"Economic recovery will be very ugly" - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

"Economic recovery will be very ugly" 

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In this issue:
» Is the Asian recovery for real?
» The Ambani brothers continue to spat
» More power deficit in store
» Cost of bailing out the US could soar
» ...and more!!

The renowned economist Nouriel Roubini has more grim news in store. According to him, the economic recovery is going to be 'very ugly' and he foresees a tepid 1% growth in the US economy in the next few years with the unemployment rate soaring to 11% next year in the US. Mirroring his views, investment guru Marc Faber does not have a very enticing view on the US economy as well.

He believes that inflation will soar in the US economy few years down the line. He believes that the deficit, which has already ballooned, will widen further because of the recession, which will compel the government to monetize the same. This will lead to a surge in the government debt. So, when the US economy recovers, there will be reluctance to increase interest rates since by then the US government debt will be massive. But keeping interest rates low will create other set of problems namely asset bubbles. So the government is basically caught in a vicious trap.

While these problems may be in the US, the importance of the same cannot be ignored given the increased level of globalization and the dependence of many economies on the US. Infact, the current financial crisis has amply demonstrated the same. Therefore, the current stimulus measures are short term in nature in that they will help in bolstering sagging economies across the world. But some years down the line, we believe that the threat of inflation looms large.

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00:55  Chart of the day
Today's chart of the day shows the ratio of market capitalisation to GDP, which Warren Buffet uses as an important metric to judge whether a country's stock prices are cheap or expensive in general. When we compare the ratio of India, China and Brazil with the US, what appears stark is that the Indian stockmarket (at 2 times GDP), and not the one in China, was in a bubble territory at the end of 2007. At the current levels still, India remains the most expensive within this group on this ratio. The Chinese markets, however, are the cheapest!

Data Source: World Federation of Exchanges, IMF

Nobody seems to be too sure about a recovery unfolding in the global economy. For instance, in Asia, hopes of a recovery have once again started doing the rounds now that the Chinese economy has reported robust growth for the second quarter. However, no such positive signals seem to be emitting from the developed world which continues to be mired in a recession. And while there seems to be optimism with respect to the Asian economies, outlook for the global economy remains bleak.

The World Bank has warned that the global economy will fall into a 'deflationary spiral' unless urgent action is taken to reduce high levels of excess capacity in the industry. Stephen Roach of Morgan Stanley is not too optimistic about the future either. Along with the developed world, Roach is not gung-ho about the Asian economies too. He believes that the financial crisis is not yet over and there are many more write-offs to come. What needs to be noted is that while the recession is not getting worse, which is indeed a positive sign, recovery is not going to happen anytime soon either. Thus, we believe that investors would do well to keep a watch on those who are unabashedly buoyant about the global economic recovery process and take a good hard look at the reasons underlying the same.

The government recently approached the apex court to become a party in the legal tussle between the two Ambani brothers over KG basin gas . This did not go down well with the junior Ambani. After all, the Bombay High Court had ruled in his favour. In fact, Anil Ambani wrote to the Prime Minister saying that the petroleum ministry is blatantly favouring Mukesh Ambani.

It may be noted that as per the memorandum of understanding signed between the brothers in 2005, Mukesh's RIL has to supply 28 million standard cubic metres per day (mmscmd) of gas to Anil's RNRL at US $2.34 per million British thermal unit (mmBtu). RIL would like the price to be US$ 4.2 per mmBtu. The government's position is that minerals found in India are national property and private deals cannot overrule government utilization policy.

The question of who is right will eventually be decided by the Supreme Court. We find it disturbing that there is so much confusion over the contractual rights of the owner (the government), the operator (RIL) and the user (RNRL and others). This sends out a wrong signal to prospective investors into the sector, whom India is desperately trying to woo through the NELP auctions.

