Are we headed for the mother of all collapses? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are we headed for the mother of all collapses? 

A  A  A
In this issue:
» Look who's become the biggest bank in terms of market cap
» Obama in the midst of another trillion dollar deficit
» Will Subbarao spring a surprise?
» Concerns over poor rainfall overdone, feels agri department
» ...and more!

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If we remember it correctly, it was the Greek philosopher Plato who once argued that there can never be utopia in our universe. Any guesses what led him to this conclusion? Well, it so turns out men can never be content with a simple life. They are acquisitive, ambitious, competitive and jealous. They are soon bored of what they have and yearn for what they don't have. How true isn't it?

Thus, in order to keep this greed to its minimum, it is important that we create extremely robust checks and balances in place. Just so that a greed of a handful of men do not heap misery upon the rest of the mankind. One place where there has been a massive slip up in this regard is the issuance of fiat currencies we believe. Perhaps the creators of this system put too much faith in the virtues of us humans and underestimated our vices. They erroneously believed that the leaders of the world will keep their greed under check and thus, not manipulate the system.

How wrong they were! And we don't have to go into the past to prove this. An event that is a testimony to our endless greed is unfolding right before our very eyes. We all know how the investment world is awaiting another stimulus with bated breath. What this means is that the world will have to be ready for another round of currency debasement. If only there were some objective standards by which to fix the value of the currency? Sadly, there is no such system in place right now. This in effect has given central banks around the world , virtually a free hand in printing as much currency as they want. Thus, the question that needs answering is how long will this continue? Can fiat currencies survive event after event of debasement?

We don't think so. Infact, some believe that debasement has already started what with central banks stocking up on gold. May be they are preparing for a day when they can say that their currency is backed by gold. We don't know for sure when that day will come. But if history is any indication, no fiat currency has survived more than 30 years we believe. The US dollar is already in its 42nd year, with its fundamentals worsening by the day. We could well be entering a dangerous phase.

Do you think the fiat currency system will survive another round of debasement? Share your views or you can also comment on Facebook page / Google+ page.

01:12  Chart of the day
We've seen how countries boast of their natural resources, their human capital and their excellent infrastructure. But is there a way to measure the same? Or still better, can all this be added up to give an idea of the total wealth of a nation . There certainly is we believe and today's chart of the day tries to address just that. The United Nations last month published balance-sheets of around 20 nations which included three kinds of assets: "manufactured", or physical, capital (machinery, buildings, infrastructure and so on); human capital (the population's education and skills); and natural capital (including land, forests, fossil fuels and minerals). Guess who topped the list on this type of wealth front? The USA indeed. At US$ 118 trillion, its wealth is head and shoulders above the rest of the nations. India, at US$ 6.2 trillion is way lower on the list. Worth noting that human capital represents around 75% of America's wealth. Thus, given its huge population, India stands a good chance of increasing its wealth a great deal more if it makes its workforce more skilled.

Source: The Economist

When Barack Obama took up the post of President almost four years ago, the global financial crisis had just begun to intensify. Despite promises of 'change' offered to Americans, the US economy is not better off than what is was then. In fact, it has been worse. The White House has predicted that this year's federal budget deficit will end up at US$ 1.2 trillion. This will mark the fourth consecutive year of trillion dollar-plus deficits during President Barack Obama's administration.

Of course it would not be fair to blame the Obama administration for the origination of the crisis. That was a result of loose monetary policies in the Greenspan era and the greed of investment bankers and global banks. But the steps taken to deal with the crisis have hardly yielded anything concrete. Indeed, two massive rounds of quantitative easing have only piled on to the debt without spurring the economy.

Unemployment has remained high. Consumption has slowed down. Then there is the fear of the approaching so-called fiscal cliff. This is a combination of big tax increases and deep budget cuts which are certain to cause some amount of pain to the average American. The White House has promised that the deficit would come down by 2017. But, it will have to think of entirely new strategies of doing so rather than resort to another round of unproductive quantitative easing.

Will he or won't he? This is the question that policy watchers and economists are asking about the Reserve Bank of India governor, D. Subbarao. In June, the central bank resisted economic pressure to cut rates, despite low GDP growth numbers. Now, going by indications based on the current economic environment, it is widely expected that the RBI will keep rates steady.

But, we can't rule out a surprise move. However, there are a few major concerns that haven't been ruled out yet. Firstly, the monsoons continue to remain a worry for the central bank, and most of India at that. Secondly, wholesale price index (WPI) inflation continues to remain above the RBI's comfort level of 5%, and the weak monsoons may further put pressure on this number. Thirdly, fiscal consolidation by the government has been often talked about, but nothing has yet materialized on this front. All these factors don't lead to a very conducive situation for a rate cut. Doing nothing is as good as doing something when it comes to RBI policy announcements.

