An Era is About To End. Is the World Prepared? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

An Era is About To End. Is the World Prepared? 

A  A  A
In this issue:
» Dollar doom warnings get louder
» What are FIIs doing these days?
» Is the oil price rise sustainable?
» Monsoon isn't India's biggest worry
» ...and more!!

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The warnings are getting louder. And they're now coming from some of the most intellectual minds in the world of finance and economics. We are talking about the rising claims that the US dollar will soon cease to be the global currency of reserve, a status it got 65 years ago after the formulation of the Bretton Woods agreement.

Now, after China and other BRIC economies raised their voice against the dollar, the chorus of calls for a significant drop in the greenback is coming from sources such as Pimco (the world's biggest bond fund), and Joseph Stiglitz (economics Nobel laureate).

A note from Pimco reads - "We are clearly seeing a loss of status for the US dollar as a store of value even in the absence of a single viable alternative. In combination with other factors, that likely means a continuing devaluing of the US dollars versus other currencies, especially the EM (emerging market) currencies."

The note further adds - "...investors should consider whether it makes sense to take advantage of any periods of US dollar strength to diversify their currency exposure." Well, as we had read about Buffett's grim views on the US economy recently, this legendary investor is already diversifying away from the dollar, and into other currencies.

We had written an article in January 2005 warning that if the global imbalances (overcapacities in Asia, low savings rate in the US) are not corrected shortly, the ex-US world might have to deal with volatile currency, equity and debt markets. That prognosis has come to play in reality, and now the world is worried about the dollar. But are we prepared for the dollar's fall from grace? We're not so sure!

In a Pimco-like prediction for the dollar, the Nobel Prize-winning economist Joseph Stiglitz has called for a new global reserve currency system. As he's said to the international media, "The current global reserve system is fraying. It's falling apart." Stiglitz also believes that the build-up of the US deficit and debt is cause for anxiety. We second his thoughts.

And while the dollar doomsayers continue with their scary prognostications, the US government is leaving no stone unturned in proving them right. As Bloomberg has reported, a White House budget review has now indicated that the projected government deficit in the US over the next 10 years will total US$ 2 trillion more than had been forecast. The cumulative deficits over these years are now expected to amount to US$ 9 trillion, up from US$ 7.1 trillion that the Obama administration had predicted in May.

Now, while the dollar's future remains clouded, the Indian rupee's present doesn't seem rosy either. Led by some FII selling in Indian equities over the past few days (FIIs net sold stocks worth US$ 440 m over the past four days), the rupee has taken a knock, falling for a second consecutive week. As per a report from EPFR Global, which tracks fund flows around the world, emerging-market equity funds have posted their highest weekly outflows of 2009 this week as investors pulled money out of China on concern that banks there may have expanded credit too rapidly.

India hasn't been spared either. However, despite this recent round of selling, FIIs' net investment into Indian stocks remains at US$ 7.3 bn for 2009-till date. This is around 11% higher than the amount that FIIs had invested in the whole of 2003, the year the first round of this rally began.

Data Source: SEBI

02:16  Chart of the day
Today's chart of the day might bring some relief to investors in India who fear that FIIs, that have been very finicky in the past, might again play truant if things were to go wrong globally. The chart shows that 'hot' FII money, represented by P-Notes (or participatory notes), has not really turned back to India despite the rally seen over the past five months. In simple terms, P-Notes are instruments used by foreign investors or hedge funds that are not registered with the SEBI to invest in Indian securities.

And given that these are not registered entities, their origin and intentions are not known. Anyways, as a percentage of cumulative FII investment in Indian stocks, the P-Note proportion fell to 15% in July (latest data available), from a peak of almost 56% in June 2007.

* Represents the share of P-Note money in cumulative FII equity investment in India
Data source: SEBI

If you remember, there were two drivers of the crude oil spike that peaked out at around US$ 147 per barrel in July last year. The first was consumption - sustained demand from the developed nations and the incremental demand from India and China. The second was speculation in crude derivatives.

Both of them seem to be making a comeback. Crude prices have surged to their 10 month high of US$ 74 per barrel as investors now hope that the economic recovery will come through and also due to a revival of interest in alternatives to equities.

Data source: CNNfn

The key question is whether crude prices can breach the US$ 100 per dollar mark again? In our opinion, oil prices will move upwards in the long term. There simply aren't enough new oil supplies which can cope with the huge demand that will kick in from India and China in the years to come. However, development of alternate energy sources such as shale gas and wind energy as well as curbs on the trading of energy futures by speculators might cap the extent of the next crude spike.

Crude oil was the highest gainer this week among several asset classes. It moved up by almost 10% over last week's close. In terms of stockmarkets, while Asia felt the pinch of a sell-off in China (which was down almost 3%, the US markets were among the few gainers. In fact, if one were to remove the sharp surge in the US Dow Jones Index yesterday, there's nothing much to talk about even there.

Source: Yahoo Finance, Kitco, CNNfn
Note: Country names are representative of their benchmark stock indices

As for the Indian markets, the BSE-Sensex lost around 170 points during the week, largely on the back of selling in metals and oil & gas stocks. Smallcap stocks however bucked the trend as their benchmark BSE-Smallcap index rose by almost 1% during the week. This index is now up 125% since its lows of March, as against a rise of just around 87% in the Sensex.

Is the food shortage in India due to insufficient area under plantation? Surprisingly the answer is no. According to a report by KPMG and Associated Chambers of Commerce and Industry (ASSOCHAM), approximately 40% of the crops in India are lost in the field post harvest. The reasons vary from the lack of infrastructure to a long supply chain.

India has about 21.7 m tonnes storage capacity against a requirement of 31 m tonnes. Moreover, these facilities are single storage for specific products resulting in poor capacity utilisation. Then, the entire supply chain is dominated by several unorganised players (the middlemen). This adds to wastage from the farm to the consumer, retailer, processor or exporters. Hopefully the present situation will force the government to shake up from its lethargy. But given the past track record, this might be hoping for too much.

04:54  Weekend investing mantra
"In my whole life, I have known no wise people who didn't read all the time - none, zero. You'd be amazed at how much Warren (Buffett) reads - at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out." - Charlie Munger
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4 Responses to "An Era is About To End. Is the World Prepared?"


Aug 26, 2009

I agree with Jatin. Pl. if you can provide your views on provide atleast following basic queries of mine? Thanks

0. Any guestimate on time frame for this, with some reasoning?
1. which currency can emerge to eventually replace USD
2. What can happen to price of Gold? How high can it go?
3. How will the rupee move?
4. What will happen to our forex reserves?
5. you had elsewhere mentioned that china is converting its forex reserve to tangible assets (like metals)! What India is doing / can do abt this?
6. What could be impact on our stock market?

Thanks, Ajit


Pradeep Solanki

Aug 24, 2009

I love the investing mantra especially the one in today's issue about reading. I am going to save this one!


ravi jain

Aug 22, 2009

respected sir,
i want to get information about topic
"An Era is About To End. Is the World Prepared?". i will be thankful to you if you please send me detail
of this topic.



Aug 22, 2009


the dollar replacement part was under the category interesting read ..... interesting read???

I mean how can a wrapup on the events marking the change of the monetary reserve system of the world be categarised under such a section.

And you did not give any possible outcomes for any of the readers by which they can benefit.

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