Trillion dollar meltdown and more
(Jul 28, 2008)
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In this issue:
» Power crisis in Maharashtra
» Easing crude worries
» RBI's monetary policy meeting tomorrow
» Bill Gross' trillion dollar warning
» ...and more!
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"Nearly US$ 1 trillion (approx Rs 4,200,000 crore) of cumulative losses will finally mark the gravestone of this housing bubble," indicates Bill Gross of Pimco (Pacific Investment Management Company), a leading global investment management firm with more than $830 bn in assets under management, on the US housing crisis.
||Bill Gross' trillion dollar warning
"The problem with writing off US$ 1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both, which, in turn, begins to affect economic growth," Mr. Gross writes in his investment outlook for August 2008.
He further states, "A trillion dollars is a lot of money, but in this age of photoshop wizardry it seems that experts can make just about anyone or anything look good. Lose a trillion? Well, just write it off a little more slowly, or suggest that mark-to-market accounting is not applicable to banks and investment banks."
Mr. Gross's forecast implies that credit-market losses are less than halfway over. Since the start of 2007, large banking and financial firms like Citigroup, Merrill Lynch and UBS have reported a cumulative US$ 470 bn in losses and write-downs after the collapse of the US subprime mortgage market roiled credit markets. And the capital raising to support these losses/write-downs has been to the tune of US$ 350 bn since the third quarter of 2007.
Even the International Monetary Fund (IMF) has predicted US$ 945 bn of cumulative losses. And then, another agency - Bridgewater Associates, a hedge fund - has projected the cumulative losses to touch a whopping US$ 1.6 trillion.
Mr. Gross has also indicated that the US government's rescue package will not be enough to revive the housing market because Fannie Mae and Freddie Mac (the mortgage finance companies) have signified that they are in a balance sheet reduction mode. "The cost of the government rescue package to taxpayers will run into the trillions,'' he adds. "I'm forecasting three years from now we'll see our first trillion-dollar deficit.'"
Life today is virtually unlivable without electricity, either in city or in villages. And if the most industrial region of a country faces an electricity scarcity, the overall economic growth is at risk. So is the situation in India, where the state of Maharashtra is facing a massive power crisis on the back of supply not able to cope up with the demand for electricity. The demand-supply gap in the state is currently around 5,200 MW, and this has led the power companies to impose drastic power cuts ranging from 5 hours to 14 hours across the state. The state government has now also warned that bulk consumers like shopping malls will face power cuts, if the situation were not to improve anytime soon.
||Maharashtra reels under power crisis
The worst affected are rural consumers who face daily power cuts of up to 14 hours. Sowing operations in the state, which are already affected by the lack of monsoon rains, will be further affected because of the crippling power cuts. Power supply to industrial units in the state has also been curtailed, with 40-hour cuts imposed on them every week. While an acute power shortage has afflicted Maharashtra for many years now, less than average rainfall this year has worsened the situation. And ironically, despite the yawning gap between demand and supply, the increase in new generation capacity has been painfully slow. In fact, over the last five years, no new power sources have come up in the state.
Also read - Do your bit for a 'bright' future of India
Most Asian markets, with the exception of Hong Kong and Singapore, closed strong today. China was a strongest performer with a 1.3% gain. Stocks in India closed 0.5% up, with the BSE-30 index gaining over 70 points. These markets were possibly taking cues from the positive close in the US markets last Friday, which were buoyed after the US Senate passed a housing bill that aims to help borrowers, bolster the housing market and act as a rescue plan for the troubled mortgage finance giants Fannie Mae and Freddie Mac.
||Easing worries on crude...
Meanwhile, crude oil is trading near its seven week lows on the back of signs that the Organisation of Petroleum Exporting Countries (OPEC) is shoring up output while fuel use in the US and emerging Asia is dropping. Oil prices have in fact tumbled about US$ 24 per barrel from the record US$ 147 per barrel it reached on July 11.
