Are we all wrong about end of America? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are we all wrong about end of America? 

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In this issue:
» What the new Infosys may look like...
» Layoffs grip Wall Street
» The only sector wielding pricing power
» India's gold imports to cross 1,000 tonne mark!
» ...and more!

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00:00
 
The economy that was the tipping point of global economic vitality not so long ago has almost been written off over the past few months. In fact the degradation of the US economy was in the making since half a decade. However, the process was given a whole new momentum after the downgrade of US' sovereign rating by the ratings giant S&P. With its ability to print currencies at will, many can argue that the US can indeed turn over a new leaf. We do not think that the cheap money policy can bring back the US to good health though. But revelation of a completely different kind has forced us to reconsider our view.

With its 'unreal assets' (currencies and treasury bonds) losing value, the US may once again dip into its natural resources to regain economic vigor. And fortunately for it, a critical natural resource is at its disposal in ample quantities. It is common knowledge that the Middle East has been the epicenter of the global energy supply for half a century now. However, that trend is about to change.

As per Daily Crux, by the 2020s, the capital of energy is likely to shift back to the Western Hemisphere. It must be noted that prior to the ascendancy of Middle Eastern oil suppliers such as Saudi Arabia and Kuwait in the 1960s, the US was the leading supplier of hydrocarbons. Thanks to the country's abundant reserves of unconventional oil, the old pecking order is all set to reemerge. Geologists believe that he US' endowment of unconventional oil is more than 2 trillion barrels. Add to that another 2.4 trillion in Canada and 2 trillion-plus in South America. That makes it more than 6 trillion barrels of oil reserves. In comparison, the conventional Middle Eastern and North African oil resources are just 1.2 trillion! That clearly proves who can benefit with oil prices going up. As far as the problem of drilling oil and gas at economic rates is concerned, technology has come handy. With the help of horizontal drilling and other innovations, shale gas production in the United States has skyrocketed from virtually nothing to 20% of the US natural gas supply in less than a decade. By 2040, it could account for more than half of it. Further when it comes to onshore oil production, the peak oil theories have all been proven wrong.

Thus if Wall Street remains in coma for longer than expected, the US can certainly look for other life saving means. Given the necessity of hydrocarbons to the developing world, we will not be surprised if the US is able to effectively capitalize on this opportunity. Its influence on global geo politics can only favour its cause.

Are we writing off the US too soon? Let us know your comments or post them on our Facebook page.

01:15  Chart of the day
 
If the number of bank failures in the US are any indication of the precarious state of the economy's financial health, 2011 has certainly not been a good year. In fact as today's chart shows the number of bank failures during the first 7 months of the current year has already outstripped the total number of failures in 2008. We belive that there is more pain left the Fed is yet to show any signs of monetary tightening. That will be a stress test for the US banks in the real sense.

Data source: Ritholtz

01:50
 
It is often said that a firm is nothing but a physical manifestation of the values of its top management. Take Infosys for example. When one of its founders, NR Narayana Murthy was at its helm, Infosys stuck to Mr Murthy's values of growing organically and thus, appeared a little reluctant to go in for acquisitions. This was even as its cash pile kept on increasing rapidly. Now that Mr Murthy has stepped down from the day to day affairs, the policy towards acquisitions looks all set to undergo a U-turn. And this change of attitude could be the result of values that the company's newest Chairman, KV Kamath stands for. As per a leading daily, Mr Kamath has assured that Infosys will take all steps possible to recover the ground it appears to be losing to rivals like TCS and Cognizant. And one of these measures could also include an acquisition in the near future. To Mr Kamath's credit though, he also added that the buyout will not come at the cost of sacrificing Infosys' core values. It will be interesting to see what this new chapter in the journey of Infosys will look like.

02:30
 
A clear cut sign of troubled time ahead is when the companies start 'laying off' employees. This seems to be the trend that has gripped the Wall Street in recent times. The recent stock market crash combined with expectations of turbulent times ahead have led several major firms to cut down their employee numbers. And the worst part is that some of these firms had gone ahead with huge investments to boost employee morale just before they announced their layoff plans. One amongst them is the Swiss banking major, Credit Suisse. As per a leading daily, the bank had spent a sizeable amount for employee posters that were targeted at boosting employee morale. A few months later, it pulled down these posters and handed out the pink slips instead. Such moves not just tarnish the bank's image but also severely hurt the morale of those who are not laid off. This in turn leads to lower efficiency as well as productivity. For banks this impacts customer service which in turn can hurt the bank's image as well as its growth prospects. The whole thing becomes a vicious circle and spirals downwards. And unfortunately that is the way most of Wall Street is headed.

02:55
 
Sectors like auto, consumer durables etc had been riding on India's strong consumption story for a long while. But, they are now having a very rough ride. Input costs are expected to remain high and demand is slowing down. Thus, these companies are seeing an erosion in their pricing power putting their margins are under pressure. Not surprisingly there is a flurry of discount offers from desperate manufacturers, trying to grab some buyers.