They say that 'the slow and steady win the race'. However, global institutions have for several years now been in the race to become 'too big to fail' . Our domestic entities too have spared no effort to join the rally, lest they be left behind. In the bargain, the importance and relevance of the age old proverb was lost. But, do not despair! Not just in India, but even globally there are still institutions who believe in following the code of conduct. Even if that means not falling in line with the elites. Our home grown HDFC Bank is one of them. The bank's performance over the past decade has been consistent bordering on boring. Quarter on quarter for the past 10 years or 40 quarters, the bank's profit growth has been 30% (+/- 1%)! Nothing more, nothing less. The economy has been through several ups and downs all this while. But HDFC Bank almost challenges the belief that banking is a cyclical business. It net interest margins never dropped below 3.5%. Its net NPAs never exceeded 1%. Such is the consistency of the bank's performance that it can be one of the easiest choices for a 10 year portfolio.

No doubt markets have also given the bank its due in terms of valuations. The bank has always been valued at a premium to its more nimble or larger players. Ones like
Yes Bank are also known to draw inspiration from the likes of HDFC Bank. Just like the later follows Buffett's favourite Wells Fargo. Hence the latest news that HDFC Bank has surpassed the market capitalization of State Bank of India does not come as a surprise to us. State Bank of India (SBI) despite being 4x the size of HDFC Bank has a long way to go to offer the kind of investor comfort that the private sector wonder does.

With more than 60% of the country's arable land depending on weather, the slow progress of monsoons so far is bound to ring alarm bells. However, as per the agriculture department, the situation might not be as bad as in the year 2009. One should know that 2009 brought with it the worst drought in three decades. Making the current year look better than one of the worst drought year can hardly make anybody feel any better.

As per the Union Minister of food and public distribution, so far we need not panic on food grain situation. For all the statistics quoted and reassurances given, we know that the concerns regarding rainfall and crops in some regions are real. While one can't blame the Government for weather vagaries, it is accountable for not making vulnerable regions drought proof. The issue should not be whether monsoons will be good or not but whether we are prepared to deal with the situation if the worst fears come true.

Meanwhile, the world stock markets witnessed a volatile week. The concerns regarding Euro crisis weighed heavy on the global stock markets in the first half of the week. However, the initial losses in the major European markets were reversed as European Central Bank (ECB) leader Mr. Draghi pledged to save the Euro.

The optimism in the global markets at the end of the week rubbed on India as well. The Indian share markets that had a lackluster run all through the week jumped to life on Friday on account of positive development in the Eurozone and cues from gains in the US markets. This was mainly due to major buying from foreign institutional investors. Amidst the earnings season, the BSE Sensex ended the week lower by 1.9% on account of fears of a weak monsoon and domestic economic concerns. Going forward, we believe the outcome of RBI's monetary policy review and progress in monsoons will influence the markets.

The other Asian stock markets ended the week in red with Hong Kong (down 1.9%), China (down 1.8%) and Japan (down 1.2%) leading the list of losers.

Source: Yahoo finance, kitco,

04:57  Weekend investing mantra
"You are setting yourself up for failure if you invest differently than you want to in order to please investors." -Joel Greenblatt
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8 Responses to "Are we headed for the mother of all collapses?"