As reported, OPEC will provide 32.9 m barrels a day of oil this month, up 200,000 barrels from June. The 13-member group produces more than 40% of the world's oil. Saudi Arabia, a key producer from the OPEC, in response to calls from consuming nations, said it would produce an extra 300,000 barrels a day in June and a further 200,000 barrels a day in July to curb prices.
"With an expansionary fiscal policy and rising risks of second-round effects of inflation, we expect further monetary policy tightening to tame inflation, but only at the cost of slowing GDP growth," says a report from the global investment house, Lehman Brothers. It has also raised concerns that the rising twin deficits - fiscal and current account - can weigh heavy on India's economic prospects going forward. Further, expressing concerns over fall in industrial production, which touched 4% mark in May, the global investment bank has said that "the top priority of the government would be to tame the high inflation rate, which we expect will continue to remain in double-digits until the first quarter of next year."
Also read - Are RBI's moves playing havoc with banks?
||...though inflation concerns in India continue|
In the meanwhile, reports just coming in indicate that Goldman Sachs, one of the world's leading investment bank, has lowered its GDP forecast for India for the next fiscal (FY10) to 7.2%, from 8.2% earlier. The bank sees weak investment outlook on account of rising interest rates as the key factor impacting India's economic growth. It has also raised its inflation forecast for both FY09 and FY10. For FY09, the forecast has been raised to 11.5% from 10% earlier, while for FY10 it has been increased to 5.3% from 4.7% earlier.
In the meanwhile, Bloomberg reports that the RBI is expected to raise interest rates for the third time in less than two months, when it meets for the quarterly review of the monetary policy tomorrow (July 29). This view is on the back of rising inflation in the economy (currently at 11.89%) even as the government has taken measures like cutting import duties on edible oil, steel products and oil. The government also recently banned export of food products like corn, pulses, rice, wheat and edible oil to spur local supplies.
The effect of rising inflation and dropping stock prices is amply seen in banking companies' performance. India's second largest bank, ICICI Bank, for instance reported a 6% YoY decline in net profit for the April to June 2008 quarter. This was on the back of a 10% decline in the bank's other income as its investments slumped on falling bond prices (due to rising interest rates; bond prices move inversely to interest rates). The bank also faced issue on the loan recovery front, as seen from the rise in its net NPAs (non performing assets) to 1.8%, from 1.6% in the previous quarter. ICICI Bank's peer, SBI, also felt the heat of rising interest rates while reporting the slowest profit growth in two years. The bank's pretax losses from treasury operations widened to Rs 8.2 bn in 1QFY09, from Rs 3.2 bn in 1QFY08.
Also read - ICICI Banks' worries beyond costs
The Indian telecom industry added a net of 8.9 m subscribers during the month of June 2008, including 8.8 m of mobile subscribers (8.6 m in May 2008). The total number of telephone connections reached 325.8 m at the end of June 2008 as compared to 316.9 m in May 2008. The overall tele-density stood at 28.3% at the end of June 2008 as against 27.6% in May 2008.
||Power or no power, more Indians are talking
Unlike most of the consumption stories doing rounds in India and which show huge potential in the untapped rural markets, home to two-thirds of country's one billion-plus population, the increasing penetration of mobile telecom services is being acted out in reality. In rural India, carrying a US$ 20 mobile phone can be something of a status symbol. This is clearly indicative of the much-larger drama unfolding in the Indian telecom market, once considered a backwater and now the fastest growing in the world.
While the country still has a long way to go in establishing a nationwide network of landline telecom networks, let alone high-speed broadband service (subscriber base currently stands at 4.4 m), it has already overtaken China in terms of mobile-phone subscription growth and US in terms of wireless base. The robust growth in the Chinese mobile phone industry in the past was due to an expanding rural market and the increasing number of people who have more than one mobile phone. These, we believe, will be the very factors that will aid a superior growth of the Indian telecom market in the future.
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
||Today's investing mantra
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