India has faced a lot of power problems in the past, and from the way things are going currently, may continue to do so in the future too. As per a Mint report, minister of state for oil Bharatsinh Solanki recently expressed how India will fail to meet its power generation capacity addition goal yet again this year, causing India's peak power deficit to widen to 12.6% in FY10. Yes, the power cuts and load shedding will continue to cause harm to the country's productivity. The reason? For one, coal which is used in thermal power plants as a fuel continues to be in short supply. Second, delays in supply of power generation equipment also continue to restrict capacity addition. All this has led to a situation where India is likely to add only 70% of an estimated target of 14,500 MW power capacity addition in FY10. Compare this to China, which is adding capacity at the rate of about 100,000 MW a year. India has not been able to add even 10,000 MW in any single year. Another example of how core infrastructure problems continue to prevent our country from achieving its full potential.

India's GDP is in the vicinity of US$ 1 trillion and that of the US in the vicinity of US$ 14 trillion. The reason we gave you this stats was to put into perspective another number. And that number concerns the total cost of the bailout of the US financial system. Many of you must be having the US$ 700 bn in TARP (Troubled Asset Relief Program) money in mind give and take a few billion dollars. But not Neil Barofsky, the special inspector general for the TARP program, who has come up with the largest figure yet. He believes that the total federal government support to the financial system could reach a whopping US$ 23 trillion. This number, as per New York Times, would amount to US$ 77,000 for every person in the US and of course, is US$ 10 trillion more than the US GDP.

However, if reality would have been anything close to that, don't you think the global financial markets would have tanked by now? Indeed. But the fact remains that the number as per Mr. Barofsky's own admission is vastly overrated. It assumes that every bank in the US fails and also assumes that all of the assets held by money market mutual funds, including Treasury Bills, turn out to be worthless. What then is the actual number? While Mr. Barofsky does not have an answer to it, as per estimates, the US has spent less than US$ 2 trillion so far. The global financial markets can thus breathe easy for the time being. The US$ 23 trillion number was blurted out just to have a proper context.

Talk about 'Women Empowerment' and Shikha Sharma, the CEO and MD of Axis Bank, will certainly be one of the women that comes to mind. Besides being at the helm of one of the topmost private banks in India, she has also now joined a forum called Tie Stree Shakti (TSS), a social network for first-time women entrepreneurs. The aim of this organization is to encourage women at even the grassroots level to start their own ventures. And why not? Women despite various responsibilities at home are capable of being strong entrepreneurs and what is more savvy investors as well. Especially when it comes to the latter, they can make sound investing decisions if given the access to a minefield of information. And the new series that we have started titled Women's Weekly is a step in that direction. This series will be a conduit through which we will provide our views on how should women go about investing for a better financial future. So, why not take control of your finances right now?

The Indian markets languished in the red today with the BSE-Sensex trading lower by 1% at the time of writing. Losses were seen in the banking and software indices. On the global front, while key Asian indices closed in mixed, European indices are also witnessing a mixed trend currently.

04:56  Today's investing mantra
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks" - Benjamin Graham
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6 Responses to ""Economic recovery will be very ugly""


Jul 25, 2009

I have been a reader of your columns from as far back as the The Times of India Monday columns days. then,and as today, I must admit that it has always been the references of the experts of the day comments. nowhere could the famous Mulraj could ever be found. what is Mulraj afraid of to comment.



Jul 22, 2009

I have been reading these short bursts of information as regularly as I can and find them very valuable because they throw new insights that are not not common and rarely advocated elsewhere. Another best practice that is very useful for the reader is the classification of each item. Keep it up & thanks.


Sheetal Bajaj

Jul 21, 2009

Instvestment Guru on the one hand is agreeing that India is expensive than china but at the same on CNBC he had accepted now investor across the world should prefer India over china.why this contradiction. Otherwise the article is very eudcative & eye opening.



Jul 21, 2009

good one and informative,



Jul 21, 2009

Recording the Charts of the day Warren Buffets says that GDP to market cap is above 1.2 is alarming and India is still in this number. Besides China depends on Exports and India exports relatively less. Don't you think you should explain to the readers than threating the readers repeatedly that India is expensive!


SundaraVaradan S

Jul 21, 2009

Very Convincing! I was really surprised to see a high Quality report. (I am skeptic; but, positive. I am investing over 35 years in India!).
Wish, you give more such good quality Reports and continuously improve on it!
All the best.

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