Aug 2, 2012

there is no dout hdfc bank is a den of thieves ,a scalper who never followes any sebi rules or rbi rules ,they just loot customers rothlessly ,they just want customers money by hook or crook,even SHAREKHAN SECURITIES is not following any sebi rules i had DP accounts opened one on my name and one on combined my name and my woifes name opened in 2006 ,only to demat my physical shares,all demat procedure finished in 2008 june ,sharekhan malad branch ,s manager mr tak even came to my residence with mr kartik the agent who opened the accounts ,they both told me after demat both your accounts r closed after transferring the stocks to hdfc securities where i had a three in one account along with hdfc bank,since 2008 june sharekhan never sent a single statement till april 2012 ,out of blue moon suddenly i recived a message from sharekhan sec. mALAD BRANCH by sms that my both accounts r still opened since 2008 june when they told me both r closed,actually they sold some of my shares and kept 5500/-rupees in each account and kept on charging dp a/c charges ,from june 2008 till april 2012 ,till all 11000 rupees they looted ,inspite od not a single share in both dp,s and not a single trade done for last 5 years, than i have to pay 1200/- more to again close both accounts,when asked why not a single statement was sent as per sebi ruls every month statement has to be sent , manager of malad branch of sharekhan ans,we donot follow sebi rules ,we hAVE OUR OWN RULES,AND HIS AGENT MR KARTIK TOLD ME HERE THERE IS NO RULE AS EXAMPLE MR TAK MANAGER OF MALAD BRANCH DRAWING MORE THAN 50,000 RUPEES PER MONTH,FORGET ABOUT MBA IN FINANCE HE IS NOT EVEN GRADIUATE ,HERE IN SHAREKHAN YOUR QUALIFICATION IS HOW MANY CONTACTS U HAVE WITH THE HIGHER AUTHORITIES OF SHAREKHAN AT NARIMAN [POINT AND HOW MUCH MONEY U CAN MAKE FRONM CUSTOMERS BY HOOK OR CROOK.,AS HIGHER AUTHORITIES HAS CONTACTS WITH SEBI ,SO NOTHING WILL HAPPEN IF YOU COMPLAIN TO THEM ,A REAL DEN OF THIVES.



Jul 30, 2012

Whenever I came to this page to write comments, I felt
there are already enough of them. But, today I feel
like at least writing a line/2 in support of what most
of fellow readers have shared - HOW HDFC BANK MADE
I have an account with hdfc bank for 12 years and been
banking for 20 years, there ain't a doubt that HDFC
BANK is indeed "mother of all looter banks".
Equitymaster, claiming to be unbiased with its opinion,
should have had atleast disclaimer.

Like (2)


Jul 29, 2012

Dear sir ,
Mr.SunilKumar Tejwani`s assessment & comments on HDFC Bank and there earnings & functioning is 100% correct.They are simply accumulating wealth by day light burglary Fees & penalty charges even for non transaction accounts, Do you think that our Nationalized Banks should also go by that unethical means to scrape out the common man`s hard earned & poor money.A common man does not in a disparate need of Rich life but for a Peaceful simple living.

Like (2)


Jul 29, 2012

The calculation of Human value is dubious. Is speaking english a factor in calculation here ? The fact that 1+ billion population manages life more efficiently with comparatively less resources is more commendable. Wealth is something fluid. History can produce artefacts of wealth moving continent to continent . Utopia is state of mind .

Like (1)


Jul 29, 2012

The calculation of Human value is dubious. Is speaking english a factor in calculation here ? The fact that 1+ billion population manages life more efficiently with comparatively less resources is more commendable. Wealth is something fluid. History can produce artefacts of wealth moving continent to continent . Utopia is state of mind .

Like (1)

sunilkumar tejwani

Jul 28, 2012

please note HDFC bank has grown by sucking blood of it's customers and not due to any exceptional operational efficiency. The other income component exceeds it's net profit figure. This other income is nothing but usurious charges, fees and commissions earned by way of unscrupulous means. State bank of India being a government undertaking, can not do so. Agreed that it is not as nimble footed like HDFC, but it has got certain compulsions heaped on it by the government like Directed lending, priority sector lending at concessional rates etc.

Like (2)

sunilkumar tejwani

Jul 28, 2012

debasement! debasement!! debasement!!! the fiat money will surely destroy millions of people's wealth over a period of time. The unholy nexus of politicians, bureaucrats, bankers and industrialists have proved costly for a common man. I curse the former President of U.S. of A Richard Nixon for De-linking Gold from paper currency (fiat money), who started this trend and has never ended till date.

Like (2)


Jul 28, 2012

The biggest flaw in our modern monetary system is the fact that our currency is denominated as debt. Every rupee, dollar or euro that exists has been borrowed by the government from the central bankers and interest is required to be paid on that borrowing. The problem is that only the principal of the loan has been placed in ciculation whereas the interest does not exist and has to be repaid only by further borrowing again at interest! This leads to a never ending increase in the supply of money and as a consequence causes inflation that we are now witnessing. The question to be answered is who benefits from such an unlawful system. The answer is our bankers who rule over the rest of us by placing us under perpetual debt savery. They have the power to create this fiat currency and earn interest and stake a claim on the productivity of the people who create real wealth. We the people are forced to pay taxes to pay for the interest that supports this fraudulent monetary system. Our politicians also benefit because money printing allows them to provide handouts to people who vote for them during elections. The unholy nexus between bankers and politicians destroyed the American middle class and I expect the same to happen in this country unless our monetary system is not reformed. KarlKarl

Like (7)
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