We're in the Middle of a Crash - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

We're in the Middle of a Crash 

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In this issue:
» "We're in the middle of a crash", says Taleb
» The Economic Survey calls for a pro reform budget
» "Go for stocks, not bonds", says David Dreman
» IT industry expects a turnaround
» ...and more!!

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There were hopes that a recovery, however gradual was underway in the US after the worst financial crisis since the Great Depression crippled the country. It appears that this bubble of optimism has burst and the culprit for the same has been the jobs report. The data released has painted a very sorry picture indeed with the US economy losing 467,000 more jobs in June and the unemployment rate edging up to 9.5%. What's more, these dismal numbers do not bode well for the Obama administration which has injected considerable liquidity into the system in the form of stimulus packages to bolster the sagging US economy. It will now be pressurised to show the results expected from these stimulus measures. Given the sheer scale of the crisis, a quicker recovery was never really on the cards. Rising unemployment means that the US will have to confront the hard reality that the spending binge that was previously second nature to Americans is not likely to be seen anytime soon. The Obama administration will be keeping its fingers crossed hoping that the stimulus packages start making some sort of an impact soon.

One person who isn't keeping his fingers crossed is Nassim Taleb, author of "The Black Swan". "You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that's breaking. We're in the middle of a crash. So if I'm going to forecast something, it is that it's going to get worse, not better", says Taleb as per CNBC.

While there is considerable debate on if and when the US and the world economy will turn around, the road map for investors in equities is clearer. As Warren Buffett says, "The best year I ever had in my life (in investing) was in a recession. And I've had other good years in recessions. It's a big mistake to say business is bad, therefore I shouldn't buy stocks."

India's Economic Survey for the year 2008-09 was tabled in the parliament yesterday. As usual, it provided an in depth analysis of the Indian economic scenario in the fiscal gone by. But first things first. The survey has to be congratulated for its prescience. The previous survey i.e. for the fiscal FY08 had argued that although India has been put firmly on a higher growth path, it will have to watch out for challenges that have reared their heads on account of increased globalisation of the world economy. Little did the people behind the survey know that their thesis would be tested and tested severely at that within few months itself. The international crisis pulled down the country's GDP in FY09 to 6.7%, thus forcing it to deviate from the 8.8% average growth that was witnessed in the previous five years.

However, even the growth of 6.7% required some difficult decisions by the policymakers, the repercussions of which are going to be felt at least in the near term. As far as the long term growth is concerned, the survey minced no words in saying that if India were to achieve high growth rate consistently, it will have to undertake some drastic reforms. And this is where we, along with a lot of other experts believe that the survey was different from its earlier avatars. As one newspaper aptly put it, "With the Left no longer a factor in the stability of the UPA government at the Centre, the pre Budget Economic Survey for 2009 championed reforms with a vehemence and zeal not seen in recent editions of this annual document." We couldn't have agreed more.
We expect the Finance Minister to pay attention to the Economic Survey's call for reforms, but we'll find out for sure on Monday.

02:46  Chart of the day
The BSE-Sensex, with a decline of 16.6%, has not really done so bad if one were to compare its returns with other asset classes over the last 16 months i.e., since Union Budget 2008-09. Oil has been the worst performer (down 32.8%) during this period. Gold has proven its safe haven status by being down just around 4.6% during this period.
EM-Emerging markets, DM-Developed markets;
Source: Yahoo Finance, CNNfn, Kitco, Trend

Speaking of asset classes, the contrarian investor and author David Dreman says he's avoiding bonds and instead sticking to stocks and real estate. As reported by Reuters, he says, "I think we're going to have some of the worst inflation, with all the printing presses around the world running 24/7. Probably the two worst investments over the past two, three years have been stocks and real estate. They could be the best investments two or three years out."

Of course, he's not the only one worried about the effect of inflation on investments. Warren Buffett has said the likely consequence of government bailouts is "an onslaught of inflation". He also believes that the second best defense against inflation is investment in good businesses (the best being investment on furthering one's talents).

After being plagued by budget-cuts from clients, pricing pressures and overcapacity; the Indian IT majors are finally seeing a glimmer of hope about the revival of the IT industry. This belief is based on the fact that there have been no new major catastrophes like that of Lehman and GM. There is also a trickle of positive economic data and growing demand for IT services from within India.

As per a leading business daily, the IT industry is maintaining a conservative outlook towards revenue prospects and is not over-enthusiastic about the new deals, as pricing pressures and lower utilisation levels continue to drag. The recruitment scenario continues to be bad. Industry veterans are expecting a U-shaped recovery somewhere by the year end.

It may be noted that the IT industry has played a key role in compensating for India's high trade deficit and keeping the overall current account deficit in check. It continued to do so with a growth of 28% in 9mFY09 as per the latest Economic Survey.

The BSE-Sensex ended nearly 2% higher today as the markets cheered the Railway Budget. Auto, power and engineering led the pack of gainers. While the Asian indices ended the day a mixed bag, the European indices are trading weak currently.

04:51  Today's investing mantra
"Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return." - Warren Buffett
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2 Responses to "We're in the Middle of a Crash"

nandakumar pachpute

Jul 4, 2009

I feel it is corest that the american economi is middle of crash as first we see the hesd of iceburg started with housing defolts and then we saw the body of iceburg with financial sector crsh after this grwing unemployment;growing inflation;and sracking industry like GM then there will be bottom of iceburg.


CMA.G.Krishnamurthy.Bsc, FICWA, CAIIB, DHA

Jul 3, 2009

I strongly endorse the view.The longer you wait with patience and wisdom in your head, the longgr shall be your reards for the waiting. Always go by the intution of your head and not intution.

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