that despite strong growth in the past couple of years, the Indian economy will have to brace itself for some headwinds going forward.

04:43
 
Meanwhile, indices in the Indian stock market have strengthened with each passing hour on the bourses today. The benchmark BSE Sensex was trading around 170 points higher at the time of writing. Heavyweights like RIL and ITC were seen driving most of the gains. While most Asian indices closed in the red today, Europe too has opened on a negative note.

04:55  Todays' investing mantra
"You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing." - Warren Buffett
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5 Responses to "The huge bubble that no one is talking about!"

Rchandrasekaran

Jul 5, 2011

Hello Sir,
When you look in to demand and supply Strategy for UG Courses, there are many and excess number of institutions with poor academic standards really producing Science and Tech.graduates with low standard of faculty knowledge which is for ahead of our original requirement NOs,and also these NOs just like that can not be accommodated by out side world because of their poor knowledge. Presently though we boast that our Nation produces lot of graduate youths, in reality very few are capable of meeting the required Standard of faculty knowledge.So in due time its not only Bubble in Graduate Education and also a big eruption in demanding job and consequently going to end in big calamity and a burst of extremism and collapse in the social order are progressing towards the future generation for sure by our sub standard policy makers.Wealthy atmosphere, Well Educated Youth,Non competitive Population growth may be a good ideology for future Harmony.

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Sachin

Jun 23, 2011

i dont really agress with this story. Consider this, out of millions of students .. picking up 20 every year...will not make US education system as bubble.. infact thats the only thing which has rised during this recession times... In india.. its a bubble... look the exbortinant prices charged by pre-school and school.. i completed my college in 2005 and the fees i paid seems to be peanuts compared to any school in india. So India will sloly and steadily grow highly costly schools and people will start having home school, alternate education, open board(already there) etc.

The more i see stories everywhere on Internet that India is growing, india doesnt have bubble.. india is fine.. we are the next leader.. i more it makes me laugh actually.. we are not ready to accept the fact that we are the top 10 dirtiest countries in the world... rank in top50 for political corruption.. 100 in terms of infrastructure.. unless we dont focus on these issues and keep blabbering about how good the growth is( which growth??), high inflation, high reall estate prices( mostly in the hands of wealthy) etc.. 1/3 of the population stuck where they were before 1993 liberalization.. lets dont blow our own trumptes.. and lets focus on basic issues( a single rain storm takes out Delhi,bangalore, mumabi :) :) :) :):)

So lets be a realisitic and lets not just keep blowing horns as in everything is cool..: ):)

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abhay Dixit

Jun 23, 2011

I think the bubble never existed (in terms of cost)in the sense it was never considered very good was not costly. However, the bubble does exist in terms of the volume. The poor quality engineering colleges and MBA schools is growing and many will close down

Like 

a.chakradharam

Jun 23, 2011

i am close witness to the bubble we are referring here.
children of my sisters are engineers with no job. there
are lot many like them working in BPOs for 2-3 thousands
salary. they are also in debt thanks to study loans. due
to money minded politicians permissions were granted for
setting up of engg colleges, where children with no
basic knowledge of maths are joining. i am worried about
their future because every body is looking for jobs
which are not coming by.

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SETH

Jun 23, 2011

Mr. Thiel could be right in flagging the issue of 'right education'. India today has a huge demand for Business Management education. I often wonder how a young person will be a Master of Business Administration if he has never done any business. It is like trying to learn driving a car from text books without ever sitting inside a car. Glamor of a MBA or BBA suffix attracts many not knowing if that will really get them the coveted life/ job.
WE NEED TO DE-COLLEGE OUR EDUCATION or REINVENT THE COURCES TAUGHT IN ORDER TO REMAIN RELEVENT TODAY.

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