But, one sector which has continued to show robust growth and maintain its pricing power is the FMCG industry. Hindustan Unilever, Colgate, Marico and ITC have hiked their average price hikes by 5-10%. GlaxoSmithKline Consumer is also planning to soon pass on the impact of higher costs. These companies are able to raise prices due to their strong presence in various niche brands. However, this doesn't work uniformly across the board. Packaged foods, skin care products, household insecticides etc are some of the categories where brands have the highest pricing power. However, in other segments like biscuits, soaps and detergents, the pricing power is relatively lower. Intense competition and high penetration are some of the reasons for the same.

03:25
 
With uncertainty and chaos brewing in the global economy, investors are rushing for gold, one of the few seemingly safe havens. No wonder, gold prices have been on a continuous rise. In fact, in this month so far, the yellow metal has appreciated by 14%. Notwithstanding, the appetite of Indians for the precious metal seems to be rising in tandem with gold prices. As you already know India is the largest consumer of gold. In 2010, we imported about 958 tonnes of the precious metal. And if the trend so far is any indication, we are set to cross the 1,000-tonne mark this year. We have already crossed 553 tonnes in the first 6 months of 2011.

Most of the buying is expected to be in the form of gold exchange traded funds (ETFs) and coins. So far, our country's aggregate investment in gold ETFs are to the tune of 15 tonnes. The same is expected to double in a year's time. On the other hand, the demand for gold jewellery may witness some decline as people cash in on high gold prices. This would cause a rise in recycled gold, and in turn would lead jewelers to reduce their stocks.

04:00
 
Emerging markets have had to deal with currency volatility for quite some time now. When they recovered more strongly than their developed counterparts from the subprime crisis, global investors made a run for their shores to capitalise on the strong growth prospects there. This posed a problem for governments and central banks of emerging countries as their currencies appreciated sharply and undermined exports; still a big revenue source for many emerging markets. Some of them even resorted to imposing capital controls. The scenario seems to have reversed now. With global markets selling off heavily in the past couple of weeks, investors have pulled out money from the emerging markets as well. This means that central banks do not have to worry about a surge in flows for the time being at least. But at the same time, they are being compelled to be on the vigil lest the sudden outflow does not result in significant fall in the value of their currencies either. Indeed, central banks will have to tread a thin line to maintain this balance. That said, it is more likely that any moves to curb the immediate fall in currencies will be short term in nature as in the long term emerging markets still hold value for investors.

04:40
 
In what has been an extremely volatile session, the Indian indices oscillated to either side of the breakeven since the start of the trade today. Relentless selling pressure in realty, pharma and banking stocks, led the indices in the Indian stock market to languish below the dotted line for most of the session. At the time of writing, the BSE Sensex was trading higher by 40 points. Most other Asian markets also closed lower. Europe has also opened on a negative note.

04:50  Today's investing mantra
"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day." - Warren Buffett
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14 Responses to "Are we all wrong about end of America?"

Joshua Kurien C

Aug 25, 2011

The setback of the US economy is only temporary. A time to look back and mend its ways.. It will surely surge back and be in the leadership position. We have seen that the euro bloc is only a house of nine pins..

Like 

Mike

Aug 24, 2011

It depends on what kind of oil you're talking about--for reserves, Alaska might well have the most available oil. But shale oil might never prove recoverable, but it's pretty well demonstrated that there are immense amounts of it in the continental US, such as in Colorado. Though kanakasabhai's energy analysis isn't very good, he's correct about the US losing valuable segments of the manufacturing industries to countries like China. Agriculture, manufacturing and energy production are where economies have their roots. The US economy has lost too much capital to the very wealthy few and to the rest of the world for any major recovery to happen soon, if ever.

As for the original poster's statement that in "all onshore oil production, the peak oil theories have been proven wrong" is flatly wrong. The original quantitative peak oil prediction, concerning onshore, conventional US production, was Marion Hubbert's, published back in the 1950's, when he predicted US production would peak in 1971. He was off by a single year: it peaked in 1970. The reason we have a murkier idea about peak oil now is that we can't rely on production statistics from OPEC and other producing states like Russia.

Like 

Harquebus

Aug 23, 2011

No water means no people. What good is energy then?

Like 

kanakasabhai

Aug 23, 2011

Regarding the query raised on SUV's by the gentleman LTJX, he may refer to Mr.Obama's call to Americans to get rid of their SUV's and their general response that they don't want to belong to third world countries. Regarding popular SUV's most of them have 4.7 ltrs and above V8 engines with seating capacity of 8 and more. He can go to any popular web site on SUV's to know about them esp. their weight and I don't want to narrate them here. Alaska still remains the largest unexploited oil source and after the Exxon oil spill over it is very difficult for the Americans to exloit oil from there. Shale gas still remains a great mystery and the production of Gas to Oil is still not wide spread and we will know only in due course how this pans out. In the mean time, Americans have to cut down on consumption and study well.I would like the Gentlemen to tell me whether the US can provide 100,000 and more engineers to virtually every top software company like IBM,Accenture, TCS, Infosys and 1000's for specific projects like Windows to MS. India does and it does not matter whether all Indians graduate or not. It is the US that is in a mess today with over $14 trillion in debt and states like California becoming Greece. India with hardly 28% of GDP in debts that too mostly private sector and the govt. accounting for hardly 12% has a long way to go. India started off as a mess from the Britishers and has a long way to go with hardly 64 years in age.It does not compare wih the US and Indians don't feel threatened by the US in any way. It is only the american politicians complaining about India and praising Indians for studying well.India is poor and can not shake the world like the US.

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LTJX

Aug 22, 2011

When kanakasabhai says that U.S. oil is mostly in Alaska, this is simply wrong. At one time, Alaska did become the #1 oil producing state in the USA with massive production from Prudhoe Bay and the North Slope fields during the 1980's and 1990's. However, more recently Texas has far surpassed Alaska to regain the #1 ranking - with continuing results from thousands of small oil producers in the Permian Basin of West Texas, as well as the new oil-rich shale regions of Eagle-Ford play in south Texas. In 2010, Texas produced an average of 1.17 million barrels of crude oil per day, while due to declining North Slope fields, Alaska produced a daily average of only 600,000 barrels (barely over half of the daily production from Texas). In fact, Alaska is just slightly ahead of the #3 oil state, as California oil production has been much slower to decline than that of Alaska, with California still averaging 550,000 barrels per day in 2010. And the Texas results do not even include the substantial contributions from the Gulf of Mexico - over 1.5 million bpd in 2010, even with the many disruptions of the BP Macondo oil spill in April of that year.

Besides, when referring to trillions of barrels in the USA, the article can only be referring to the so-called oil shales (actually kerogen, an immature form of oil) of the western states (mainly the Green River formation in Wyoming). Kerogen has been burned for electricity in Estonia as a sort of coal, but in theory it can also be converted to oil. It's confusing, but this is not the same thing as "shale oil and gas" which often involve hydro frac'ing. And it still remains to be seen if this massive kerogen resource can be converted to oil in commercial quantities at reasonable cost...

And, 15% does not sound like an especially high dropout rate for college. Or, are you saying that more than 85% of the college students in your country graduate with a degree?

Lastly, I've never heard of a 5.5 ton SUV (11,000 lbs) - the largest SUVs might be 3 tons (or 6,000 lbs) at the most... A typical American car is closer to 3,000 lbs (or 1.5 tons).

Like 

Borkar M.R.

Aug 22, 2011

New Captain. New Values! If one wants to write judgement in a haste then it is right to lable New Infy now itself. Does ICICI Mr Kamth was running reps what Infy has been. The shades Bright/Gray/Black where Infy will b in years 2 come under Mr.Kamath? As I mention in the opening of this comment, let us wait, at least for 3 yrs to write a fresh balance sheet.

Like 

Tamal Dasgupta

Aug 22, 2011

At last we are talking sense about US future. Look at the US population density, its natural reserves,its agriculture, its science and technology and one would be stupid to write them off. And that is why the rest of the world sometimes wishes the US bad. Funny, India with its zillion problems will come on top and the US will sink to anhilation. Very wishful thinking. The US also has a far higher educated force. They will all perish and the Indian will rule? Possible, but a century away.

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Borkar M.R.

Aug 22, 2011

The Spirit of The Nation that counts. There cannot be straight line course for anything. Up/downs have 2 b there if one wants 2 move forward. This discussion is fine. It will help the Trend to emerge.

Like 

Dr. Sreenivasa Murthy M.D.

Aug 22, 2011

America's problems lies in mainly 3 things:
1. Mindless outsourcing to increase shareholders wealth has deprived its citizens of decent jobs. Joblessness leads to depressed economy.

2. Predatory banking system has pushed its citizen's to the brink of bankruptcy by giving them loans which they can never repay. Worse many lost whatever savings they had in the housing bubble.

3. Education in America has become expensive and the common people cannot afford it. So without good education the pool of highly skilled people has in fact decreased in recent times, leading to a vicious cycle it is cheaper to outsource.

So if America has to regain its post glory it had to address these three problems first. Otherwise no amount of natural resources will make the common man on street have a decent life.

Like 

Hemant Chandorkar

Aug 22, 2011

It is possible that "end of America" view may turn out to be wrong for many reasons such as

(1) tapping of natural resources, not used so far, as correctly pointed out by you

(2) corrective action(s) by US govt at a later date, though indications of the same are not visible now

(3) resurgence of national spirit leading to corrective action by US population; again appears to be distant possibility for now

(4) lack of leadership from elsewhere resulting into entire world being in need of US revival - present factor

(5) US is a country of immigrants i.e. resourceful people from the entire world

In conclusion, your caution about hasty write off is well founded

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